Economics

Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

October 10, 2015
By
Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

The September 16-17th FOMC minutes were released Thursday afternoon, continuing the market’s Beast Mode reaction to Fed dovishness. The S&P 500 completed the best week of the year, barely down-ticking from 1,893 to 2,015. The market rallied 7% from the lows after the September Employment report to the highs yesterday. The 122 handle rally takes the market multiple up one turn (from 15x to 16x multiple). Despite the euphoria of a quick fix, there are a number of reasons for caution after scrutiny of the Fed’s minutes. Yes, the Fed minutes were dovish. Full stop. The Fed awaits more data on improving labor markets despite a 5.1% unemployment rate, and inflation is expected to remain below 2% for some time. All the voting members, other than Lacker, voted against a hike....

Read more »

Super Dovish Fed Persists

September 18, 2015
By
Super Dovish Fed Persists

The Fed’s lack of policy response, and subsequent press conference, evokes memories of a scene in Bronx Tale… What’s going on here?  Now you can’t leave.  I will never forget the look on their faces.  All eight of them.Their faces dropped.  All their courage and strength was drained from their bodies.  They had a reputation for breaking up bars.  But they knew that instant they made a fatal mistake.  This time, they walked into the wrong bar. An opportunity for the Yellen Fed to exit ZIRP came and passed yesterday. Possibly, it will be more convenient to start a rate hike cycle in October/December or possibly, in 2016. But if China enters a recession, and financial markets remain stressed, it is also possible that the Fed will be unable to raise rates during the...

Read more »

Employment Report & Markets; Forcing a Fed Rate Hike

September 9, 2015
By
Employment Report & Markets; Forcing a Fed Rate Hike

While the odds on a Fed rate hike are still vacillating, the strong jobs report, and recent market action are now forcing the Fed’s hand. The Fed needs extreme market conditions to justify not hiking. The point has arrived where stock and bond markets are strong enough, even with the prospects of a hike, that diminished Fed credibility should outweigh any benefits of pausing. Stanley Fischer clearly outlined the need to hike ahead of not only inflation, but inflationary expectations. The August Employment Report was a key data set before the Fed meeting. The headline jobs number was soft at +173k jobs but all other aspects of the report were notably strong: July payrolls were revised +30k higher (to 245k) June payrolls were revised ++14k higher (to 245k) The unemployment rate fell to...

Read more »

China in Recession; Yuan Depreciation Imminent

September 3, 2015
By
China in Recession; Yuan Depreciation Imminent

China is at the end-game of its great economic transformation. Multiple iterations of 5-year plans, and flawed central economic planning, created a massive build-up in debt that can no longer be continued. China’s debt fueled growth is understood, but the impact of the deleveraging phase is becoming evident in real time. Various estimates of China debt exist, but given the proliferation of shadow banking, and state involvement in the corporate sector, China’s total debt is a nebulous subject. Using estimates, China debt rose from $1 trillion in 2001 to $30 trillion today. China GDP is approximately 10x larger during a period in which debt rose 30x. McKinsey Global Institute estimates China debt-GDP at 282% in 2014. China’s economic problem is straightforward. Party rulers believed steadfast in the ability to...

Read more »

Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

September 1, 2015
By
Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

This weekend’s Jackson Hole speeches, and subsequent commentary, outlined the guideposts for a Fed rate hike, potentially in September. The explosion in crude, if it holds for two more weeks, will pressure the Fed to hike. The Fed clearly highlighted the USD, employment, and oil, as drivers of inflation. The fast 10-point in rally in oil, from sub-$40, to near-$50, unwinds 2-months worth of decline. With the Fed keying off energy price declines as “temporary”, the failure to hike, in the face of the above mentioned factors swinging more inflationary, risks a credibility issue. With stronger crude (again if it holds), the August Employment Report looms very large, and will likely be the final determinant of a September rate-hike, aside from a potential market crash. On the topic of market crashes… funny...

Read more »

Stanley Fischer’s Jackson Hole Speech: Fed Determined to Lift-Off

August 29, 2015
By
Stanley Fischer’s Jackson Hole Speech: Fed Determined to Lift-Off

Stanley Fischer delivered a critical speech this weekend at the Jackson Hole, Economic Symposium, outlining the Fed’s forward looking view on inflation and the potential for a lessening of factors that dampen inflation. This speech signals the Fed is staying the course and determined for rate hike lift-off on the advertised time-table. CJF interprets this speech hakwishly, relative to market expectations for a push-out to the December lift off timeframe. It is likely that December is the latest possible preference for lift-off with September (or October) still very much on the table. Will be interesting to see how volatile markets react to some of the forceful language in the speech. The speech, in full, is a worthwhile read. Excerpts with CJF commentary: The past year’s energy price declines ought...

