Are Equities past their best returns - Bond King says so
Discussion
I read that. A difficult one, he's clearly very clever and very rich on one hand but on the other he made a few poor calls last year re bonds.
As a private investor you would hope that you could get a good if not constant return, he on the other hand has the problem like Warren Buffet says that the size of his fund means he can't invest in a mid-cap oil company. I recall that they have nearly a Trillion under management but regardless of whether he is right or wrong, the notion and him saying it shows a worrying thought chain.
As a private investor you would hope that you could get a good if not constant return, he on the other hand has the problem like Warren Buffet says that the size of his fund means he can't invest in a mid-cap oil company. I recall that they have nearly a Trillion under management but regardless of whether he is right or wrong, the notion and him saying it shows a worrying thought chain.
munky said:
Bloke who runs bond funds for a living in "I think equities are rubbish" shocker! Well I never...
Bernanke will keep the equity flame alive.The Fed may hold off easing until the stock market really tanks.
Global markets whipped themselves into a frenzy in expectation that the world's major central banks would ease policies at their hotly anticipated meetings this week. Having rallied furiously late last week, they risk being disappointed if the monetary solons don't come through with the measures the markets seem to be banking on.
In case you have been blissfully off on holiday, the Federal Reserve winds up its two-day meeting on Wednesday. Its counterparts on the other side of the pond -- the Bank of England and the European Central Bank -- will wind up their confabs Thursday before the bell rings on Wall Street. While the ECB's actions will have a huge impact on global markets, depending on the decisiveness and boldness of its moves, the decisions of our dear Fed are more proximate.
Rarely has the breadth of policy options to be considered by the U.S. monetary authorities been so wide-ranging. Usually, the debate is over whether to make an incremental move in the direction already taken, or stand pat, which leaves open the option to act later.
Now, as with so much in the nation, there is a split down the middle. The so-called hawks think the Fed has done enough; too much, actually, and if they had their druthers, they would prefer to tighten policy. The doves on the other side say the Fed has not done enough to ease. Chairman Ben Bernanke has to hammer out a consensus among the 12 voting members on the Federal Open Market Committee. Though he has the votes on the panel, too many dissents would raise doubts in the market about his leadership. That would be disastrous -- regardless if you're a fan or a foe of the Fed chairman.
So, what are the realistic outcomes?
The most likely option is for the Fed to do little or nothing -- for now. That leaves Bernanke's options, and he could detail them later in August at the Fed's annual policy get-together in Jackson Hole, Wyo. In 2010, Bernanke memorably laid out plans for the second round of quantitative easing, or large-scale Fed bond purchases -- QE2.
The risk markets are rooting for QE3 because the liquidity injected by the first two rounds of quantitative easing spurred big rallies in stocks, high-yield bonds, emerging markets and commodities. A more likely, but less potent, move would be to continue the Fed's so-called Operation Twist, in which it shifts its securities portfolios to lengthier maturities to bring down long-term interest rates. Or the Fed could concentrate its purchases on mortgage-backed securities to bring down further the cost of home loans. All of which would be in response to the continued sluggish economy, evidenced by the most recent data showing tepid, 1.5% annualized growth in the second quarter and unemployment stuck at 8.2% in June (with no improvement expected in July's numbers due out Friday.)
Something's going to happen, say the economists at Goldman Sachs, because doing nothing "is tantamount to a tightening," they write in the firm's daily letter. The 10-year Treasury yield would rise 30 basis points (0.3 percentage points) if the Fed stopped supporting the long end of the government bond market, Goldman economists write, noting Fed officials have endorsed that view in recent statements. And the spewing of leaks in various business dailies that the Fed is prepared to act is no accident. Nuff said.
Apart from outright purchases, what else could the FOMC do? Having already declared its intention to keep short-term rates near zero through late 2014, it could push that date farther out, perhaps to mid-2015. Which is what the financial-futures markets are pricing in already.
Alternatively, the Fed could lower the interest rate on excess reserves (IOER, if you haven't gotten your fill of alphabet-soup abbreviations.) Banks already are sitting on $1.5 trillion of excess reserves, on which they get paid 0.25% -- more than they get for buying two-year Treasury notes. And a damned sight more than they're paying you or me on our cash.
So, why are the banks getting this IOER subsidy from the Fed? Well, the ECB took its subsidy away, and banks that want to park their money are paying for the privilege with negative short-term rates in Switzerland or German bunds. Cutting the 0.25% IOER to nil would save the Fed some $3.8 billion annually, which it could return to the Treasury and the taxpayers.
History may play a part in the Fed's decision. Uwe Parpart, head of strategy and research for Reorient Group in Hong Kong, notes today is the 10th anniversary of Ben Bernanke's 90th birthday toast to Milton Friedman. "Regarding the Great Depression: you're right, we [central bankers] did it. We're very sorry. But thanks to you, we won't do it again," he said at the time.
Friedman and colleague Anna Schwartz showed the Depression was caused by Fed policies that allowed the money supply to shrink by one-third in the early 1930s. The Fed also caused a renewed downturn starting in 1937 by tightening policy in reaction to exaggerated inflation fears caused by the large volume of excess reserves sloshing around the banking system at the time.
Bernanke, a scholar whose focus of his studies was the Great Depression, has been guided by the blunders of that period to do the opposite. Keep that in mind and you will have a guide to his future moves.
As such, he has exorcized the demons of that past era. In so doing, however, the way forward from here isn't clear. Bernanke won't countenance draining the $1.5 trillion of excess reserves that swirl through the financial system. Yet it is difficult to see what adding to that sum would accomplish.
Bernanke has always contended central banks still have tools once short-term interest rates -- their traditional policy lever -- are at or near zero. Central banks can expand their balance sheet through QE, for instance, without limit. The impact has become less and less with each application.
Notwithstanding the Fed chairman's insistence, monetary policy in the U.S. may have done all it can do to spur growth. If a little is good, more must be better, right?
But as Hoisington Management chief economist Lacy Hunt continues to point out, Fed stimulus tends to boost the cost of necessities for the broad swath of average Americans while benefiting a small percentage of affluent Americans through the elevation of asset values.
A cynic might say the latter is what counts. The Fed is apt to act when the stock market drops precipitously, which hasn't happened yet. In the meantime, it might be best for investors to curb their enthusiasm.
Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff