The latest quarterly update on consumer balance sheets, out yesterday from the Federal Reserve, shows that the net worth of households is closing in on an all-time high relative to income. Inflating asset prices (stocks and homes) are the big driver here. Asset prices can become unhinged from the income they generate temporarily, as my chart proves, but the historical record shows that episodes of income and asset price divergence don’t last long and they are ultimately resolved through a painful busts. … [Read more...]
Panic at the IMF
Yesterday, IMF President Christine Lagarde said the Fed should hold off on hiking interest rates until 2016. Apparently Ms. Lagarde and her Keynesian brethren who dominate global policy circles, are so terrified of a 0.25% interest rate hike that they dream up reasons to delay the day of reckoning. Ms. Lagarde justified her policy call by saying inflation is too low and there are “significant uncertainties as to the future resilience of economic growth.” Seems an odd sentiment considering how ineffective Fed policy has been at driving strong growth in the U.S. over recent years. Hopefully … [Read more...]
Auto Sales Soar
Automobile sales are soaring. In May, auto sales hit a new cycle high and an almost 10-year high. Soaring auto sales are a bullish signal for the economy, but auto stocks seem to disagree. The S&P 1500 automobiles index has been trending down since 2013. What is the performance of auto stocks telling us about the economy? Stock prices are forward looking. Investors may be saying that the current run rate of sales in the auto sector is about as good as it gets. If that is true, a cyclical downturn in auto sales may be closer than some expect or alternatively competition in the sector is … [Read more...]
Federal Reserve: Coming Clean
St. Louis Federal Reserve President James Bullard who has made a habit of moving markets by lobbing monetary policy grenades into the markets when they are least expected is coming clean on the Fed’s failed monetary experiment. You may recall that many investors credited Bullard with single handedly putting a floor under a nasty stock market correction last October by suggesting the Fed should halt the taper. Well he is sort of coming clean. Bullard is out with a new paper that comes to the very obvious conclusion that holding rates at zero since 2008 or promising to hold them there for … [Read more...]
The Inflation Ruse
Inflation plays a key role in the monetary policy decisions of the Federal Reserve. The Fed’s mandate is maximum employment and stable prices. In its infinite wisdom the Fed has decided that the definition of price stability means 2% inflation. How the Fed gets away with defining an inflation rate that wipes out about half the value of a dollar over a 30-year period as price stability is truly bewildering, but I’ll leave that topic for another day. Since professors Bernanke & Yellen took over the Fed, the central bank has been obsessed with hitting its self-imposed 2% inflation target. … [Read more...]
Vanguard GNMA Outlook 2015 Part II
In Part I of this series I explained the risks that investors are compensated for when they invest in Ginnie Mae mortgage backed securities. Since GNMAs are backed by the full faith and credit pledge of the United States government, the primary risks that investors in GNMA securities should be concerned with are pre-payment risk and extension risk. Some of the major factors that influence pre-payment risk and extension risk include the level of interest rates, the historical path of interest rates, housing turnover, the aging of loans, seasonality, and consumer credit conditions. I’ll focus … [Read more...]
Spring Still Not Here for the Economy
The early economic data for the second quarter is beginning to come in and it doesn’t look promising so far. Industrial Production data was released today and it declined for the fifth consecutive month. Yearly momentum in industrial production is trending down as well. The Michigan Survey of Consumer Sentiment came out this morning and it showed the largest monthly decline in more than two years. It is still a bit early to call this a trend for the second quarter, but the absence of a bounce back from the winter doldrums is nonetheless disappointing. … [Read more...]
Vanguard GNMA Outlook 2015
Originally posted May 22, 2015. (See Part II by clicking here). With long-term interest rates rising sharply in recent weeks, many investors are wondering what they should be doing with their bond holdings. How do bonds perform in a rising interest rate environment? That answer of course depends on the type of bonds you own. Are they short-maturity bonds or long-maturity bonds. Are they corporate bonds, Treasury bonds, or mortgage backed securities? What are the ratings of the bonds? Are they dollar denominated bonds or foreign currency denominated bonds? Lots of variables to … [Read more...]
Yellen Takes Blame for “Quite High Equity Valuations”
Fed Chair Janet Yellen apparently roiled markets earlier this week when she said that equity valuations were generally quite high, but added that they were not so high when you compare the returns on equities to the returns on bonds which are also very low. So stock valuations are quite high, but not when compared to bond yields which are also quite low. Isn't that just another way of saying that low interest rates have inflated stock values? And who is responsible for “very low” bond yields? That would of course be Mrs. Yellen’s Federal Reserve. The Fed is holding short-term … [Read more...]
The Folly of Data Dependence
Yesterday, the Wall Street Journal editorial board pointed out that over the last five years, seasonally adjusted first quarter GDP growth has come in at an average of 0.60% compared to an average of about 2.5% for the second, third, and fourth quarters. Here’s what the chart looks like. Maybe this is just randomness, but it looks more like there is something distorting the accuracy of the seasonally adjusted GDP in the first quarter. It sure makes one reconsider the wisdom of a data dependent monetary policy. … [Read more...]
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