Read more »

A tale of two growth rates; GDP and US corporate profits

June 3, 2014
By
A tale of two growth rates; GDP and US corporate profits

Last week’s “second” 1Q14 GDP print revised to a -1.0% annualized growth rate relative to the prior print of +0.1%. The second 1Q14 GDP print was shrugged off, with equity markets rallying to new highs, in impressive fashion, given the seasonally low volumes around Memorial Day. While the 1Q14 print is still not “final” (there will be third print, and an ultimate benchmark revision) there is little fear for two consecutive down GDP quarters; the typical definition of a recession. Nonetheless, the real economy is still punk. The performance between the real economy, and the environment for corporate profits, is often confused, and wrongly, treated as one and the same thing. CJF holds the view that what’s ok for the economy is a nirvana for corporate profits. If the...

Read more »

April employment report; strength broadens to lower-end

May 2, 2014
By
April employment report; strength broadens to lower-end

This month’s job report will rightly be questioned; late-winter/early spring weather for much of the country was horrible in February and March, and this morning’s report reflects payback from depressed activity making results appear better than they actually are. Nonetheless, trends in April, and thus far year-to-date, reflect a potentially important change in labor market dynamics; the broadening of job creation to the lower-end segment of the job market. This emerging trend represents the start of a sea-change towards “normalization” in the job market – looking more like what it used to look like pre-financial crisis, finally. The implications for lower/middle income consumption, the housing market, inflation, and corporate input costs are crucial. Data points supporting signs of broadening: U6 unemployment rate fell to 12.3% from 12.7% (this metric...

Read more »

Wealth Effect; gaining steam from asset returns and persistence

April 29, 2014
By
Wealth Effect; gaining steam from asset returns and persistence

The ongoing economic tug-of-war remains tied. Growth spurts with better momentum (housing, auto, healthy corporate profits, job market) are almost immediately met by numerous automatic stabilizers (higher mortgage rates, deteriorating housing affordability, satiation of replacement cycles). But weighing the good and the bad, we are in a fine environment for the stock market. The environment is good enough to drive slow, yet relatively stable, economic growth but weak enough for corporate input costs (labor, materials, interest rates) to remain very well contained. Margins are elevated, cash flow is healthy, and the market performs well (big picture). The wealth effect is a key item on the “good” side of the economic ledger that is set to gain steam in terms of economic drivers. “Wealth” matters because it is the secondary...

Read more »

Student debt bubble; should school loans be repaid, or not?

April 23, 2014
By
Student debt bubble; should school loans be repaid, or not?

Tuesday’s WSJ presented an interesting cover story on student debt forgiveness. Push back is growing with respect to managing the amount of total debt forgiveness or capping it to a maximum amount; the article states $57,500 as potential forgiveness cap per student. Bubble aftermath is never pretty and the fascinating case of runaway US student debt will be no different. Let’s be frank, there is no black and white solution to any of this. Per the American Student Assistance association, there are approximately 37 million Americans with some form of outstanding student debt. Each instance is unique from the standpoint of two important factors: 1) capacity to repay 2) the ability to earn a return on a debt-financed education spending If individual students were mini-corporations, its credit worthiness would...

Read more »

Crimea Annexation; the implications for global capital allocation

March 27, 2014
By
Crimea Annexation; the implications for global capital allocation

  Around geopolitical events, political posturing is generally the short-term focus for all parties involved, and markets, but the longer-term implications are often unrelated to what is obvious in the short-term. The despotic approach of Vladimir Putin, and his “damn the torpedoes” approach to dealing with market/economic consequences exacerbates this effect. A fascinating take on the longer-term consequences of Putin’s bravado is detailed in the Journal of Foreign Affairs.  Recent actions are presented as a negative for Russia and a positive for the Ukraine. While this will take several years to validate/invalidate, the article is provocative and provides at least a partial justification for financial markets (outside Russia/Ukraine) to come to terms with the annexation issue, and largely ignore it. Perhaps Ukraine/Russia geopolitical issues become 2014’s version of last...

Read more »

Europe’s Prisoner’s Dilemma – LTRO Needs to Continue for Years

May 22, 2012
By
Europe’s Prisoner’s Dilemma – LTRO Needs to Continue for Years

European leaders have inadvertently created one of the financial world’s largest negative feedback mechanisms. By issuing long-term refinancing operations (LTRO) with cheap ECB funding for terms up to three years and encouraging European banks to take the funding and purchase assets such as sovereign debt, the ECB effectively has encouraged the European financial system to purchase and hold “money good” European sovereign debt. With cheap funding available and the ECB encouraging banks to take the money and invest/lend a situation was created where the natural buyers of sovereign debt were propped up and supported. With many of the bonds in Spain and Italy having maturities in the vicinity of 5-10 years, there is a good chance that the LTRO will need to continue for a number of years until...

Read more »