Bloomberg — Bloomberg Economics Editor Michael McKee handicaps candidates to replace Ben Bernanke when his time is done at the Federal Reserve. He speaks on Bloomberg Television’s “Bloomberg Surveillance.”Click here to watch the video.
CNBC: Harvard University’s Martin Feldstein discusses how the Fed’s policy has created a “bubble” in the long-term bond market and investors have been losing money as the market has come to “adjust” to it.Click here to watch the video.
The yield on 10-year Greek bonds were 10% last week. That’s 2% points higher than they were on May 22.Click here to read more.
Remember, bond prices fall when interest rates rise. Bond price sensitivity is measured by duration. As a general rule of thumb for every 1% increase in rates the principal value drops in percentage terms by the duration. For example, a 1% increase in interest rates would be about a 10% loss in value on a 10-year zero coupon bond. That’s how rate volatility is wreaking havoc on Greek bond investors.
A roundup of articles we found interesting this week.Click here to read more.
Nigerian cook survives 2 days under sea in shipwreck air bubble, Joe Brock, The Globe and Mail
Quantitative Quicksand, Alan Meltzer, Project Syndicate
Can Bernanke Avoid a Meltdown in the Bond Market?, Jim O’Neill, Bloomberg
Are Americans Saving Too Much or Too Little?, Matthew C. Klein, Bloomberg
The Fed has turned markets upside down, David Rosenberg, Financial Times
World has 10 years of shale oil, reports US, Gregory Meyer, Financial Times
For Anyone Who Still Thinks Earnings Matter, Tyler Durden, Zerohedge
Fiscal Fixes for the Jobless Recovery, Alan Blinder, The Wall Street Journal
How America Lost Its Way, Niall Ferguson, The Wall Street Journal
During the collapse of 2008 and through the rebound of 2009 U.S. markets and foreign markets closely tracked one another. But toward the end of 2009, and more so ever since, the U.S. has diverged from world markets.Click here to read more.
While the rest of the world has developed a very flat look, the S&P 500 has reached new highs. Whether or not this is the effect of the Federal Reserve debasing the world’s reserve currency, it leaves a big question mark as to what to expect from second quarter earnings at U.S. multinationals.
In 2011 (latest data available), 46.1% of S&P 500 sales came from outside the United States. That’s nearly half. Given the declining prices for foreign stocks, isn’t it reasonable to assume that some of that weak economic momentum will sneak into U.S. multinationals’ bottom lines?
But investors keep buying up American stocks, seemingly without consideration for the sorry state of the world’s economic growth. You can see in the chart below that the world’s stock market has formed an L-shaped recovery. Meanwhile, the S&P 500 is developing a more parabolic look every day.
Be cautious about your investments. Don’t let Ben Bernanke railroad you into taking on more risk than you’re comfortable with. Subscribe to our premium strategy report, Young Research’s Global Investment Strategy for insights on building a portfolio of international investments.
It would seem that the emperor has no clothes. In the last few weeks, markets have begun to act as though they no longer think the Fed’s strategy is credible. Same goes with the world’s other interventionist central banks.Click here to read more.
The sole purpose of global central bank monetary policy in the last five years has been to keep rates low. The theory goes that low rates will encourage borrowing, which will encourage spending and that, in turn will strengthen the economy. The big problem? It hasn’t worked yet, and it appears that market participants may be thinking that it never will.
Take a look at movements in global markets of late. You can see on the chart below that TIPS yields are skyrocketing. If the goal of the Federal Reserve is to keep real rates down, the Fed is failing.
Now take a look at the Nikkei and the yen on our next two charts. After the Bank of Japan dumped an ocean of money on the market, stock prices took off. But recently it would appear as though the market has lost faith in the government’s commitment to stimulate.
The stunning market volatility can be seen in the currencies of South Africa and India as well. Both have taken nosedives compared to the US dollar in recent weeks.
The volatility in global asset markets suggests that either the market has lost faith in the power of central banks or investors have already fully discounted QE-infinity, making the recent volatility even more terrifying.
Yesterday the price for the 10-year Treasury note ticked down 15/32 to yield 2.212% while the 30-year fell 25/32 to yield 3.367%. Investors reaching out on the yield curve should not be surprised by this downward price action. The Treasury market paid no attention to Standard & Poor’s upward revision, to stable, for the U.S. credit rating. I’d stay away from Treasuries altogether. As Carolyn Cui at The Wall Street Journal reports: Click here to read more.
