Surging Bond Yields: A Wayne Angell Moment

Lost in the shuffle of “Stocks Plunge on Surging Bond Yields” and “Treasury 10-Year Yield Hits 5-Year High” headlines were some impressive nuggets:

  • Dollar Hits Four Year High in Asia
  • Federal Deficit Sharply Lower, down 34.6 percent from the same period a year ago
  • U.S. Economy: Trade Deficit Shrinks as continued strong overseas demand pushed American exports to an all-time high

Perspective is a very difficult thing to maintain in the day-to-day grind of Wall Street. It is easy to forget that things do not happen in a vacuum, that the puzzle fits together like a Jenga tower.
A month ago, there was tremendous hang-wringing over the U.S. Dollar in freefall and The Twin Deficits were looming large. While upward pressure on bond yields was the obvious consequence, it had yet to become the Bogie Man because financial news tends to answer the “why did this happen” question of the day through the rear view mirror.
Bond yields have been ticking up for more than four years, so why did people pick this particular moment to freak? Perhaps we have another great example of sentiment cycle.
Think of the market as a coal-powered cargo train sitting in the valley, one that must go up a mountain range. The beginning is always difficult. The crew must calculate the amount of coal needed for the journey, and as the train chugs and gains momentum, they hope there is enough fuel on board to power the whole thing over the top.
The villagers on the other side of the mountain never, ever see the train until it is at the summit, flying along with a full head of steam. It seems to be coming at them at a dangerous speed and they fear that it will come off the rails. It’s not their fault. This is the only perspective available from the foothills.
The job of a market strategist is to hitch a ride on the train and write about what they see. For example, in May 2003, I wrote a timely bond rant. In November 2006, I documented the paradigm shift. While this sort of analysis might not be actionable, it is still good to know certain things in order to maintain perspective.

Wayne Angell

There was something to his philosophy when he was a Fed Governer.

MR. ANGELL. Well, it seems to me that we’re at a juncture here where it’s time for us to pause and see what happens. The fourth quarter and the first quarter are the consequences of the monetary policy that we implemented in the second quarter and the third quarter. We are already past [influencing] those. Whatever these quarters turn out to be, it would be most unfortunate for us to have a slowdown–or a slowdown near to zero if it’s that slow, which I don’t think it is–and then not to capture the price level opportunity that you get from being there. It would just be such a waste to step up to that point and then not to capture the benefits. So, I think it’s imperative that we not be too caught up in tuning in on the employment and output numbers that we’re going to be seeing. I think we have to remain forward-looking. Most important, it seems to me that the dollar exchange rate is out there. And it seems to me that we cannot go through a period of substantial dollar weakness in foreign exchange markets without absolutely upsetting all the financial markets. The only way that I can see us not going through such a period is for us to make some gains on the trade balance in this window [of opportunity]. I am more encouraged from talking with central bankers in Europe and Japan concerning their growth prospects. We have an opportunity now for them to grow faster than we’re going to grow and I guess I’m going to be on the optimistic side, as the Vice Chairman was, in regard to exports. It seems to me that our policy ought to be designed to keep nominal GNP in the 4 to 5 percent range and hope that we get a fantastic real GNP out of those numbers. If we hold to that kind of a pattern, then I think there’s ample opportunity to [get] the exports we need to do or [get] the crowding out of imports. — November 14, 1989 Meeting of the Federal Open Market Committee

It was only two years after the Crash. He made total sense. People are now worried about the same things as they did back in 1989. As Mark Twain wrote, since “It is not worthwhile to try to keep history from repeating itself, for man’s character will always make the preventing of the repetitions impossible,” it probably pays to be anticipatory and pragmatic.
Fast forward to March 20, 2000, after six rate hikes:

Angell: This economy can go on expanding for another nine years. This is a wonderful new era that couldn’t have happened without a vigilant Fed. The Fed’s expertise in developing the business cycle has reached a level where we no longer have the boom and bust after-effect of it. In 1987-1988, the Federal Reserve made a mistake. By concentrating — against my objections — on the stock market, (then Chairman Paul Volcker) lowered rates because he thought the wealth effect was going to have a slowing effect on the economy. We blew it. And consequently we were in desperation to stop the inflation rate from rising. So we had to have an end-of-expansion slamming on the brakes, which led to a recession. Greenspan has ensured that as we start the 10th year of this expansion, we don’t have those end-of-cycle deals where everyone recognizes inflation is around the corner. —

A year later, on April 20, 2001, on CNN Moneyline:

KEENAN: Welcome back. In our “Sector Focus” this evening: the bond market long-term interest rates rose sharply this past week even as the Federal Reserve surprised the markets with a cut in short-term interest rates. Joining me now, a man who has been calling on the Central Bank to be more aggressive in its rate-cutting program throughout this year, Wayne Angell. He is the chief economist with Bear Stearns, and Wayne, welcome back. Good to have you with us.
KEENAN: You have been calling on the Fed to act, and act aggressively. And you also said that the Fed would cut in-between meetings after its last meeting in March. Yet you pulled that prediction off the table, only to have the Fed follow through the following day. To what extent do you think that the Federal Reserve is playing with your head and trying to fake out you and some of your colleagues?
ANGELL: The Federal Reserve isn’t playing with anyone’s head. The Federal Reserve has a significant responsibility in regard to holding short rates higher than market rates have been going. And the Fed has been running a decidedly deflation risk by holding short-term rates up above long-term rates. So it’s good news to see the short rates come down.
KEENAN: Why do you think the Fed acted this week? And do you think they timed the cut on Wednesday morning to get the maximum upward momentum in the stock market?
ANGELL: No, not at all. After the March 20th meeting, I suggested that the Federal Reserve really had a two-week window to lower rates between meeting. And what the Fed did is they waited for all the data to come in, and then they weighed that evidence, and they then came up with exactly the right answer, and that is capital spending. And our economy is plunging into negative territory.
KEENAN: The Fed addressed that in its statement, also talked about the potential impact of the reverse-wealth effect. Does that mean we get another half-point cut on May 15th?
ANGELL: Yes, I believe it does, and that’s why I feel so much better. Because if the Fed had skipped another intermeeting move, then they would have had only been able to move the rate down to 450 by the May 15 meeting. This way we have a very, very good chance that the Fed will lower the funds rate to 4 percent at the May 15 meeting.
KEENAN: Can the Fed keep us out of a recession?
ANGELL: That — the Fed can keep us out of a recession if we’re not already in a recession. The Fed can’t roll the clock back with monetary policy. But monetary policy works almost immediately. Whenever the Fed lowers the funds rate more than the market expects, then the prices of everything tend to move up, including prices of equities.
KEENAN: All right. We have to leave it there. Thanks, Wayne. Always good to have you with us.
ANGELL: Thank you.
KEENAN: Wayne Angell, chief economist at Bear Stearns, joining us from Washington.

After his stint at the Fed, he became chief economist at Bear Sterns. Working on Wall Street clearly had an effect on his perspective.
I remember seeing him on CNBC, demanding an intermeeting rate cut. I thought to myself, if Mr. Angell was a chocolate bar, he would be Almond “Sometimes You Feel Like a Nut” Joy even though he started out as a “Sometimes You Don’t” Mounds.
The lesson? None of us are immune.