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Fed Policy

Sep 08 2022

Fed-Pivot Watch—Pivot Pushed Further Out

  • Sep 8, 2022

Since our July report, market action felt like the pivot had already occurred. However, according to our latest update, numerous measures have moved away from levels that would support a pivot. In other words, the eagerly-awaited Fed pivot has been pushed further out.

Aug 05 2022

The Yield Curve: Two “Perfect Records” At Stake

  • Aug 5, 2022

Yield curve action is getting harder to dismiss by the day. But which curve is the most relevant? We tried to answer that question in disciplined fashion in April. To our surprise, the “2s10s” spread that’s ubiquitous in bond-land scored near the bottom of the pack.

Aug 05 2022

LEI On The Precipice

  • Aug 5, 2022

The LEI’s 3.6% six-month annualized loss through September 2006 was the largest decline not followed almost immediately by a recession. This year, the LEI contracted by 3.7% over the six months through June—if a recession is avoided in the current experience, it would be the most misleading signal in the history of the LEI as currently constructed.

Jul 08 2022

Fed Pivot Watch

  • Jul 8, 2022

The late 2018 policy error and subsequent pivot of Chairman Powell’s rookie year is probably the best case-study for today’s pivot debate. Here we evaluate the current status of key pivot triggers and compare them to the readings of late 2018. Given the political environment and backward-looking nature of the Fed, we think the bar is higher for a pivot than the market hopes.

Jun 07 2022

Your “Free Lunch” Comes With A Tab

  • Jun 7, 2022

The market impact from money printing has been underwhelming when adjusted for the inflation it’s unleashed. Measured from the peaks associated with the first attempt at Quantitative Tightening, in inflation-adjusted terms, Small Caps, EAFE, and Emerging Markets all have losses.   

May 06 2022

Past Pivots Put Powell In A Predicament

  • May 6, 2022

Market conditions leading up to the May rate hike were similar (if not worse) than those that triggered Powell’s late-2018 “pivot.” Free-market tightening of 2022 is apt to play into the path of policy. There’s likely a dovish “pivot” in store later this year—one that may be aggressively sold rather than bought.

Mar 05 2022

Zigs And “Zags”

  • Mar 5, 2022

Like Gonzaga in the NCAA basketball tournament, stock market bulls are set for their first real test in a very long time.

Feb 05 2022

What “Causes” Inflation To Decline?

  • Feb 5, 2022

Last year’s consensus view that inflation would prove “transitory” missed the mark. There’s no reason for shame; inflation forecasting hadn’t been a required investment skill for the previous 30 years.

Feb 05 2022

Speed Trap Ahead?

  • Feb 5, 2022

In San Francisco, thefts of less than $950 have been decriminalized, while in Minneapolis, police are so beleaguered that car thefts not involving injury are ignored. Is it any wonder that the economy felt free to violate its usual stock market “speed limits” throughout much of 2021?  

Feb 05 2022

Easy Money? Not In Small Caps

  • Feb 5, 2022

One might have predicted that big beneficiaries of war-time-style levels of federal spending, financed by money printing, would be Small Cap stocks. And from March 2020 until March 2021, they were. But the larger picture is sobering. 

Feb 05 2022

A Failure of "Free Money"

  • Feb 5, 2022

Senator Rand Paul’s annual “Festivus” report on wasteful spending makes for sobering reading to the dwindling few who care about federal finances. The “low light” for 2021 was a $465,000 grant to the National Institute of Health for a study of pigeons playing slot machines.

Feb 05 2022

“Collared” By The Fed?

  • Feb 5, 2022

In late January, the S&P 500 was down so much (almost 10%!) that it revived talk of investors’ favorite “safe” security. No, not T-bills—and not even Amazon or Apple common stock—but the Fed “put.” Years ago, we called it the “hypothetical” Fed put. But by now, we’re believers.

Jan 28 2022

Small Caps’ Three-Year Ride To Nowhere

  • Jan 28, 2022

Yesterday, the Russell 2000 closed down 20.9% from its November 8th high, and market bulls have conceded it was “due” for a pullback after a 146% gain off the March-2020 COVID lows.

The Russell’s decline is moderate by the historical high-beta standards of Small Caps. However, this drop—combined with other developments transpiring over the last few years—has produced a shocking result: The Russell 2000 is now unchanged on an inflation-adjusted basis since its “Quantitative-Tightening Top” of August 31, 2018. But what a three-year ride it’s been!

