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Investment Research Since 1978

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Fed Says Fed Most Important to Your Returns

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We have noted often on this site and in our monthly strategy reports, that in recent years, Federal Reserve policy has become the main determinant of stock market performance. When the Fed opens the monetary spigot (or hints at it) stock prices rise and when they shut off the valve, prices fall. In a recent blog post, the Federal Reserve Bank of New York attributed over 80% of the return on stocks over the past two decades to, well, itself. The article titled The Puzzling Pre-FOMC Announcement “Drift”, sites a Fed report that finds “that since 1994, more than 80 percent of the equity … [Read more...]

Fed Counts its Chickens Before they Hatch

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It is no secret that the hubris from the economists at the Federal Reserve is palpable, but a recent piece from San Francisco Fed president John Williams takes the cake. In the bank’s monthly economic letter Williams does a premature victory dance for the unconventional monetary policy and bashes the great Milton Friedman in the process. Below are some excerpts from his paper with my comments. Milton Friedman (1970) famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than … [Read more...]

Job Creator Confidence Plunges

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The NFIB Small Business Optimism Index plunged 3 points in June—its biggest drop in over two years. Nine out of the ten components in the index worsened last month. The only component that improved was credit conditions—no surprise given record low interest rates. But easy money doesn’t do much to stimulate the economy when businesses aren’t interested in expanding. And according to the NFIB small business survey, only 5% of businesses think now is a good time to expand—a level historically associated with recession. America’s job creators don’t want to expand because of the weak economy and … [Read more...]

Prepare Your Portfolio For More Money Printing

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That didn’t last long. The post-meeting euphoria from the 20th summit to once and for all put an end to the euro-area debt crisis has officially ended. Spanish 10-year bond yields are back above pre-summit levels and at one point today they crossed 7%. Yields on Italian bonds have also risen in recent days, but not to the extent of Spanish bonds. It seems investors are losing patience with euro-area policymakers. Following each meeting, policymakers have announced plans to make a plan to announce a lasting solution to the debt crisis. Yet, after 20 iterations, the euro-area debt crisis rolls … [Read more...]

Stand Down Dr. Bernanke

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Yesterday, as was widely expected (yet somehow still disappointing to Wall Street) Dr. Bernanke unveiled the Fed’s latest installment of market manipulation. The Fed announced plans to expand Operation Twist by $267 billion over six months. Apparently, record low interest rates for corporate, mortgage, treasury, and almost any other debt you can think of simply aren’t low enough to promote recovery. Since the crisis began, the Fed has held interest rates at zero, engaged in not one, but two rounds of money printing, promised to keep rates at zero through 2014, extended the maturity of its … [Read more...]

Euro-area Black Magic

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From the lead article in this morning’s Wall Street Journal: “With foreign investors almost completely absent from Spanish bond markets for months, Spanish banks have propped up the government, which is now forced to turn to Europe for help propping up the weaker banks. Meanwhile, the stronger banks are shying away from buying government bonds—for fear they would be dragged down, too.” Just so this is clear, the Spanish government whose only source of funding is Spanish banks, just bailed out those same banks by taking on an additional $125 billion in debt. Problem solved? Global equity … [Read more...]

Greenspan: We Don’t Have a Plan B

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Say what you will about former Fed Chairman Greenspan (yes he made lots of mistakes), but he strikes us as a much deeper thinker than the current gentleman who chairs the Federal Reserve. Mr. Greenspan tends to acknowledge the flaws of interventionist fiscal and monetary policy and at least in these videos he focuses on bigger picture structural issues. In contrast, Mr. Bernanke focuses on manipulating quarterly GDP statistics, at all costs, and misses the forest for the trees. Both videos are well worth a watching. … [Read more...]

Bond Yields Turn Negative

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If you thought 25 basis point yields on two-year US Treasuries were bad, take a look at the yields on German Bunds. Two year German government bond yields are now negative. Investors (and rightfully panicked Greek and Spanish savers) are now paying for the right to lend Germany money. 30-year German government yields have also plummeted. Germany can borrow for 30-years at a rate of only 1.6%--a full percentage point less than the U.S. If you are looking for a return on your capital, the German bond market isn’t the place to invest. … [Read more...]

JP Morgan Proves Case against more Bank Regulation

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Emboldened by JP Morgan’s $2 $3billion trading loss, proponents of the Volcker rule (provision in Dodd-Frank to restrict banks from making speculative investments) are calling for even tougher financial regulation. Treasury Secretary Geithner said of Morgan’s loss: “this failure of risk management is a powerful case for reform.” And in a letter to regulators, Senators Carl Levin and Jeff Merkley wrote: The massive failed bet by JPMorgan Chase provides a stark reminder why we desperately need your agencies to implement the Volcker Rule—a modern Glass-Steagall firewall that separates our core … [Read more...]

The Commodities Whale

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In a recent IMF working paper, author Shaun K. Roache provides readers with some valuable insight on China’s role in world commodity markets. It is no secret that China is a whale in the commodities space, but Mr. Roache helps readers understand just how much of an outlier China’s commodities consumption is when compared to the historical record.  The title of the paper is China’s Impact on World Commodity Markets. 2.1. Long-term structural trends China is a large consumer of a broad range of primary commodities. As a percent of global production, China’s consumption during 2010 accounted … [Read more...]