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Trader: Get rid of Federal Reserve transparency

 By Keith Bliss, Cuttone & Co.

The need for central banker opaqueness

 

I was struck the past two weeks by the markets' (^DJI^GSPC^IXIC^RUT) reaction to all of the Fed speak. First down, then up. More whipsaw, more confusion. I remember a world where central bankers were not the rock stars of the economics and financial realms, but merely academics who toiled daily in an effort to control inflation and maximize employment.

Their actions and words were opaque, at best, which many complained about because they wanted to have more information to get ahead of the trade. The central bankers caved to the demand and started on a policy of transparency. 

 

This movement toward openness was well-intentioned, but it has led to more confusion, recklessness, and sloppiness in the market. Gone are the days when market players would have to wait for a key metric to size and position their portfolios. Today, we hang on every word, parse every speech, and interpret every gesture of Fed officials as they speak—simply to gain a modest advantage. I submit that all of this has not led to a modest advantage for most, but rather to a lot of frustration and losses due to incorrect interpretations.

 

Trading on Alan Greenspan's briefcase size

March 17 -- Former Federal Reserve Chairman Alan Greenspan talks with David Westin about central bank investments, potentially funding infrastructure investment through 30-Year treasuries, and why he sees a return of inflation. He speaks on Bloomberg ‹GO›.
March 17 -- Former Federal Reserve Chairman Alan Greenspan talks with David Westin about central bank investments, potentially funding infrastructure investment through 30-Year treasuries, and why he sees a return of inflation. He speaks on Bloomberg ‹GO›.

While they have every right to state their views—and they are in high demand to speak at various events—I just wish the Fed officials would not tell us everything, all the time. There was a time when our only clue to the monetary policy announcement was watching Alan Greenspan go into a FOMC meeting carrying his briefcase. A bulging briefcase meant a policy change was coming because Mr. Greenspan had reams of documents to be used to convince his colleagues of the change; a thin case meant no change. That was a lot more fun…and a lot less stressful! Transparency should go away.

 

Data, data, and more data

 

As release days go, April Fool’s Day 2016 is one of the heavier in recent memory. In addition to the monthly Employment Situation report (a.k.a. the ”jobs report”) and all that comes with it, we have data on manufacturing, consumer sentiment, and auto sales.

Naturally, the main focus was on the jobs report and what it may mean for the month-end FOMC meeting. Given the Fed statements of late (there’s that transparency demon again), I’m not sure today’s job gains, or the modest uptick in the unemployment rate, really mean anything. The calculation methodology for the unemployment rate is dubious at best, so having it increase 0.1% is meaningless. The market certainly has dismissed it, as Fed Funds futures barely budged.

 

Despite some modest weakness today on the open, the markets are still in a holding pattern. The real action will begin when first quarter earnings begin unofficially on April 11 with Alcoa (AA). That’s when we get to see if our suspicions about a weak quarter are correct. Of course, at this point, a terrible quarter is just an educated guess … but guessing is a lot more fun than being told.