Treasuries held losses despite Standard & Poor’s move to raise its outlook on the U.S. credit rating, as the market continued to grapple with fears that the Federal Reserve will start tapering its stimulus this year.
Credit-rating firm S&P revised its outlook for the U.S.’s rating to stable from negative, citing its resilient economy, monetary credibility and the dollar’s status as the world’s reserve currency. But the firm kept the U.S.’s sovereign credit ratings at “AA+/A-1+.”
The positive news failed to draw cheers from the Treasury TWE.AU -2.50%market, however.
At 3 p.m. EDT, the benchmark 10-year Treasury note was down 15/32 in prices to yield 2.212%. The 30-year-bond fell 25/32 to yield 3.367%. Bond prices move inversely to yields.
Monday’s losses extended the selloff in the Treasury market following Friday’s jobs report, which showed a slightly better number of jobs created in May.
A roundup of articles we found interesting this week.Click here to read more.
Can the Fed Make Up Its Mind on QE?, Caroline Baum, Bloomberg
Quant hedge funds hit by US bonds sell-off, Sam Jones, Financial Times
Printing Out Barbies and Ford Cylinders, Clint Boulton, The Wall Street Journal
Poll: What is the Primary Cause of Speculative Investment Bubbles?, David Larrabee, Enterprising Investor
How Teachers Unions Make The Best People Want To Quit Teaching, Josh Barro, Business Insider
One of Wall Street’s Riskiest Bets Returns, Katy Burne, The Wall Street Journal
Wounded Heart, William H. Gross, PIMCO Investment Outlook
The Shocking Truth About Wall Street Stock Recommendations, Reeves and Moscovitz, The Motley Fool
Central Banks Stow More Scandinavian Currencies, Ira Iosebashvili, The Wall Street Journal
A (Gold) Key to Metal’s Lot, Mukherji, Anand and Shumsky, The Wall Street Journal
Caroline Baum at Bloomberg explains the Fed’s fuzzy messaging on the future of QE.Click here to read more.
First Baum lays waste the idea that the Fed can use predictive models as the basis for sound monetary policy.
At his March 20 press conference, Fed chief Ben Bernanke said “it makes more sense to have our policy variable,” with purchases that respond to changes in the outlook.
To him, perhaps. If I understand Bernanke, he is saying that every six weeks policy makers will examine an array of leading, coincident and lagging indicators, most of which are revised and subject to seasonal distortions, to take the economy’s pulse and reassess the forecast. From there, they will determine the appropriate amount of monthly bond purchases.
This idea is as infeasible in theory as it is in practice.
Unlike the physician who uses real-time feedback to adjust the dose of a patient’s medication, central banks operate in a world of long and variable lags. Their predictive models have a poor record. The continuation of QE has always been predicated on an improvement in “the outlook for the labor market,” rather than an improvement in the labor market per se. Call it a better jobs market once removed. The inherent flaws in the theory should be apparent.
She cites frequent revisions as once reason it is impossible for the Fed to accurately base its decisions on real-time data.
An example will serve to demonstrate why using real-time data to adjust QE is a fool’s errand. As initially reported by the Bureau of Labor Statistics, non-farm employment averaged 157,000 a month in the fourth quarter. Subsequent revisions raised the average to 209,000.
Last week, the Bureau of Economic Analysis uncovered an additional $108 billion (annualized) of personal income in the fourth quarter, which had to come from a larger workforce, higher compensation or some combination of the two. The revision was based on the Quarterly Census of Employment and Wages, an almost-universal tally of jobs and wages derived from tax reports submitted by employers.
If you’re going to chase bubbles, you had better watch out for air pockets! By May 22nd the Nikkei 225 was up more than 50% for 2013. Speculators and gamblers who believed in the hype have received an unfortunate reality check in the days since. In only ten days, the Nikkei is down a punishing 17%.Click here to read more.
You can see on the chart below that volume (the bar chart) of trading in the WisdomTree Japan Hedged Equity Fund (the vehicle of choice for speculators) really began to pick up in April. Today, only two short months later most of the folk who bought in at those prices are sitting on losses. That doesn’t even consider those who bought in May.
When prices start erupting in parabolic fashion it’s best to take an extremely skeptical view of such movement. It rarely ends well.