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Dollar Tables

24 Sep

You have to start wondering if the folks around the FOMC table are actually talking to one another. Recent comments by Chairman Yellen regarding investor complacency in the face of alleged upcoming rate hikes does not seem to jibe with comments by Fed President Dudley about the recent strength in the U.S. Dollar. Perhaps the reason that investors are so ambivalent about upcoming rate hikes is because they have every reason to be. With all of the dashboard indicators arguing for a rate hike, Mr. Dudley has simply added another gauge to that dashboard. If the Fed is worried about the strength of the U.S. Dollar, they should join the queue as  Japan and the EU are all in a race to debase. The ultimate winner of this race to the bottom will be hard assets with the loser being the last remaining shred of Central Bank credibility. Buy Stuff


Cult Hero

12 Sep

If you did not read todays op-ed piece in the NYT by Professor Paul Krugman, it is definitely worth the read. In the piece, Professor Krugman questions the credibility of those that would even suggest that the Fed policies of the last few years are laying the ground work for higher inflation. He calls it the power of the inflation “cult”. Mr Krugman wonders why so many have adhered to a prediction that so far has failed to materialize. I won’t ruin it for you, but his general thesis is that those that would argue that endless bouts of Fed liquidity ultimately will lead to inflation are really arguing against government spending. In Professor Krugman’s view, those in the inflation camp are really opponents of social programs in disguise. As someone who never saw a government spending program he did not like, he should know. In fact, if you follow Professor Krugman’s views in the NYT, he feels quite strongly that the Fed has not gone far enough to cure everything that ails the U.S. Economy. Much like those that he criticizes, Professor Krugman constantly is pressing for more of the same, while completely ignoring the possibility of unintended consequences. Professor Krugman also fails to mention that this sea of liquidity on which the global economy currently resides has been fueled by not only the Fed, but by every other major Central Bank. As someone who puts such credence in the powers of Central Banks, one would think that Professor Krugman would at least give some deference to the possibility that they will ultimately get what they want (higher inflation).

Fed goes really really all in on Wealth Effect

19 Jun

If you were  forced to listen to the circuitous ramblings of Janet Yellen yesterday,one had to be amazed at the degree of precision ascribed to the Feds various forecasts. Not only were the forecasts precise, but astoundingly they did not even make any economic sense. According to Chairman Yellen, the jobless rate is projected to fall to 5.1% by 2016 with prices also remaining  stable throughout that same period. In their rosy scenario, the funds rate only rises to 150 basis points, thus further cementing negative real rates at the front end of the curve. When asked about the recent uptick in the overall price level, she dismissed this as simply noise and also downplayed the decline in unemployment as lacking substance given that the composition of these new jobs was suspect. One has to wonder at what point the capital markets will wake up to the fact that the Fed is simply a one trick pony at this stage. We had to laugh at a Bloomberg interview, post news conference, in which an analyst commented that the Fed has many options still open to it in the event of some “black swan” event. This analyst stated that they always could engage in more forward guidance if need be. We may be wrong, but if the unforeseen comes to pass(and it always does) simply stating categorically that they will do nothing for longer will probably not do the job. The reaction in the dollar, and more pointedly commodities, after this latest round of Central Bank inaction is a clear signal that the maybe the wake up call is now upon us. Buy Stuff

I Wanna Be Sedated

17 Jun

Much has been made about the lack of volatility, relatively speaking, across almost all parts of the capital markets. The dampening down of what would be considered normal volatility has again been laid at the feet of the command and control Central Bankers.We are not surprised however as the prevailing attitude is that low rates cure all ills, when in reality, low rates create more ills.  We all should be quite attuned to the sedative effects of low interest rates on investors perceptions of real risk, if the recent crisis has taught us nothing else. Thus, when we see potentially serious geo-political flareups such as Iraq or China/Korea, any hint of serious concern is smothered quickly by the “whatever it takes” mentality inherent in  all Central Bankers. However, as Bertolt Brecht said ” Because things are the way they are, things will not stay the way they are”.

Made in the USA-Reflation

28 May

I have to put us in the dumbfounded camp when it comes to the recent action in Treasuries. Yields that are scraping along the bottom, actually negative real yields if you take the most recent CPI data and a sub 2.5% Ten Year Note, would not seem to jibe with the action in Global Equity Markets. It’s hard to imagine that  the equity markets and the fixed income markets both have it right. The explanation for the aforementioned Treasury rally has been laid at the feet of outright deflation, ostensibly exported from the newly submerging markets (China, Brazil, etc..). The geo-political backdrop to a global macro environment that is still based on “beggar thy neighbor” policies would argue that there is less to this deflationary argument than meets the eye. David Rosenberg of Gluskin Sheff deftly points out that the newfound global disharmony, both politically and economically, will have vast implications for forward thinking investors. Mr Rosenberg comments ” Tectonic shifts are taking place and this in turn requires a shift in strategy for anyone operating under the old paradigm of world harmony, political stability, central bank prudence and expanding global trade flows”.The tectonic shifts for which Mr Rosenberg refers are the anchors of inflation/deflation and his argument for a pre-emptive shift in portfolio composition, in our opinion (obviously), is spot on. Position yourself on the right side of the tectonic plate and Buy Stuff. 

Groundhog Day

23 May

I can’t help but feel like Bill Murray in the movie Groundhog Day, whereby it appears that every day in the Capital Markets is a repeat of the day prior. Forget the new normal, or the great moderation, we are now in the midst of the Groundhog Day Market. In this nirvana, Stocks rally, bonds rally or at least stay range bound, commodities sell off and volatility across the board stays stubbornly low. Investors in this new era, would appear, like Bill Murray, to be in some kind of twilight zone where it’s not “no news is good news”, its there is no new news. Every day the background noise is the same: “Stocks are the place to be given where rates are”,” The Fed will not raise rates until…”,” Inflation is dead”,” De-flation is the greatest risk”. This world would indeed be nirvana if not for the faulty premise that underlies all of this complacency; namely that Central Bankers have it (whatever it may ultimately be) under control. What concerns us is not the occurrence of some black swan event, but rather the high level of disjointedness which will occur given the significant mis-allocation of capital across all global Capital Markets.Major dislocations in markets usually do not stem from one single “event”, but rather from the collective group -think that believes that all events are simply one-off in nature and thus can be controlled. Market dislocations occur when the macro suddenly overwhelms the micro, thus rendering simple solutions (Central Bank action) relatively ineffective. Don’t mistake sameness for safety, Buy Stuff.

Small Talk

22 May

The minutes from the last Fed meeting were released yesterday, and as usual, the mindless chatter was soon to follow. A great deal was made about the discussion of the continued taper and more importantly how, or if, they would shrink their $4Trillion balance sheet. Without going into details, except to tell us that rates would not normalize any time soon, the committee felt they had a sufficient number of unproven methods to either reinvest their runoff proceeds or not. Depending on growth, or employment, or inflation the Fed feels confident that rates will remain low, or not, and that they will make adequate adjustments to policy, or not, depending on whether conditions warrant. Fed speak has been reduced to the most abject level of nonsense, which everyone feels somehow compelled to comment and act on. What was classic in yesterday’s minutes was the discussion of risks whereby some Fed members felt there were potential risks out there involving financial markets, namely tight credit spreads and low levels of overall volatility possibly hinting at extreme levels of complacency. The general feeling was however that it would be” helpful to continue to explore the appropriate regulatory, supervisory and monetary policy responses to potential risks to financial stability”. In other words, stay at the party everyone, we will clean up the mess afterwards- trust us.Trust in Central Bankers at your own risk. Buy Stuff.