Posts Tagged ‘ ZIRP ’

Yellen Fed & Monetary Policy: “Running it Hot”

September 24, 2016
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Yellen Fed & Monetary Policy: “Running it Hot”

The September Fed meeting issued few surprises; fed funds were not hiked, as was telegraphed by the Brainard speech. While the Fed maintained interest rates, in the press conference, Yellen once again, found a way to interject incremental dovishness, driving interest rates lower, and asset prices up. The playbook of the Yellen Fed for the past 3-years continues. The new focus of the Fed revolves around finally acknowledging that the Philips Curve is a rubbish inflation model, and that more slack exists in the labor market, and the economy, than previously believed, hindering an acceleration in inflation pressures. Cynics will observe that this new found slack wasn’t focused on by hawkish Fed Governors, up until September 10th, when talk of two hikes this year were still be floated. The...

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Valuing the Yellen Put

April 7, 2016
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Valuing the Yellen Put

The Yellen Put, follows a line of Federal Reserve inspired put options, valuable to market participants of specific Fed Chair eras. The rationale behind the Fed Chair put is simple; with the Federal Reserve so vigilant to support any downtick in the economy and/or markets with interest rate cuts (Greenspan), quantitative easing (Bernanke), and ZIRF (Zero Interest Rates Forever – Yellen) investors receive downside protection from the Fed. Actually paying for downside protection vis-a-vis real put options takes on a ludicrous feel; markets don’t go down much, and if they do, they never stay down. Duh. That markets are increasingly policy driven is a reality of the current investment/economic cycle. 2016 investors are learning (through force) just how valuable the Yellen Put is. Janet Yellen is the most dovish...

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ISM sinks to post-2009 lows; Industrial Economy Recession a Catch 22 for Fed

December 2, 2015
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ISM sinks to post-2009 lows; Industrial Economy Recession a Catch 22 for Fed

November ISM sank to the lowest level since 2009. Stunning, that the ISM (Institute for Supply Chain Management) survey, formerly known as NAPM (National Association of Purchasing Managers), printed 48.6, the lowest level since the throes of the financial crisis. For perspective, the last time the ISM printed sub-48, in June 2009, the S&P was 900. Today, at 2,100+, the market is a cool 134% higher. The S&P is up by 1,200 handles, after having earned approximately 620, the cumulative EPS for the market from 2010-2015. The market is up at a much faster pace than earnings as the multiple swelled from 12x to 17x. What a 6-years. Awkward that December marks the potential lift-off, delayed that is, of a sea change in Fed policy: the end of ZIRP (zero interest rate...

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Global Growth Scare + High Valuations = Bear Market Dynamics

September 29, 2015
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Global Growth Scare + High Valuations = Bear Market Dynamics

It’s been a difficult market since the dog days of summer. After 10-months of exceptionally low volatility, a fierce downdraft set in during mid-August. Lower stock prices, and volatility, will persist, simply because the conditions to go right back to the old dynamic aren’t in place. There isn’t enough global growth to support stock prices at high valuations. Full stop. Investors got complacent, extrapolating higher trends in stocks price as growth around the world slowed; a bad combination. For perspective, the market (S&P 500) got close to 18x forward (1-year ahead) earnings at the high of 2,131. An 18x multiple represents an incredible move from the 12x multiple the market achieved during most of 2011. QE set in motion exceptionally low interest rates and a stock-market re-rating. The ability...

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Super Dovish Fed Persists

September 18, 2015
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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...

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China in Recession; Yuan Depreciation Imminent

September 3, 2015
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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...

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

August 29, 2015
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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...

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Emerging Market Doldrums

August 26, 2015
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Emerging Market Doldrums

Not out of the woods yet – no way. The world has changed in the past week, and unmistakably, extreme volatility (mostly of the down kind) is back within financial markets. The potential of Fed rate hike cycle, in the not too distant future, is wreaking havoc. An unintended consequences of the extended period of ZIRP (2011-now) is the degree to which the rest of world, particularly EM, depend on it. Market lurches with random gaps higher and sudden sell-offs occur daily since China’s FX policy shift and highlight the fragility of financial markets. The overarching issue for EM can be reduced to capital flows and structural reforms. The 2015 circus act out of Greece/EU, in hindsight, deflected attention from the coming EM storm/crisis. With Greece now “fixed” EM...

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Negative German Yields – Implications for Risk Averse Financial Markets

January 10, 2012
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Negative German Yields – Implications for Risk Averse Financial Markets

On Monday, Germany gained entrance to a rarified club of sovereign nations paid to borrow money. This US accomplished this feat during the depths of the financial crisis. Now Germany is able to achieve the same feat during the Eurozone sovereign debt crisis. In a debt auction on Monday, Germany was able to sell 3.9B EUR worth of six-month debt priced at an average yield of -0.0122%. The auction was almost 2x oversubscribed. Investors were willing to pay Germany a little over a basis point to take money for six months and simply give it back. These are fascinating times within financial markets, where there is no term premium for money and such extreme risk aversion. There are a number of items which will have implications for financial markets...

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On Paranormal – A Review of the “New-New Normal”

January 6, 2012
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On Paranormal – A Review of the “New-New Normal”

PARANORMAL: beyond the range of normal experience or scientific explanation, not in accordance with scientific laws. A great friend of mine, and incredibly savvy investor, recently pointed me to Bill Gross’ January 2012 Investment Outlook: “Towards the Paranormal”. He suggested it was an intriguing, provocative, and worthwhile read. After reading the four page monthly I immediately agreed with all of those qualifications even though aspects of the paranormal thesis don’t sit with me. After pondering for a couple of days, here are my observations (Bill Gross, if you are a Crackerjack Finance reader, please feel free to comment at any time). Now would be the time to read the original piece on the PIMCO website to get much more out of today’s thoughts. The financial markets are slowly imploding...

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