Archive for the ‘Interest Rates’ Category

Correct Yourself

Monday, August 31st, 2015

Last week was a tough week for investors, given that the market dropped for six consecutive days. It was an even tougher week for financial advisors and investment managers who have been advising clients to keep a heavy allocation of stocks in their portfolios.

Advisors who are telling their clients to invest a greater percentage of their portfolios into stocks should be able to answer clients’ questions about why they are so optimistic that stock prices will continue to increase.Exp_2013_11_21_0

Investors, likewise, should ask why they are following that advice.  Investors need to be accountable for their future.  If their advisors are wrong, they will pay the price, not their advisors.

Answer These Questions

Given the state of the world economy – and stock markets throughout the world – many questions need to be answered.  Here are some of them:

Where is future growth going to come from? Don’t look to China, which may claim to be growing at 7% this year, but few believe it. Don’t look to the U.S., where baby boomers are retiring and millions of people in all age groups have stopped looking for work.

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Yellen’s Soliloquy: To Raise or Not to Raise

Monday, August 10th, 2015

To raise, or not to raise – that is the question:

Whether ’tis nobler in the mind to suffer

The barbs and insults of outraged pundits and journalists

Or to raise rates in spite of a sea of troubles

And by raising rates extend them. To stagnate, to grow —

No more (than 2%) – and by a flatlined economy to say we end

The headache, and the thousand natural shocks

The stock market is heir to.

We could go on imagining Fed Chair Janet Yellen in the role of Hamlet, another famous person who met with tragedy due to procrastination.  We could make note of “the law’s delay, the insolence of office, and the spurns that patient merit of th’ unworthy takes,” even if we don’t know what “spurns” Shakespeare was talking about when he wrote Hamlet.

We could go on, but “conscience does make cowards of us all,” so we’ll leave it at that and turn instead to last week’s comments by Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.  Lockhart said “the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.” Yellen as Hamlet

The experts will tell you that anticipation of increasing rates is built into current stock prices, but if that’s the case, why did stock prices drop to their lowest levels since February after Lockhart’s remarks?  Maybe it was the disappointing earnings reports for the quarter, or the still-not-there employment numbers, but the most direct correlation appears to be with the fear of rising interest rates.

Keep in mind, too, that the statement didn’t come from the chairwoman.  Granted, Mr. Lockhart is a member of the Federal Open Market Committee, but he’s not Janet Yellen.  Perhaps the idea was to see what impact his comments would have so the Fed as a whole would still have the option to not raise rates in September.  Mr. Lockhart apparently drew the short straw at the last FOMC meeting.  (more…)

Maybe the Fed Is Just Lazy

Monday, August 3rd, 2015

Just last month we reported that the Federal Reserve Board’s policy statement was almost identical to its previous policy statement.  Now the Fed has issued another policy statement – and it’s almost identical to the last one.

Granted, there’s not much to say.  The economy has flatlined, the Fed has run out of policy tools and it’s mid-summer … a time when many people spend more time avoiding work than actually working.  But this is the Federal Reserve Board we’re talking about – the people who are in charge of our economy, since neither President Obama nor Congress want to do much about it.

So, for those of you who remember what a “carbon copy” is, the latest policy statement is a carbon copy of the last one.  Maybe we should just re-run our previous blog post. Yellen, Janet

“The most notable change,” as Goldman Sachs’ Chief Economist Jan Hatzius wrote, “was the addition of the word ‘some’ in the committee’s description of desired progress in the labor market.  Specifically, the June FOMC statement said that it will be appropriate to raise interest rates ‘when it has seen further improvement in the labor market’ (and is reasonably confident that inflation will move back to two percent).  Today’s statement said that rate hikes would be appropriate after ‘some further improvement in the labor market.’ ”

So “further” became “some further.”  (more…)

Why Worry About Climate Change When You’re $18 Trillion in Debt?

Monday, April 13th, 2015

Which crisis scares you more – climate change or our growing debt?

Climate change certainly receives a lot more attention in the media and a lot more attention from politicians, even if they’ve done little about it.

