I usually reserve Friday blog posts for lighter topics but with the FOMC meeting this week, I think it is important to touch on the Fed's plan to shrink its $4.5 trillion balance sheet. While the announcement was widely expected, it spelled out in greater detail plans to slowly unwind the Fed's sizable bond holdings. We believe that this step is very positive alongside interest rate hikes. The economy is doing well enough that the Fed can step back from its emergency measures, thus saving ammo for the next recession. We do not believe that this will cause a spike in long term rates but will monitor the situation closely.
Since the Great Recession, market participants have had to hang on to every word coming out of the Fed and its governors. Central bankers became the driving force behind the bull market. It is no surprise that we have written far too many blog posts on Central Banks and their influence. Thankfully since May 2016, we haven't written anything on the Fed because they were essentially on hold. Furthermore, the economy has been gaining momentum and fundamentals are now the driving force behind the stock market hitting new highs.
In the financial markets, we have always had two important components: investors and regulators. Today, we are seeing governments as significant market participants that impact global markets. Sovereign wealth funds and public pension funds around the world are now among the largest owners of publicly traded stocks and bonds. China and Japan alone represent $5 trillion in public funds out of an estimated total $30 trillion of investments owned by 160 countries. No doubt these are investors of great size that can crowd out individual and institutional investors.
Last August, Runnymede Capital warned our readers that a financial hurricane was coming. Over the past six months, the stock markets around the world tumbled and the US has followed suit in 2016. Our clients, who gave us permission to raise cash reserves, were fortunate and their assets were protected.
Bubbles are the only things that matter. The rest of it is boring. You show up for work, markets are at normal levels, and there's not much you can do. It's all trivial. But in a great bubble you can get your clients' arses out of the way, and the money you can save can be quite legendary." - Jeremy Grantham
The financial services industry generally frowns upon market prognosticators. "Stay the course," they say. This is especially true in recent years since passive investments have outperformed active ones. Admittedly, peering into one's financial crystal ball and voicing an opinion can be a risky endeavor. Besides the obvious risk of being wrong, another risk is being labeled a perma-bull or perma-bear. In article after article that I read, the media loves to turn to its favorite go-to bulls and go-to bears for an appropriate quote. Unfortunately, few individuals are permitted to change their minds and even fewer do it well.
At Runnymede, we do a lot of research, and our view is dynamic, not fixed. Ultimately, our market outlook is reflected in the positioning of our clients' portfolios.
Fed’s Williams foresees up to five rate hikes this year. Is he clueless?
Many of the economic departments of the regional Federal Reserve banks conduct outstanding research on the economy. At Runnymede, I rely on them heavily for my prognostication on the economy as well as the stock market. The pity is the bosses at the Fed must not read their own research. Is it possible that the Chicago Fed's National Activity Index (CFNAI) is not part of the "data" that the Central bank is so "dependent" upon? CFNAI has missed expectations 9 of last 11 months and has been below 0 (contraction) for 8 months last year. In November the index missed expectations once again, tumbling to its lowest reading since May.
The #Fed has NEVER correctly forecast a recession.— Jim Rickards December 16, 2015
The Fed announced that it would increase its benchmark rate by one quarter of a percentage point. The major beneficiaries will be the banks and brokers, not people on Main Street. Runnymede believes the US and world economies will weaken in the quarters ahead. Our view is supported by Jim Rogers, a top investor, and Sam Zell, a real estate tycoon.
The Fed has a very different opinion. Who will be right?
The FOMC is set to meet on December 15-16 and the market is finally buying the rhetoric that a rate lift off will begin this month. While Fed chair Janet Yellen has been hinting at a potential rate increase for much of the year, the financial markets are now pricing in the reality. Economists can argue whether it is the right or wrong decision, but the fact remains that the Fed is now highly likely to raise rates for the first time since June 2006. As you can see the 90 day T-bill rate is moving up sharply in anticipation.
Back in March 2015, we wrote that you shouldn't count on the Fed to raise rates in 2015 because of deflation and slowing growth. In September, we wrote that recession is just around the corner in the US.
Therefore (unlike the street), we were not surprised by Friday's weak job report where job growth was less than expected. Not only that, wages disappointed, revisions to August's report were bad, and the participation rate fell to a new 38-year-low.
It's time for investors to stop listening to the media noise and if you look at the the actual data, you can only reach one conclusion: the Fed will not raise rates in 2015 or 2016, but they will soon turn 180 degrees and start talking about the next round of QE (quantitative easing) and/or negative rates.
Let's take a look at 3 reasons why the data dependent Fed can't raise rates anytime soon.
Today with bated breath, the financial markets are waiting on the FOMC statement for any hints of a potential rate hike in 2015. Many economists are still expecting a hike in September or October but at Runnymede, we remain highly skeptical that the Fed will raise rates in 2015. Like we have been saying since March, the data dependent Fed just doesn't have the numbers to justify their first rate hike. Janet Yellen and the Fed target 2% inflation and sorry we aren't anywhere near that number. She should be more worried about deflation than inflation at this point.
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