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What Bill Dudley's Hedge Fund Advisors Told Him About A September Rate Hike

By now virtually every prominent financial authority or pundit has chimed in and told the Fed not to hike rates: these include the IMF, Larry Summers (who for some reason lost the fight with Yellen for the Fed chair because he was seen as "too hawkish" - oops, irony), and even China. Yet all of these are irrelevant, because when it comes to soliciting opinions, the NY Fed in general, and former Goldmanite Bill Dudley in particular, care about just one group of "advisors" - the Investor Advisory Committee on Financial Markets (a group created in July 2009 after the 2008 market crash) also known as the billionaires who run the country's biggest hedge funds, prop desks and PE firms, including JPM, Credit Suisse, Apollo, Blackrock, Blue Mountain, Brevan Howard, Tudor, Fortress, and lo and behold, David "Balls to the Wall" Tepper.

The next IACFM meeting is scheduled to take place in October, as such it will be too late to change the Fed's opinion for a potential September 17 rate hike.  Which is why we have to revert to the latest advisory committee meeting which took place on June 25, just before the Greek referendum was announced and two months before the Chinese devaluation, the July FOMC minutes and subsequent market correction. It will have to do.

This is what the "smartest people in the room" told Bill Dudley and his minions about a potential September rate hike. From the June 25, 2015 minutes:

Domestic Developments


Committee attendees discussed the outlook for the U.S. economy and their expectations for monetary policy. Overall, they noted that real economic activity has gradually improved after a lackluster first quarter. Committee attendees characterized indicators of realized inflation as improving, but subdued relative to FOMC objectives. Meanwhile, the labor market was viewed as at or near full employment.


Committee attendees suggested that the FOMC is likely to increase the federal funds target range during 2015, with September cited as the most likely timing of liftoff. Some felt that financial markets are well positioned for liftoff, while others expected volatility following the first increase in the target range. Most Committee attendees suggested that the path of the policy rate would be more impactful on financial conditions than the timing of liftoff. They expected the path of monetary policy to be data dependent, but noted that they expect the FOMC to be cautious during normalization.

A quick primer on what "discounting" means - since all the participants expected a September rate hike, and since most expected volatility "following" the rate hike, some of these "smartest people in the room" decide to frontrun the volatility (a polite way for violent selling), and sell first before everyone else did. Just in case there was still some confusion about the recent market selloff.

But back to the advisory committee minutes, and what it said about global developments including China:

The sharp rise in core euro area yields during the second quarter was mostly attributed to positioning dynamics, with some feeling low yield levels were too extended. Committee attendees suggested relative value considerations prompted the coordinated move in global developed market rates. Better-than-expected economic data in the euro area and, to a lesser extent, shifting expectations for the ultimate size of the ECB asset purchase program were cited as contributing factors.


Committee attendees suggested that the euro area economy is improving, but that inflation indicators remain below mandate consistent levels and are likely to remain there for a considerable time. They felt that the ECB was doing its part, but fiscal and labor market policies across the region were likely to inhibit the euro area from reaching its inflation mandate in the near term. Most felt that that further euro depreciation was necessary to stimulate the economy.


Committee attendees generally concluded that the Japanese economy has also improved, highlighting the strength of the labor market and the improvement in inflation indicators. A few cited concerns about the Bank of Japan’s exit strategy, given the size of their balance sheet.


China was the focus of the emerging markets discussion. Committee attendees characterized the Chinese economy as slowing, with most believing GDP was running below the target level. Most concluded that recent PBOC easing measures were executed to combat the slowing economy, but noted that financial conditions were not easing much in response. Committee attendees acknowledged officials’ efforts to internationalize Chinese markets, but suggested some of those efforts may run counter to easing initiatives. Beyond China, Committee attendees did not consider emerging markets, on the whole, well prepared for liftoff by the Federal Reserve given that few countries have made structural changes necessary to absorb higher rates.

Well, they were right: emerging markets have since been paralyzed by the biggest currency collapse since the Asian Crisis of 1998 in the aftermath of the Chinese devaluation. However, if the June minutes are to be trusted, then none of what is going on in China is a surprise to any of these smartest people in the room, which is why "Committee attendees suggested that the FOMC is likely to increase the federal funds target range during 2015, with September cited as the most likely timing of liftoff", unless...

What appears to have happened in the ensuing 2 months is that none of these so-called "smartest" people hedged against anything that they warned may happen. Well, actually we take that back: recall from August 14, or just two weeks ago: "Did David Tepper Just Call The Market Top" - the S&P tumbled some 10% since then.

In fact, what has happened is that none of these "smartest people" were actually hedging anything - only Nassim Taleb was actually prepared and ready to capitalize from a market crash, and as we reported last night, his affiliated hedge fund, Mark Spitznagel's Universa made $1 billion last Monday. As for everyone else, well, just look at the table below which including many of the "advisors" listed above:

In fact, the hedge fund performance ranking above is the only thing anyone has to care about when evaluating the chance of a Fed rate hike: if and when the hedge fund losses become too unbearable, any rate hike - September, December, or whenever - will be indefinitely delayed. And that is all Bill Dudley will hear from the only group of advisors whose opinion, and offshore bank accounts, he cares about.