Loop Capital (VIX analysis)

Strange Days at the Fed Not a Problem for Stocks, VIX

The first development is the new version of “Operation Twist”.  The original operation twist, which dates back to September of 2011, involved the purchase of longer dated bonds and the sale of short maturities.  This new Operation Twist involves the sudden movement from Fed dovishness, which prevailed over the latter part of the summer and peaked with the Hurricanes Harvey and Irma, to a more hawkish bent evidenced most recently by Chairman Yellen’s quote in the text box. Ms. Yellen struck an uncharacteristically clear note on the need for the Fed to preserve flexibility to raise the funds rate in December notwithstanding possible continued lack of progress on the inflation front.  Her speech “Inflation, Uncertainty, and Monetary Policy”, which was delivered at the 59th Annual Meeting of the National Association for Business Economics Conference, reinforced the reassessment underway in the bond market since early September that has resulted in a large increase in the implied probability  of Fed action in December and seen the 10-year Treasury yield rise over 30 basis points.
After beating back the temporary insurrection of doves Lael Brainard and Neel Kashkari, Yellen will have to swiftly say her goodbyes to Stanley Fischer, retiring for personal reasons, and put down the welcome mat for newly appointed Governor Randal Quarles, who will be first official vice chairman for supervision, a position created by the 2010 Dodd-Frank reform law, in addition to his chores as a Governor.  The confirmation of Quarles, head of investment firm Cynosure Group, was not in doubt.  There is no question that Quarles has bona fide qualifications for the newly created spot, although his appointment represents a dramatic shift towards less supervision than when Daniel Tarullo, the former Federal Reserve governor, served unofficially in that capacity.  While this may be a case of the fox guarding the henhouse, Quarles is a very capable fox. I expect major US banks to expand their trading in bitcoin.
Meanwhile the parade of candidates for the Fed Chair continues.  At least four candidates have been interviewed—Kevin Warsh and Jerome Powell were confirmed interviewees.  Other candidates, Glen Hubbard and NEC Head Gary Cohn apparently have not been.  Glenn Hubbard, while in possession of a strong resume, is hurt by the “used goods” syndrome.  While it’s not a barrier for an aspiring US President to have run for, and lost, his own party’s nomination before ultimately winning the whole shooting match; the same is not always true of posts like the Fed Chair.  Hubbard has been discussed before, didn’t get too far, and is not likely to get too far this time either (“Always a bridesmaid, never a bride”).  Gary Cohn has been trying to sooth the President’s hurt feelings in the wake of Cohn’s Charlottesville remarks, but not enough time has passed and with a decision from the Administration due in the next couple of weeks, his candidacy may be dead.
Chairman Yellen has done an admirable job and would normally be considered a shoe-in since recent practice has been for a new president
to reappoint the Fed Chair of the previous president regardless of party affiliation in order to maintain continuity.  President Trump lives to break convention, however, and any new feelings of attachment Trump may have developed for Yellen will pale relative to his need to flout convention. Predictit, a “real-money political prediction market… {whose} job is to study the wisdom of the crowd” has Yellen and Cohn fading while Warsh rallies.  Powell appears to be a late add.
Financial markets are well aware that the President will be placing his stamp on the Fed with the numerous open positions currently and more anticipated as governors’ terms expire. This, along with all of the other Federal Reserve comings and goings, raise an interesting question:  there is plenty enough going on to justify an increase in the VIX, yet the index continues to languish, almost inexplicably, in the eleven months following Trump’s election.  A variety of market-worthy events:  North Korean theatrics, legislative setbacks, Administration firings by the cartful, NAFTA, immigration, Russian election intervention, modestly rising oil prices and whatever else have collectively failed to boost the VIX.  Will it be the changing Fed that finally moves the needle?