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Archive for the ‘Federal Reserve’ Category

It’s all about her background, stupid

There is a long and interesting profile of Janet Yellen, the head of the Federal Reserve, in the latest issue of the New Yorker. As you might expect from this longstanding voice of the liberal New York elite, it paints her in a  sympathetic light, and usefully draws attention to how and where her views about the role of economics and the central bank were formed.  Here is a short extract, in which the author picks up on the fact that her first official public appearance after succeeding Ben Bernanke in the job was carefully chosen to send a message about her priorities:

She had gone to Chicago a few weeks earlier to speak at a conference for neighbourhood revitalisation organisations – not the venue a new Fed chair wouuld ordinarily choose for a maiden speech. Yellen was sending a signal. As she put it that day “Although we work through financial markets, our goal is to help Main Street, not Wall Street”. More than five years after the financial crisis, historically high numbers of Americans are still out of the labor force, working part time when they’d rather be full time, or unemployed for more than six months. Yellen spoke mainly about unemployment, and told the stories of three blue-collar Chiacagoans, two black, one white, who had lost their jobs in the recession. Her staff had found these people for her, and she had spoken to them on the phone before her speech. Two of the three – from Chicago’s desperately poor West Side – had criminal records.

Read the rest of this entry »

Written by Jonathan Davis

July 28, 2014 at 4:21 PM

Emerging markets: an accident that’s been waiting to happen

Stern words today about the roots of the current emerging markets crisis from Stephen Roach, the former chief economist at Morgan Stanley now less stressfully ensconced at Yale University, where  he is a senior Fellow. You can read the full broadside here, but this is a short extract, highlighting how the huge destabilising capital flows into – and now out of – emerging markets can be directly traced back to the policy of quantitative easing. The countries now suffering most are those, such as India and Indonesia, which have run large current account deficits and/or have failed to make necessary structural reforms during the good times:

A large current-account deficit is a classic symptom of a pre-crisis economy living beyond its means – in effect, investing more than it is saving. The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad. That is where QE came into play.

It provided a surplus of yield-seeking capital from investors in developed countries, thereby allowing emerging economies to remain on high-growth trajectories. IMF research puts emerging markets’ cumulative capital inflows at close to $4 trillion since the onset of QE in 2009. Enticed by the siren song of a shortcut to rapid economic growth, these inflows lulled emerging-market countries into believing that their imbalances were sustainable, enabling them to avoid the discipline needed to put their economies on more stable and viable paths. Read the rest of this entry »

Debt: still very much in favour

Reports by the Wall Street Journal that officials at the Federal Reserve are drawing up plans for starting to rein in the current programme of QE are worth noting. Jon Hilsenrath, the Journal reporter who wrote the story, is widely held to be the Fed’s favourite unofficial channel for making known its future intentions.  Could it be that even the Fed is starting to get concerned about the runaway effect that its monetary stimulus is having on asset prices? Throw in Mr Bernanke’s warnings about excessive risk-taking last week and it is tempting to suppose that even the Fed would be happy to see a pause in the the advance of risk assets, at least for now.

That would certainly seem to sit quite well with the normal midyear seasonal pullback that we have seen for each of the last three years. The worry with QE has always been that it is easy to get started on it, but very difficult to stop. Now that the Japanese have joined the QE party in an even more dramatic way, the ripples are being felt in financial markets all round the globe, compounding the scale of the eventual problem. Yields in a number of credit markets (eg junk bonds, leveraged loans) have fallen to what look like dangerously complacent levels. Companies such as Apple are obviously happy to take advantage of the ultra-low rates on corporate debt, but whether that achieves any longer term benefit remains to be seen – not so obvious when the purpose of the debt is committed to share repurchases rather than new capital investment. All the while a return to the levels of economic growth we witnessed before the crisis broke in 2008 remains stubbornly distant. Read the rest of this entry »

The “most dangerous investment environment ever”

These are the latest comments on the implications of the drastic policy measures being adopted by central banks in a so far unsuccessful attempt to stimulate their economies. They come from one of the most successful managers of a “real return” fund in the UK. Iain Stewart has been running the Newton Real Return fund since its launch in 2004, with only one small down year (2011). Anyone interested in capital preservation in the current uncertain climate is likely to find much that resonates here. The full story can be found here (source: FE Trustnet).

