Painting Stories: In Memoriam Moe

The virtual ink hasn't yet dried on the FOMC's one-two punch of rate cuts (125 bp in 8 days) and the "market" is back calling for more. According to the Fed funds options market, the probability of a cut in March is 90%, with the chance of a 75 bp cut rising to 30% - equal to that for a 25 or 50 bp cut (see chart below).

Chart: Cleveland Fed

In contrast to Greenspan's previous gradualism (he rarely moved by more than 25 bp), the Fed's current actions reflect Mr. Bernanke's choice for an aggressive monetary style, shaped by Milton Friedman's theories and his own academic work. Both interpret the Great Depression as the result of hesitant monetary policies in the face of financial market turmoil, instead of unsupportable asset bubbles and severe socio-economic imbalances in income and wealth.

The outcome is that the Fed now pays much more attention to financial market behavior than anything else. Indeed, the latest FOMC announcement could have been written by a broker's investment policy committee; the very first sentence after announcing the new rates is: "Financial markets remain under considerable stress...".

I won't expand on the danger of thus getting caught in a knee-jerk spiral of policy action - reaction, but focus instead on the quality and significance of market data, used to inform the Fed's market-driven decisions. For example, who determines the option prices that are used to calculate the probabilities shown above, and which are then interpreted by the Fed as "the market expects us to..." ?

In other words, who's "painting" the picture that the Fed sees? Let me tell you a story...

When I was starting my career in finance I had the great good fortune to sit next to an old gentleman who started working in Wall Street one month before the 1929 Crash. In an uninterrupted career that spanned decades - he only stopped to fight in WWII - he made and lost several small fortunes and finally learned enough to become comfortably rich.

When I met him, Moe was well past retirement age and didn't have to work for a living, but came to the office daily anyway. As he succintly put it: "What else am I going to do?". He was happily married to a gracious and elegant lady, so the the usual excuse of avoiding marital distress didn't apply; perhaps being out of the house kept it that way... In any case, Moe's position in the firm was assured by tradition, honor and, I suspect, not a little fear of the age discrimination laws. Upper management kept hinting he should retire voluntarily - they gave him a gold watch, twice - but he just shrugged them off. And kept the watches.

I learned a lot about markets from Moe that isn't to be found in any formal training course or book - save the classic Reminiscences of A Stock Operator, which he could have easily written himself, anyway. He didn't share financial theories, analyses or models with me, just hard practical facts about people and how to battle for a buck on the Street. (He also told me stories about Ziegfeld girls, but they can't be repeated here.)

One morning, he glanced over his newspaper and saw me poring over the double tome of Daily Graphs. "You see anything in there you like?", he asked. Naturally, I was flattered and started spewing out the usual gobbledygook about technical formations, indicators, angles and the like. He listened patiently. When I finished, with what must have been the look of a puppy expecting a treat on my face, he said: "Let me tell you a story".

"When I was about your age and full of piss and vinegar, I too looked at charts, thinking I could figure it all out by looking at pictures. One day, I even approached a big speculator and solicited his business by recommending something out of a chart. He asked me what I saw and I told him all about the picture - the same as you just did. When I finished, the guy gave me a shark smile and said, "Son, I'm the guy painting the picture you're looking at - now git". Moe stopped right there and went back to reading his newspaper.

I have never forgotten Moe, rest his soul. He comes to mind every time I see a chart, an analysis or a particular "action" in a market. For instance, when I look at the above Fed fund implied probabilities, I wonder... Who exactly is doing the "implying"?

And I also wonder...has Mr. Bernanke ever met a "Moe"?