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Investment Research Since 1978

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Fed President Proves Common Sense Innate

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Trying to prove that common sense and good judgment must be innate, Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis and graduate of the venerable Princeton University at the age of 19 is out with a speech on monetary policy that makes Argentina’s central bank sound credible. For those of you who don’t follow this stuff regularly (something you can give thanks for on Turkey Day), Kocherlakota is the Fed president who 12 months ago flip-flopped from hawk to uber-dove. In a speech yesterday, displaying more than a touch of hubris, Kocherlakota, likens today’s … [Read more...]

Household Balance Sheets Send Ominous Signal

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The Federal Reserve released its quarterly flow of funds data yesterday. One of the key items in the Fed’s quarterly report is the net worth of households.  The good news from the report is that household net worth increased in the second quarter. The bad news is that growth in household net worth once again outpaced growth in disposable income. Since the value of an asset is determined by the income that asset can be expected to generate, there should be some relationship between household net worth (assets minus liabilities) and income. That is to say that asset prices should be bounded by … [Read more...]

Bernanke’s Jobs Farce

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Matthew Klein at Bloomberg is out with an insightful piece on the folly of the Bernanke Fed’s obsession with “the data.” As we’ve pointed out regularly on this site and in our monthly strategy reports, the Fed is implementing emergency monetary policy using signals from economic data that is 1.) a poor predictor of future economic growth and 2.) regularly revised. Klein summaries a new paper that lays out in detail large distortions in the monthly jobs data. This is silly, but it wouldn't matter except for two recent developments. First, the Fed has become hypersensitive to monthly jobs data. … [Read more...]

7 Fed Meeting Takeaways for Investors

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Below are some thoughts on the implications of the Fed’s dovish surprise at yesterday’s FOMC meeting. The actual economic impact of the Fed’s decision not to taper its money printing campaign isn't all that significant. What is significant and more meaningful is the signal the Fed sent, and the implications that signal may have for future policy and investment strategy. 1.)    The probability of a late-1990s style stock market bubble-and-bust just increased measurably. The U.S. stock market is already at one of its most richly valued levels in history. The Fed’s dovish posture at the latest … [Read more...]

Fed: Money Printing Not Effective After All

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Five years after the initiation of the largest money printing campaign the world has ever seen, the Fed is finally coming to the same conclusion that many Americans reached years ago—pumping trillions of dollars of freshly printed money into the financial system does not create lasting economic growth. As we've argued on this site and in our monthly strategy reports regularly, quantitative easing does little for the real economy. It does unduly inflate stock prices and encourage manipulation, mispricing, and misallocation, but as far as creating economic growth? There is very little evidence … [Read more...]

Bubbling (or Just Frothy) House Prices?

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Here is a blast from the past. I came across this little nugget while doing some work on real estate. The title of the piece is Bubbling (or Just Frothy) House Prices? It was written by a couple of researchers at the Federal Reserve Bank of St. Louis in November of 2005. For context, I’ve included a chart of the Case-Shiller Home Price index with an arrow pointing to when the report was released. From the report (emphasis is ours): Yet, do the P/I [Price-to-Income] ratios observed on the two coasts constitute a bubble? Note that when real estate is evaluated as a potential investment, housing … [Read more...]

Billionaire Bond King Bill Gross Slams Ben Bernanke

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Bill Gross is out with a scathing new Investment Outlook on Dr. Bernanke’s misguided monetary activism. [expand title="Click here to read more."] Below are the highlights. You can read the letter in its entirety here. Central banks – including today’s superquant, Kuroda, leading the Bank of Japan – seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn’t seem to be … [Read more...]

Volcker Delivers Punishing Blow to Bernanke Fed

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In a speech this week to the Economic Club of New York former Federal Reserve Chairman Paul Volcker delivered a punishing blow to the misguided monetary activism of the Bernanke Fed. This is the best speech on economic policy you will read this year. [expand title="Click here to read more."] Volcker has under his belt the wisdom of over 60 years of experience in monetary policy. In addition he brings loads of common sense and humility to the table—two ingredients in short supply at the Bernanke Fed. Volcker can see the shortcomings of the misguided approach that Dr. Bernanke and is erudite … [Read more...]

Will Summer Spell the End of the Bull Market?

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As U.S stock prices continue their liquidity-fueled ascent, the rationalizations for remaining bullish on the U.S. stock market become more perverse by the day. Barron's is calling this the TINA market, as in There Is No Alternative to U.S. stocks. [expand title="Click here to read more."] How comforting. The best justification for putting your life savings into the stock market is, "Might as well, ain't nothing better." The peddlers pushing product for Wall Street's biggest banks are using a similar line of reasoning, telling their clients to load up on U.S. stocks because the American … [Read more...]