Fed and three representations

Fed and three representations

 

Major indexes all moved substantially higher with substantial volumes improvements. Yes, Dow’s 1.3% gain is still below IBD’s 1.7%, so what?

Benchmarks, even though often based on historical data, are still subjectively made. Benchmarked on its presumed comfort zone of CPI 1-2%, Fed is not comfortable with CPI of 2.7%, but it just have to deal with it.

 

Keeping interest rates unchanged, Fed today “omitted a crucial sentence from its accompanying statement that suggests it is dropping its tightening bias”(marketwatch.com). Fed’s softening in its long-standing tightening bias is definitely a new piece of bullish FA information. With that, market rallied. 10Y T yield dropped about 7 base points to 4.518%, kind of lowest YTD. Bill Gross must be smiling.

Speaking of Bill Gross and the gang of bonds, I thought about CCP’s famous “three representations” in Jiang’s time. Similarly, Fed has its own version of “three representations”:
   

The first two are well known, being Fed’s employment objective and inflation control, its dual mandate empowered by congress. The third one is bond market, as I thought.

Since US monetary system was debased from gold standard, US government’s “control” (for lack of a better word) of banks, and banks control of economy, is basically based on treasury bonds, with Fed’s policy implemented via the purchase and sale of T bonds among Treasury, Fed, banks, and the rest of bond market such as PIMCO, with an average daily volume of  $501B, 7 times of that of US stock market.   So, when Bill Gross and his alike claimed that they cannot make “structural profits” under current yield curve and economy needs a rate cut, Fed listens.

Once on “three representations”, we have to talk about CCP and its “three representations”. Although always seemingly formidable and infallible, CCP faces an equally daunting challenge when trying to make their “three representations” work. 

“As of July 2006, the Chinese population was 1.3 billion, which is more than four times as large as the U.S. population of 298 million. In terms of total production, measured in dollars at purchasing power parity, the Chinese economy is the world’s second largest economy, trailing only the United States. In 2005, the Chinese GDP exceeded $8 trillion, which was roughly two-thirds the U.S. GDP.”

Because of this and other reasons, CCP and US have to work very closely with each other in many areas where both of them are “stakeholders”, such as purchase and sale of US T bonds, some kind of “order” for US dollars, some kind of USD-pegged currency system in Asia, and  of course, Iran, N. Korea, etc.

Interestingly, when stock market corrected last year, all gold bugs and dollar bears came out crying, as if the end of world was coming. This time, they all seem unusually quite. I guess they somehow figured out, that with Comrade CCP and Uncle Sam in alliance, there is a thick resistance line atop of Iran, N. Korea, and may be gold as well.   

marketreflections.com