Dec 07 2021

Is Powell A “Phillips Curve” Guy?

  • Dec 7, 2021

With consumer price inflation raging at 6.2% and few indications of an imminent rollover, Jay Powell has waved the white flag and retired the ill-begotten “transitory” descriptor. The timing of Powell’s concession is intriguing—perhaps he’s a fellow follower of a simple inflation model: the Output Gap.

Dec 07 2021

“Memes” Need Money Growth...

  • Dec 7, 2021

The extra months of QE “auto-pilot” failed to support some of the themes we’d have thought were the most likely to benefit from it—including IPOs, SPACs, Bitcoin, and the sky-high growers favored by the ARK Innovation ETF. Instead, the smart play with each of these assets was to ignore the ever-expanding Fed balance sheet and sell in February.

Nov 05 2021

Fed Taper—Not A Policy Error

  • Nov 5, 2021

We believe concerns about central-bank policy error are mostly a foreign issue, because they have moved much more aggressively than the Fed. The market has shown no indication of a Fed-policy mistake and we are still on board with the reflation trade.

Nov 05 2021

No Bark, No Bite?

  • Nov 5, 2021

If NBER is correct that a new economic expansion began in mid-2020, then this cycle is unfolding in “dog years.” After limiting between-meal snacks earlier this year, champion-breeder Jay Powell has informed his pack of canines that their portions will also be reduced as of later this month.

Nov 05 2021

Aging Prematurely

  • Nov 5, 2021

Regardless of one’s view on the maturity of today’s economic and market cycles, it’s hard to deny that the continuation of extraordinarily-loose economic policies is now causing those cycles to age prematurely. And no doubt it’s contributing to the premature “graying” of many market participants. 

Sep 08 2021

A Good Thing To Have In Reserve

  • Sep 8, 2021

It seems investors care mostly that the authorities have fiercely defended the S&P 500’s status as the World’s Reserve IndexTM. A decade of QE should have taught us that when the Fed conducts a decade’s worth of QE in little more than a year, U.S. Large Cap stocks benefit the most. 

Aug 06 2021

Liquidity Letdown?

  • Aug 6, 2021

Stock market liquidity might seem plentiful, with the Fed still buying $120 billion in bonds per month under the all-too-predictable continuation of what was first billed as an emergency operation. However, the steadiness of QE masks a major second-quarter reversal in “excess liquidity.”

Aug 06 2021

Sharing The Punch Bowl?

  • Aug 6, 2021

The gap between YOY growth rates in M2 and nominal GDP just flipped negative after four quarters of record-high readings. In other words, the recovering economy is now drinking from a punch bowl that the stock market once had all to itself. Similar drinking binges occurred in 2010 and 2018, both of which then experienced corrections north of 15%.

Jul 08 2021

Are High Prices A Form Of “Tightening?”

  • Jul 8, 2021

It’s certain that today’s cyclical bout of inflation will prove “transitory,” if only because the word itself is practically meaningless. Our time on earth will also prove transitory, and so too will the current stock market mania—to the shock of most of the nearly 20 million “investors” on the Robinhood platform.

Jun 05 2021

Ulterior Fed Motives?

  • Jun 5, 2021

In an echo of last decade, the Fed has come under fire for keeping crisis-based monetary policies in place well after a crisis has subsided. Predictably, the Fed rationalizes its uber-accommodation by citing the slowest-to-recover data series from a set of figures that already suffer from an inherent lag (labor market indicators).

Jun 05 2021

We’re The Government And We’re Here To Help

  • Jun 5, 2021

Our trusted civil servants must have found a list of our old Economic/Interest Rates/Inflation components and began to “discontinue” those once invaluable to us and other Fed watchers. It’s a hindrance, but we still have the one that is most correlated to stock prices and it’s free: The ever-expanding balance sheet.

Jun 05 2021

Time To Start Thinking About “Thinking About…”

  • Jun 5, 2021

The COVID collapse showed the Fed could abandon its clunky forward guidance and make the appropriate “pivot” when the facts changed. Now that facts have changed for the better, the Fed is right back to the rigid and dogmatic approach that characterized Fed-speak for almost all of the last economic expansion.

Jun 05 2021

What Should Quants Count?

  • Jun 5, 2021

On May 25th, Fed Chair Jerome Powell promised to pull back emergency support “very gradually over time and with great transparency.”

“Very gradually?” No one doubts that. But “with great transparency?” Not a chance...

