Gross on Threats to Economy Going Forward

The quantitative easing that has occurred in the post-Lehman era has led to a situation, writes fund manager Bill Gross in a recent Barron’s article, where central bank balance sheets are replete with equities “in a desperate effort to keep global economies afloat.” Concurrently, he argues, more than $5 trillion of investment grade bonds “trade at negative interest rates in what can only be called an unsuccessful effort to renormalize real and nominal GDP growth rates.” This environment, he warns, presents a degree of economic uncertainty down the road because both central bankers and private economists rely on historical models […]

Inverted Yield Curve as Recession Predictor

Whether or not the yield curve on U.S. Treasuries is inverted can be a useful tool in forecasting the next recession, according to a recent Barron’s article. The inverted yield curve has predicted three of the past three recessions, the article says, which “helps lend confidence to its predictive powers.” Typically, long-term interest rates are higher than short-term rates, which results in an upward-sloping yield curve. But an inverted curve occurs when short-term rates are higher than long-term (that is, the 10-year minus the three-month rate is a negative number). The article cites a 2010 Fed report titled “Monetary Cycles, […]

The Stock Market Still Seems to Believe the Fed

Economic indicators show that a slowdown might be in the offing, even though the Fed has been raising rates and the labor market continues to tighten, according to a New York Times article from earlier this month. Despite the occasional surge in technology stocks and the steady drop in energy shares, the article says the market continued to push forward through the second quarter. But some investment advisers are developing concern that if the economic weakness persists, “it may be time to start believing their own eyes and lighten up on stocks,” that article says. Other indicators that support the […]

Dalio Says Global Economy Entering New Phase

Billionaire hedge fund investor Ray Dalio says the global economy is entering a new phase where “markets won’t get the same level of support from monetary policy makers,” according to a Bloomberg article from earlier this month. The chairman of Bridgewater Associates recently wrote that central bankers are shifting from the nine-year period of holding down interest rates and are giving clear signals that stimulus will be tapered. He notes the following: The Fed is “debating when in coming months to start shrinking its balance sheet” as it continues its “gradual campaign of raising rates”; European Central Bank officials have […]

Bond Yields Will Probably Stay Low

The bond market continues to cause confusion for experts, writes a Charles Schwab strategist in a recent Barron’s article. Since the end of the recession in 2009, it argues, “consensus expectations have called for higher bond yields and the death of the 35-year bond bull market. Yet, 10-year Treasury yields are now nearly 200 basis points lower than in 2010.” The author opines that, although economic conditions support bond yields above 2%, market expectations are not aligned with the Fed’s plan to continue tightening monetary policy in the second half of the year. “The divergence in these expectations,” it says, […]

Paul Tudor Jones Issues Warning for Fed

The billionaire investor says that “years of low interest rates have bloated stock valuations to a level not seen since 2000,” and the fact that the current market cap-to-GDP ratio is the highest it’s been since 2000 should be “terrifying” to a central banker. This according to a recent Bloomberg article. Jones’ warning echoes that of many other money managers, the article says, who are concerned that stocks are trading at dangerously high levels. The nervousness has heightened, the article says, as “The S&P 500 index is trading at about 22 times earnings, the highest multiple in almost a decade, […]

Twitter and the Fed

Research shows that trading strategies built around tweets in the days preceding Fed meetings have been profitable, writes Steve Russolillo in this week’s The Wall Street Journal. As the use of quantitative investment strategies continues to rise, social-media platforms such as Twitter have become popular sources of intel to gauge investor sentiment, says Russolillo, referring to the frequency and impact of the president elect’s tweets since the election. A study conducted by Andrew Lo, a finance professor at MIT’s Sloan School of Management, and Ph.D. student Pablo Azar analyzed 3.9 million Fed-related tweets from 2007 through 2014 and assigned scores […]

“Irrational Exuberance” Revisited

This past Monday marks the twenty-year anniversary of former Fed chairman Alan Greenspan’s famous speech in which he used the phrase in reference to then-stretched equity valuations. In last week’s Wall Street Journal, Steven Russolillo writes, “His call was spectacularly wrong—at first.” Russolillo offers a Greenspan quote from a WSJ interview: “If you rate me on my irrational exuberance forecast, I get a C. But analytically, it was describing a process that I thought we had to be very concerned about.” The phrase, which has been part of the financial world lexicon ever since, seemed to only boost the market—which […]