“Fixing the price of government bonds is a very risky policy as it can lead to mis-allocated capital. I would say now is the most dangerous environment I have ever seen. It feels nice when stock prices just keep going up, but if anything, those assets are being pushed up by policy. It may be an uncomfortable thought, but we need to keep reminding ourselves that the reason we are all bathing in an ocean of liquidity some five years on from the financial crisis is that we have, to date, failed to lay to rest the legacies of the last cycle. The problem is that forcing mature, ageing economies to grow through monetary easing is recreating the distortions and excesses which caused the crisis in the first place”. Read the rest of this entry »

Written by Jonathan Davis

April 23, 2013 at 3:06 PM

Even cash is now at risk

Albert Edwards, the lead strategist at Societe Generale, has added some typically forthright (and witty) comments on the latest developments in Euroland. By making explicit the fact that both uninsured bank depositors and all classes of bondholder have been required to take part in the rescue/liquidation of the two largest Cypriot banks, the troika (EU, IMF and ECB) has highlighted the fact that cash itself is now officially potentially an unsafe asset. He wonders also (as do I) how long it will be before a Eurozone country finally decides that remaining in the single currency is not worth the trauma that staying in involves.

Most economic analysis concludes, probably correctly, how much more costly it would be for either a creditor or debtor nation to leave the eurozone system compared to struggling on within it. Indeed for Germany, despite becoming increasingly irritated by having to dip their hands into their rapidly fraying pockets, the crisis in the eurozone has been accompanied by the lowest unemployment rates since before re-unification in 1990. Read the rest of this entry »

Written by Jonathan Davis

March 27, 2013 at 5:42 PM

Hold on to your hats in Japan

The dramatic upwards move in the Japanese equity market since the autumn has plenty further to go, according to Jonathan Ruffer, the founder of the private client fund management group Ruffer LLP, one of the professionals whose latest thinking I (and many others) like to follow closely.  Ruffer as a firm has held an overweight position in Japan for quite a long time, and now stands ready to be vindicated if Japan’s new reflation policy takes hold, as the markets now seem to be assuming. Writing in his latest quarterly review, he comments as follows:

We hold roughly half of portfolios in equities, in the UK, Europe, US and Asia, but the largest geographic position is in Japan. This market was broadly flat when we last wrote to you, although we had made good money in financial and property stocks. In the last quarter these and other holdings surged further, providing a strong finish to a dull year. The rationale in Japan remains intact; it is the warrant on world economic growth, and so more of the same in terms of monetary stimulus should favour Japan without the rest of the world’s downside. The stability of Japan, its lack of overcapacity, and the absence of financial or labour fragilities, give some protection, and afford it the ability to generate a self-sustaining economic recovery. The low expectations built into the possibility of a Japanese economic recovery provide the opportunity for further sharp market rises. The major obstacle to a more bullish backcloth has disappeared with the appointment of Abe as Prime Minister, and the forthcoming retirement of Shirikawa as Governor of the Bank of Japan. In this new world, the investment danger for foreigners is a weak yen (we have been fully hedged), but this is a benefit to the equity market. Read the rest of this entry »

Written by Jonathan Davis

January 21, 2013 at 3:33 PM

Nose out of book

After several weeks immersed in completing the book I have been writing on the investment methods of Sir John Templeton, to be pubished in the spring next year, this week sees the return of this blog to active duty. The past three months in the financial markets have been amongst the strangest and most volatile I can remember for some while - certainly since the great crisis of 2008. Two main things (the Eurozone crisis/horror movie and an apparent slowdown in the recovery of the US economy) have dominated market sentiment throughout these months, leading to a huge amount of displacement activity by anxious investors, and a good deal of hyperbole amongst the commentariat.

Suffice it to say that the news on both counts appears to have improved in the last few days. Although the Eurozone crisis is clearly still a long way from being resolved, the US data does appear to point to things picking up on the other side of the Atlantic, which should silence the most extreme prophets of doom for a while, at least.  Having broken out of their trading range, it will be surprising if equity markets do not finish the year on a relatively strong note, perhaps even crawling their way back to the level at which they started the year. The prospect of new bouts of quantitative easing by the Federal Reserve and Bank of England have dampened yields on long term Government bond, but the sovereign debt of overborrowed developed countries continues to look a/the most vulnerable asset class on any but the shortest of time horizons. Read the rest of this entry »

Written by Jonathan Davis

October 31, 2011 at 4:04 PM

Mr Bernanke, Japan and the US debt problem

Today saw the start of a significant rally in the US stock market for the first time in several days, and a significant day for the UK stock market, where the yield on the equity market briefly rose above that of the 10-year bond yield, traditionally an early warning signal that equities will deliver good returns over the medium term. It still looks like being a long hot August, however, with the Eurozone crisis showing little immediate signs of easing.

It was naughty - but oh so pointed – of Albert Edwards, the very bearish  market strategist at Soc Gen, to point out what Ben Bernanke, the chairman of the Federal Reserve, had to say in the now infamous “helicopter Ben” speech nine years ago. That was the speech, made well before he succeeded Alan Greenspan in the top job at the Federal Reserve, in which he expressed absolute confidence that the US would never again be allowed to experience a deflationary recession.