Mar 05 2021

More On The “Rate-of-Change” In Rates…

  • Mar 5, 2021

The liquidity and interest-rate backdrop for stocks has been favorable to such an extreme that we’ve cautioned any minor diminution in this condition could trip up the stock market. On that score, the monetary aggregates and the Fed’s balance sheet don’t pose much concern. On the other hand...

Mar 05 2021

Ruminations On The Fed, Past And Present

  • Mar 5, 2021

If the “Maestro’s” image was dinged from being the “original bubble-blower,” imagine what will happen to Jay Powell’s if stock valuations mean-revert alongside interest rates and inflation over the next few years.

Feb 05 2021

Early-Cycle “Overheat?”

  • Feb 5, 2021

Equities continue to benefit from an odd combination of faith and doubt in the Federal Reserve: Faith that the “Fed put” under financial markets is struck closer to the price of the “underlying” than ever before, and doubt that limitless liquidity will trigger a dangerous rise in consumer prices. In all fairness, this glass half full assessment is hardly a theoretical one, but one based on years of empirical evidence. 

Dec 05 2020

A 40-Year Inflationary Echo

  • Dec 5, 2020

When measured by the gains in stocks, gold, and house prices, there has been just one other occasion in which asset inflation was as “broad” as today—late 1980. But the differences in underlying fundamentals between then and now couldn’t be more stark. 

Dec 05 2020

A “Fed” Conundrum

  • Dec 5, 2020

“Don’t fight the Fed” has been great advice for stock market investors over the last nine months. For 2021, that won’t cut it. It should be: “Don’t believe the Fed.”

Nov 06 2020

Liquidity: As Good As It Gets?

  • Nov 6, 2020

Stock market manias thrive on buzzwords, and if there’s a single one that captured the essence of the late 1990s’ boom it was “productivity.” In today’s version, our top candidate is “liquidity”—and we doubt anyone would argue.

Oct 07 2020

Inflation In The Wrong Places?

  • Oct 7, 2020

Long before policymakers’ extreme response to the COVID collapse, we feared that the Fed’s interventions were suppressing important signals from the stock and bond markets. But we now suspect that hyper-expansionary policies are suppressing price signals from the “real” economy as well.

Sep 18 2020

Inflation: Looking Beyond The CPI

  • Sep 18, 2020

The Fed is hell-bent on generating inflation of 2% or higher in an over-supplied world that we think should probably be experiencing mild deflation. Their success or failure at this mission will be critical for asset allocators. For equity managers who must remain fully invested, however, the more important question might be not whether the Fed can generate higher inflation, but where.

 

Sep 05 2020

An Unwelcome Surprise?

  • Sep 5, 2020

Several measures of U.S. economic “surprises” have soared to all-time highs in the last couple of months, showing that even economic forecasters have finally learned to play the corporate game of  “under-promise then over-deliver.” Mind you, that’s only 30 years after most industrial firms eliminated the role of “staff economist.”

Sep 05 2020

Can Money Growth Trump All Else?

  • Sep 5, 2020

In 2019 and 2020, our regard for time-tested valuation tools resulted in tactical portfolios being underexposed to stocks during a pair of tremendous rallies. Now, the critique is that we don’t appreciate the brilliance of today’s policymakers and their miraculous ability to pivot just when the stocks (and, in the latest case, the economy) need it most.

Sep 05 2020

The Tab For “Freebies” Keeps Escalating

  • Sep 5, 2020

There’s an underlying faith that bureaucrats at the Fed and Treasury will keep good and bad businesses, alike, afloat—and overvalued. We’re still trying to unearth a single historical analog that merits such confidence.

Sep 05 2020

Musings On A Manic Market

  • Sep 5, 2020

Officially, those quick to pronounce the move off March lows as a new bull market have been proven correct with new S&P 500 all-time highs. Fundamentally, though, there’s enormous risk in Large Cap valuations, regardless of where one believes we are in the economic cycle.

Sep 05 2020

Keep Safe

  • Sep 5, 2020

A truly skilled writer would attempt to build up a little suspense before revealing the central theme of this section. But in this makeshift world of sixty-game baseball schedules and seven-inning doubleheaders, who has the time or patience for that?

Sep 05 2020

A New Proposal To The Fed: Buy Bank Stocks!

  • Sep 5, 2020

While most economic numbers have been positive, the fly-in-the-ointment was the latest Senior Loan Officers’ Survey. Banks have tightened their lending standards across the board.