“Presidential Cycle” Stunted by the Fed says Grantham

The phenomenon of robust stock market gains during the third year of a president’s term—coined the “presidential cycle” by fund manager Jeremy Grantham—may have been “killed off” by the Fed, according to an article in the Financial Times. Research conducted by Grantham, founder of the GMO fund management group in Boston, analyzed stock gains during the first, second and fourth years of presidential terms going back to 1932 and found that average gains during those years were 0.2% per month as compared to between 0.75% and 2.5% during the third year. This led to his prediction that the U.S. market […]

Potential Downsides in Ultra-Easy Monetary Policy

The Fed’s implementation of monetary easing after the financial crisis, while intended to bolster a teetering economy, is instead leading us into a Pay-the-Piper scenario, says Brian Singer, head of the Dynamic Asset Allocations Strategies team at William Blair in a recent article for Barron’s. “We’ve now seen eight years of ultra-easy monetary policy, which we believe won’t end well,” he says. Singer recalls two other efforts that had precarious outcomes: The “oil shock monetization in the early 70s,” he argues, “did not prevent the Standard & Poor’s 500 from declining 50%.” Alan Greenspan’s lowering of interest rates (starting in […]

Jason Zweig on Why Interest Rates Matter

When shopping for sale items, it’s customary to look at the price tag and see how much an item has been “marked-down”. You’d rather browse the “30% off” rack than the racks with lower discounts. Why? Because it affects the item’s value. On a much more sophisticated level, stock values and interest rates have a similar relationship. In a recent Wall Street Journal article, Jason Zweig describes how interest rates are an important factor when determining the intrinsic value of investments (the current value of the cash they are likely to generate in the future). Here’s how it works: If […]

The Only Fed Voice that Matters – Listen to Yellen

James Grant of Grant’s Interest Rate Observer recently weighed in on Federal Monetary Policy in a Bloomberg Report video. Grant believes the Fed “conceives its principal work to be suppressing or distorting the free play of interest rates or prices.” Asked what the Fed should do or not do to make the prices rule, Grant said the Fed has missed its mark, explaining that it had six or seven years to orchestrate a return to normal interest rates but are now confronted with moving to restore a normal structure of interest rates. Grant opined: “what the Fed ought to do […]

Paulsen: Three Possible Economic Outcomes for the Markets

Jim Paulsen, chief investment strategist at Wells Capital Management, told CNBC last week that the current situation “lends itself to a market that’s vulnerable to kind of bouncing around a lot but not really going too far.” He thinks that ultimately, what the Fed does “is going to be determined by the economy” and he sees “three major outcomes possible: One is that the global and the U.S. economy just simply roll over here; that’s a very scary outcome” that would require a renewed focus on fiscal policy, but he “think[s] that’s a low-odds probability.” More likely in Paulsen’s view, […]

DoubleLine’s Gundlach Identifies Downward Pressures, Warns Against Fed Rate Hike

Jeffrey Gundlach, CEO of DoubleLine Capital, delivered a fairly grim assessment in a recent webcast, Financial Advisor reports. Characterizing the recent bump in stocks as a bear-market rally, Gundlach pointed to a combination of factors that will put downward pressure on markets, expressed concern about the impact a Fed rate increase would have, and described positive market sentiment as perplexing. He identified valuation as one problem: “The S&P charts look horrific,” he said, “when you take out outliers from mining and energy, the valuation levels are a little scary.” He also said equities are closely correlated with the price of […]

GMO’s James Montier on Fed-Induced Bubbles, Alpha, and More

James Montier of Grantham Mayo van Otterloo’s (GMO’s) Asset Allocation team spoke with Advisor Perspectives recently about interest rates, behavioral biases, and other key factors affecting markets. He said that unlike the longest-serving Fed governor William McChesney Martin, who said the central bank’s job is to “take the punch bowl away just when the party was getting interesting,” recently the Fed governors “are more like teenagers at prom night . . . spiking the punch bowl and handing out free drinks and hoping to get lucky at the end of the night.” This, he suggested later in the interview, has […]