Market Anthropology: Lighting an Escape Fire

Tuesday, June 11, 2013

Lighting an Escape Fire

While we agree that the optics and assumptions between 94′ and today are worlds apart; whereas, the element of surprise was much greater before the Fed became painstakingly transparent and the bond bull matured into the market patriarch it is today – the degree of speculation attached to that assets one way street still has considerable and like potential to disrupt and influence markets through distortions of flows as it did in 1994. Considering the perversion in correlations we’ve witnessed recently, and as noted last week with our expectations for further dollar weakness – the comparative has more harmonies than dissonant chords for now. 

It’s safe to say many had expected a range in yields within trend this year, but were tempered by the gathering disinflationary tide and the perception that Bernanke would continue to be influenced by the specter of deflation that still haunted the Fed’s house. If anything, and considering the Fed’s preferred measure of inflation (PCE) flirting with historic lows – or even our inflation expectations construct framed by the long:term silver:gold ratio; it seemed more likely that the Fed would at the very least extend the expectations of stimulus – rather than curtail. In this sense and apparent in the bond markets quick ignition, the element of surprise so crucial to a central banks efficacy appears intact – and to boot has come from the opposing side of the field. 

Whether lighting the brush in the bond market here was a sign of desperation, brilliance or causal coincidence is hard to say at this point. We are reminded of the true story of the Mann Gulch Fire, that although tragically took the lives of thirteen young firefighters in Montana in 1949, rewrote the training protocols for dealing with a fire that was imminently about to overtake its handlers. To make a long but fascinating story short, a creative and desperate smokejumper named Wagner Dodge lit a fire directly in front of himself before the rapidly approaching forest fire overtook him and his crews position. After lighting the fire, he then motioned for his men to step into the newly lit area. Unfortunately, likely believing he had lost his mind – they refused and attempted to outrun the fire which was burning quickly up the hillside. In the end, Dodge survived nearly unharmed – while the fire killed thirteen of his men.   

Reigning in expectations of stimulus by the Fed in the face of inflation data flirting with historic lows and a global economy dangerously close to stall speed might appear reckless at face value. With that said, the Fed perhaps succeeds at killing two birds with one stone by reigning in risk appetites at large, while also changing the perception from one of disinflation to inflation’s right around the corner. 

Reflexivity burns bright – assuming we don’t perish in the fire.