Last week, as one small example, President Obama said in an interview that his push to address climate change was influenced by an asthma attack his daughter Malia had when she was a four-year-old.  Asthma is a medical condition that has no connection to climate change.  It would be as logical to suggest that climate change cured her asthma, since she no longer has it and the climate has continued to deteriorate since she was four. National Debt and Interest 1 Wallace

We’re not suggesting that climate change doesn’t merit serious attention, but even if it’s as big a deal as environmental activists would have us believe, the U.S. is going to have little impact unless China, India and other ozone-busters get on board, too.

Debt, though, which President Obama and most members of Congress rarely talk about, just keeps rolling along.  (more…)

Bubble Busters

Monday, March 30th, 2015

“I had a stick of CareFree gum, but it didn’t work. I felt pretty good while I was blowing that bubble, but as soon as the gum lost its flavor, I was back to pondering my mortality.”                                                                                                                                                                             Mitch Hedberg

When the news about U.S. markets and the U.S. economy is depressing, I usually read about Europe and feel better about the U.S.

I spent a lot of time reading about Europe this week, but it didn’t do much good – even with Greece continuing to defy logic by pretending that it’s OK to live off of someone else’s money.

The problem is that easy money policy is not so easy anymore.  It never did prop up the U.S. economy, in spite of Keynesian enthusiasm, but at least it created the illusion of economic health by propping up the stock market.  Now, it’s unable to do even that. burst-your-bubble

U.S. markets fell throughout the week, but especially on Wednesday, which saw declines of more than 2% in the Nasdaq and Russell 2000. The Dow dropped nearly 300 points, or 1.6%, while the S&P 500 finished the day about 1.5% lower.  The New York composite stock exchange is now back to where it was last July and the S&P 500 is approaching November levels.

And there’s likely to be more trouble ahead, as a 4% drop in the biotech and semiconductor sectors showed a “classic parabolic reversal,” according to Peter Boockvar, chief market analyst at the Lindsey Group.  A parabolic reversal is a technical indicator that signals a change in an asset’s momentum.

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No Animals Harmed in Drafting Fed Policy Statement

Monday, March 23rd, 2015

Thousands of years ago, Roman soothsayers would visit the oracles and interpret the entrails of slaughtered animals.  We haven’t advanced much since then.

Fortunately, no animals are slaughtered today, but many brain cells seem to die in the reading and interpretation of policy statements of the Federal Open Market Committee.  Like the soothsayers of old, today’s economists, journalists and pundits interpret the news and report it as fact – even though they generally haven’t a clue about what’s being said.  We’re not even sure the FOMC has a clue about what’s being said. Animal

The policy statements themselves are an anachronism.  In today’s world, most news is immediate.  By the time a newsworthy event ends, it’s been tweeted, blogged and reported on by anyone and everyone who is interested.

Yet the Fed issues policy statements on its Federal Open Market Committee meetings two months after the meetings take place.  Apparently, it takes the FOMC that long to agree on language that says nothing and can be interpreted however the reader would like it to be interpreted.

Many well-paid experts make a living off of these interpretations.  They will tell you, with certainty, that the Fed will definitely maybe raise interest rates sometime this year – or maybe next year – but they’re just guessing.

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Another Year of ZIRP?

Monday, February 2nd, 2015

When the economy recovers, interest rates will go up, right?

That’s been the Federal Reserve Board’s line for years now.  Yet as the Fed gushes about an allegedly booming economy, some are saying that interest rates are unlikely to increase this year.

So what gives?Interest Rate Chart

Last week’s Federal Open Market Committee Statement, which summarizes monetary policy, noted that since the FOMC’s December meeting, “the economy has been expanding at a solid pace.”  The statement notes that the unemployment rate is declining, consumer spending is increasing and, if not for that troublesome housing market, everything would be just dandy.

As if to put an exclamation point on the FOMC statement, Fed Chair Janet Yellen met with Congressional Democrats last week to reiterate just how fine the economy is doing.  (The real purpose of the meeting may have been to explain the FOMC statement to members of Congress, as it contains phrases such as, “underutilization of labor resources continues to diminish;” which could have been worded more clearly by saying, “Many former middle managers are still working as greeters at WalMart.”) (more…)

More Consideration of “Considerable”

Thursday, October 16th, 2014

Yes, we’ve already discussed the word “considerable” at considerable length, in relation to its use by the Federal Reserve Board in its recent policy statement.

