Fed Minutes Reveal Pernicious Policy Paradox; Bond King Says Hang On To Gold

They needed some “additional data.”

Data like a vote count from the UK, where the possibility of an imminent black swan landing sealed the deal for no FOMC hike in June.

"Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data on the consequences of the U.K. vote," minutes from the Fed’s June meeting released on Wednesday read. Note that this is yet further confirmation of what we’ve known all along and what Janet Yellen explicitly acknowledged last September. Namely, the FOMC reaction function now depends to a large extent on exogenous variables that have the potential to cause turmoil in global financial markets.

Here are the highlights (or “low”lights, depending on how you look at it):

  • Most participants expected Brexit vote could generate turbulence that might hurt U.S. economy; almost all saw “surprisingly weak” May employment report boosting uncertainty

  • Many were reluctant to change their outlook “materially” based on 1 data release; participants generally expected to see resumption of monthly gains in payrolls sufficient enough to promote strengthening of labor market

  • Some said that with labor market at or near level consistent with full employment, reasonable to expect any gains to soon moderate from pace seen in past few years

And the reaction from markets was…

… well, not too dramatic, frankly. Yields dipped, stocks held onto moderate gains and looked perhaps poised to trend higher, and gold slid a bit.

You can write that off to befuddlement, but the fact is we didn’t really learn much other than that the Fed is itself befuddled. But then again we already knew that too. So maybe we didn’t learn anything at all. Who knows.

What we do know is that a second rate hike seems more and more like a pipe dream. It’s a vicious circle. Central bank easing is making the system more fragile, but removing the accommodation will break it altogether. That’s a pernicious policy paradox if ever there was one.

But even as rate hike expectations plummet…

(Chart: SocGen)

...the “Bond King” says Treasurys are a particularly terrible investment. In an interview with Reuters, DoubleLine’s Jeffrey Gundlach said it wouldn’t be “prudent” to jump into Treasurys. “[They’re] the worst trade location ever,” he added.

This despite the fact that they’re quite compelling compared to other safe havens like say German bunds and Japanese government bonds, the yield on which continues to grind inexorably deeper into negative territory. Here’s a look at relative attractiveness:

(Chart: SocGen)

What then, you might fairly ask, does Gundlach recommend? Pet rocks, that’s what. “Things are shaky and feeling dangerous,” he told Reuters over the phone. “I am not selling gold.”

Neither, apparently, is anyone else...

(Chart: BofAML)

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