Last Friday on CNBC, former Fed Chairman Alan Greenspan said that it's fair to characterize the current bond bubble as an "irrational exuberance" type of forecast. He did hedge the statement by saying that he has "no time frame on the forecast." Also note that he started making this bond bubble call in 2015.
The Wall Street Journal is reporting that President Trump is considering renominating Janet Yellen as Fed Chair but also views his economic adviser Gary Cohn as a top candidate. The president has changed his tune since the election season when he criticized Yellen repeatedly. Now he says that he thinks she is doing a good job and has "a lot of respect for her." Cohn would represent a dramatic shift away from an academic led Fed to a savvy business leader in Cohn who had a 26 year career at Goldman Sachs.
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.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede. Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.