But apparently we are on to something of a considerable size.  Maybe it was a slow news day, but The New York Times devoted an article to the Fed’s use of the word, noting that “Federal Reserve officials are looking for a new way to reassure investors that they are not ready to start raising interest rates.” 

Fed Chair Janet Yellen

Fed Chair Janet Yellen

Commenting on the “considerable time” reference in the policy statement, The New York Times article reported that an account of the meeting “suggests that officials are trying to find a new way to say the same thing.”

Think about that.  Unemployment remains high, inflation goals are not being met, the Fed is holding trillions in bonds it will eventually have to sell and the stock market is acting wobbly … but the Fed is looking for a “new way” to say “considerable.”

Fed Chair Janet Yellen could just say the Fed is not ready to start raising interest rates.  She could say the Fed is not planning to raise rates “for a long time,” which would be reassuring to investors.  Or members of the Federal Open Market Committee could go to an online thesaurus and come up with more than a dozen synonyms in seconds.

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Too Much Interest in Interest Rates

Friday, October 3rd, 2014

There has been much market panic of late over the possibility that the Federal Reserve Board will be raising interest rates sometime in the not-too-distant future.

Small cap stocks were the first casualty.  As September ended, the S&P 500 was still up 7.3% for the year, while the Russell 2000 was down 3.8% and off 7.4% from its high in July.  Even after being up more than 40% year-over-year at the end of December, the Russell 2000 was negative year-over-year on Wednesday before having its best day in six weeks on Thursday. 
20141002_RTY

As The Wall Street Journal explained, “Given that periods of market turmoil tend to buffet small stocks more than their larger counterparts, many investors in small companies are fearful as the Federal Reserve moves toward raising interest rates.  Even investors hopeful for small stocks are proceeding with caution.”

But should the markets be this skittish over interest rates?

In September, Fed Chair Janet Yellen announced that interest rates will remain low for “a considerable time” even after quantitative easing (QE), the Fed’s bond-buying program, ends.  QE is scheduled to end this month, but could be extended.

Economic data continues to be mixed.  The official U-3 unemployment rate dropped to 5.9%, but the percentage of Americans participating in the workforce is at a 36 year low.  Jobs are increasing, but four out of five of them are for low or minimum wages.  So QE could be extended, since its alleged purpose is to help the economy grow.

Even if QE ends this month, the “considerable time” Ms. Yellen cites could, indeed, be considerable, given the consequences of raising interest rates.

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Janet Yellen Takes Us Through the Looking Glass

Thursday, September 18th, 2014

“When I use a word, it means just what I choose it to mean — neither more nor less.”  

               Lewis Carroll, Through the Looking Glass

The word for today is “considerable,” as in interest rates will remain low for “a considerable time.”

How long is “a considerable time?”

Long enough, apparently, for investors, who boosted the stock market to yet another new record this week, after Federal Reserve Board Chair Janet Yellen announced that the Fed would keep interest rates near historic lows for “a considerable time.”  The Dow Jones Industrial Average crossed 17,200 for the first time ever, closing at a new high of 17,157.

Apparently, investors are like kittens, because, as Alice notes, “whatever you say to them, they always purr.”

Looking-glass-lewis-carrollCNN Money interprets, with certainty, that “considerable” means summer 2015 “at the earliest.”  Yet The Wall Street Journal, referring to the policy statement, admitted, “we have no idea what it says about the future of monetary policy.  We doubt even Fed Chair Janet Yellen knows.”

“Better say nothing at all. Language is worth a thousand pounds a word!”

Lewis Carroll, Through the Looking Glass                                        

Having read the policy statement, we conclude that it means whatever you want it to mean, as it contains more hedges than the Palace of Versailles.  Consider this single sentence …

“The Committee continues to anticipate (hedge 1), based on its assessment of these factors (hedge 2), that it likely will be appropriate (hedge 3) to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal (hedge 4), and provided that (hedge 5) longer-term inflation expectations remain well anchored.”

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