The Fed, he said, quite unequivocally, had the tools, in the shape of the printing presses, with which it could be sure of preventing deflation (and boy, you might say, has he used them already!).  But then, he asked – rhetorically – in his speech: Read the rest of this entry »

Written by Jonathan Davis

August 9, 2011 at 4:17 PM

A right old mess

The risk that the sovereign debt crisis could spiral out of control in the face of inadequate political will to resolve the crisis is clearly growing the longer that the impasse in the Eurozone (over peripheral country debt) and the United States (over lifting the debt ceiling) continues. Suggestions that we are in danger of a rerun of 2008 are not, alas, fanciful, and are growing by the day.

This is how the hedge fund manager Crispin Odey summed up the situation today, noting first the standoff in the United States, where both political parties seem blissfully unaware of the stakes for which they are playing.

The markets should be scared of such political madness, but instead the dollar benefits from greater madness emanating out of Europe. Greece is bust. Easy. However Germany and the Netherlands need to realise the necessity of recirculating the savings flows back into Spain and Italy. This current malaise provides an anvil upon which those countries can be hammered. A Euro in which deposits from southern Europe flood to Germany and are not re-exported except reluctantly by the ECB is ultimately doomed to expire. The timing of this is dangerous. Politicians are going away on holiday, but the markets will not wait. Read the rest of this entry »

Written by Jonathan Davis

July 19, 2011 at 10:48 AM

Mixed messages from the markets

Two contrasting views today that neatly sum up the current rather feverish market dynamics. This link summarises Deutsche Bank’s view that the worst case outcome the Eurozone crisis could be a 35% fall in global stock markets. And here, on the other hand, is the latest weekly view from fund managers Artemis, citing six reasons to be cheerful.

Of course the whole world could still go to blazes in debt’s handcart. It might well. But on balance, we prefer to remember that the FTSE 100 is (just) above its level as 2011 began. And that’s despite, it’s worth remembering, Japan’s tsunami, war in Libya, Arabian unrest, nemesis in Greece and the end of American QE.

Corporate health. Sure, there’s more bad news to come, we reckon, for most UK retailers. But there’s still much less credit risk in most companies than there is in governments. Take a stock like Hunting (oilfield services). It has cash of £300 million, a third of its market cap. Or publisher Reed. It’s priced at 11.5x, has a 4% yield, diversified earnings and improving margins. Japan’s NTT Docomo (mobile telecoms, 3.8% yield) has more cash than it knows what to do with.

M&A. Weaker sterling makes UK assets even more attractive to foreign (war) chests. Negative real interest rates in the west. These force investors, reluctantly or otherwise, into (high yielding) equities. Pessimism. It’s pronounced. If history has any predictive power, the gloom suggests this is a ‘buying signal’. Emerging markets. China seems to be Goldilockian. The prospects are patent, and the growth is good. The best western companies will continue to make their money there, not here. QE2. Its positive effects will take time, but will benefit the US economy.

What all this confirms to me is that the market, as always, has great difficulty in finding a level when there is a wide range of potential outcomes, some of them extreme. The Eurozone crisis is a good case in point.  The way the crisis has evolved is as much an indictment of the inadequate way that Europe’s political class have responded to the new threat of sovereign debt default as it is about the underlying gravity of the potential problem.

Meanwhile, the interesting part about Mr Bernanke’s recent testimony, to my mind, is the reaffirmation that his whole approach to running the Federal Reserve is rooted in his paramount desire to avoid deflation at any cost.  if he does restart a further round of printing money (quantitative easing), it will be because the Fed sees a real risk of deflation once more.

The odds are still against a worst case outcome at this point, but there is no denying that it is a possibility, and that is what sends risk-averse investors scuttling for protection. In these circumstances remember all those stories about a big turn in sentiment towards gold and other commodities in the early part of the year? Gold’s continued ascent to new highs tells a different story.

Written by Jonathan Davis

July 15, 2011 at 2:00 PM

Jeremy Grantham lets rip

If anything Jeremy Grantham, the crusty Yorkshire-born founder of the American fund management business GMO, is even more scathing in his latest quarterly letter about the shortcomings of the Federal Reserve than Andrew Smithers was in his report I mentioned here yesterday. As always, though, he has plenty of other interesting things to say on the investment outlook as well.

This is the conclusion of his extended critique of the way that the Fed under Greenspan and Bernanke has repeatedly primed the monetary pumps to distort the workings of the normal business and economic cycle, initially with ultra-low interest rates and latterly with quantitative easing. It is well worth reading in full; you will struggle to find a better polemic on this subject.

Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears,this easing has sent the dollar down and commodity prices up.

Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.

In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment. Read the rest of this entry »

Written by Jonathan Davis

October 28, 2010 at 10:37 AM