Or is it?
This is the title of Chapter 25 of my manuscript called Mortgage Market Mayhem, written in early 2008. The quintessential example proffered is the day employment numbers come out.
Strangely, though, after 25 years of being true, today’s employment numbers weren’t following the pattern.
I’ll just share an extract from the manuscript to frame the issue, and then take a guess at why the old bond market truth is no longer reliable.
Some would say that Wall Street is a hard place with humorless people, but I would have to disagree. The issue isn’t whether they have a sense of humor, it’s what they find amusing.
[Extract from Mortgage Market Mayhem]
Within five minutes of the space shuttle Challenger disaster, Wall Street traders were in competition over who could be first with the latest joke. In the middle of the Crash of ‘87, when I was working at Pru, I heard a new joke every five minutes, even after a customer had burst into one of our firm’s own branch offices and shot one of our brokers.
I saw bets escalate into the mid five-figures over stunts that were dreamed up to cause distress and humiliation for one or another among us. The stakes quickly escalated when target practice on the trading desk became a contest to see who could hit the bald “bull’s eye” on one of the salesmen’s heads with a crumpled piece of paper.
One of our group’s salesmen at Daiwa got $20,000 for shaving his hair off. Shortly thereafter, a woman in the systems department came up and offered to shave her hair off for only $10,000. She had nice hair, too.
Some call it tension release. Others think that Wall Street trading desks just attract obnoxious smart people who make too much money.
My pat answer to the assertion of “too much money” was always that there was a chair near mine for anyone who could do the job, because we could use the help. Now that I’m older and, I hope, wiser, I’m not so sure that Wall Street might not be a little more honest if the pot of gold at the end of the rainbow was a little smaller. I never had a retort to the accusation that Wall Street is populated with obnoxious smart people, since I believe it does have more than its proportional share.
Still, from my very first job through the spring of 2008 while I write this, some things on Wall Street never change. How you did or how the market did last month or last year doesn’t matter. The Street turns against its own if it senses weakness. And the only thing that makes traders happy is making money.
It should not surprise anyone that a world feeling generalized misery can be a reason for generalized happiness, if the trading desk is making money.
I saw this most starkly one Friday in the mid to late 90’s. It was 8:30 a.m. on the first Friday of the month, when the Department of Labor released its employment report for the prior month. For the first third of my investing career, the Money Supply had been the king of all numbers, and everyone acted as if the markets would live or die on the change in M3 when it came out. Then the money supply number faded, and Wall Street waited for the employment report to feel the pulse of profit for both stocks and bonds.
On that particular Friday, I saw the reality of Wall Street happiness in a way that I hadn’t before. The monthly jobs release showed much higher unemployment than had been predicted. The trading floor I was on was suddenly filled with a chorus of cheers as traders hooted and hollered and threw their fists up in victory, and then furiously bid up the price of bonds of every maturity and every type.
I headed into my office to see how the structured deals I was working on had changed with the new lower bond yields, but I felt like a visitor to another planet.
Maybe it was because I wasn’t raised with a life of privilege. I was the oldest of seven children. My father was a Master Sergeant in the Army and my mother helped take care of the children in the neighborhood to supplement our income. I went to Yale on a full scholarship. I’d always supported myself.
I knew that the employment number represented real people who’d lost real jobs. When you include the families of those workers, at least a million more Americans were reported to be suffering hard times that day.
Whatever the reason on any given day, it is an overriding fact that bond traders really do like bad news. Luckily, traders can almost always find bad news to be happy about. When the economy is in the dumps, demand for credit drops, and rates drop. That makes bond traders really happy.
[end of extract]
Today’s employment numbers had both good news and bad news. It was fascinating to see the analysts following their political muses to emphasize one direction or the other. The stock and bond markets were equally ambivalent.
Some said that further government action will be needed, and that was good for markets. Others said that further government action will be needed and that was bad for markets. Still others said that the political environment will prevent further government action, which was (you guessed it) either good or bad for markets depending who was speaking.
Why are they having such a hard time deciding whether the news is good or bad, and whichever it is, if that is bad or good for markets?
Because we are against the proverbial edge.
None of us in the market ever thought we would see negative interest rates, but we have (on T-bills). None of us thought the Fed would lower rates to zero, since only Japan and Switzerland had ever done that, and accepted wisdom was that they did it to encourage investment in something other than 100% safe investments. But America has a shortage of savings, so what’s the point in driving savings to go elsewhere?
The reason bond traders like really bad employment numbers is that the Fed, at least since Greenspan, has always reacted to economic hardship by lowering rates. They even lowered rates to deal with imaginary economic issues like Y2K.
Today, you can probably shoot a cannon full of grapeshot across a Wall Street trading floor without hitting anyone who remembers the Fed under Paul Volcker.
Even the European Central Bank seems to have purged all the rate hawks who believed in harsh medicine for some economic maladies.
Still, once you get to zero, how can things get better? Free money for Fed borrowers is as good as it gets, and it lets the lenders raise rates to 18% for consumers that never missed a payment on a credit card in 25 years. After all, they can get a healthy return buying 4% MBS guaranteed by the government, and pay for them by borrowing money in 0.75% CD’s or even 0% Fed window funds. Why deal with those messy small businesses and households if times are so easy?
The only problem is that it will end, and no one knows when. If the economy gets bad enough, government bonds may not sell so well, and then all those government bonds that yield 2%, 3% or 4% and provided fat carry profits will lose value — maybe all the carry profits, and then some.
When today’s numbers came out, CNBC did their thing with multiple talking heads, each a CNBC opinionator or similar person hired by some Wall Street firm, bank, or investment company.
In this market, CNBC can fill its screen with these “experts,” each of whom may see the same numbers in two opposite ways. Worse yet, even those that see the numbers the same way will disagree on whether it’s good or bad for bonds, and yet again on whether it’s good or bad for the Dollar, and once more on whether it’s good or bad for stocks.
By my count, they need to divide their screen into 16 pieces to cover all the combinations.