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'Serious Danger Zone' Despite Fed Antics

'Serious Danger Zone' Despite Fed Antics

Monday, 30 May 2016 01:18 PM Current | Bio | Archive

Federal Reserve Chair Janet Yellen gave, in her way. that long awaited forward guidance saying: “It’s appropriate ... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate … the economy is continuing to improve ... growth looks to be picking up … further gains (in the labor markets) are possible.”

Unsurprisingly she also repeated what she’s said so many times before: “It is important to be cautious ... because if we were to trigger a downturn or to contribute to a downturn, we would have limited scope for responding.”

Anyway, in the bond markets, the 10-year Treasury futures contracts for September delivery slid abruptly 11/32, or $3.44 per $1,000.

In Seoul, St. Louis Fed President James Bullard said global markets appear to be “well-prepared” for a summer interest rate hike from the Fed, but refrained from saying whether the Fed should hike in June or July.

He stated: “My sense is that markets are well-prepared for a possible rate increase globally, and that this is not too surprising given our liftoff from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time … so my ideal is that if all goes well this will come off very smoothly … U.S. GDP growth seems to be materializing in the second quarter.”

I think that for long-term investors it doesn’t matter that much whether the Fed hikes in June, July or even September. What really matters is the fact that the Fed finally seems decided to start its long way to normalization.

In this context, I’d like to come back for a moment to what Yellen said on Friday: “… if we were to trigger a downturn or to contribute to a downturn, we would have limited scope for responding.”

Yes, she is 100 percent right because the Fed is “out of ammunition” if a downturn (let’s hope not a sudden) in the U.S. economy had to take place.

Therefore and notwithstanding all the reasons against it, the Fed has to start, better rather than later, and hopefully not too late, building a positive interest rate buffer zone once again.

No doubt, this will disturb many market segments in many places on the globe.

Because of this special situation, long-term investors should better be prepared for the unexpected, and this for the very simple, but at the same time for the extremely complicated reason, which goes far beyond what is mostly understood about international finance, is that at present and for the very first time since World War II and Bretton Woods,  the coming path to normalization of the Fed funds rates will cause disturbances because of its diverging path with the Euro area, Japan, and others.

This could lead to the creation of some kind of a new global financial architecture whereby, and this is very important for investors, global “temporary” imbalances will have to be tolerated and hopes for an orderly realignment of currency rates based on real growth, balances of payments, real deficits and surpluses, and so on will be obliged to wait for better times.

Maybe, long-term investors could try to be honest and ask themselves: “What’s really 'working' well these days in the world?” 

I still consider 2017-2018, and even beyond that, as a serious danger zone. Yes, we aren’t there yet…

All that said and thanks to Yellen’s comments, dollar bull bets have already jumped the most in 6 months.

Moody's Investors Service
released an interesting report that could help commodity investors getting a somewhat better idea where commodity prices could be headed for over the next 12-18 months.

Moody's says they expect that commodity prices will stay low for a prolonged period, corporate earnings will be negatively affected; thereby weakening the debt repayment capacity of many commodity firms.

Maybe it could be prudent cashing-in on commodity gains for now as the recent spikes in commodity prices could probably be only temporary and chances are we could re-visit the lows from a few months ago.

Finally, and in context of this week’s ECB Governing Council’s Monetary Policy meeting it could be well taking notice that German import prices fell for the 40th straight month.

Unfortunately, disinflation forces in the euro area appear remaining well in place.

We’ll see what ECB President Mario Draghi will say about that this week.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Maybe long-term investors could try to be honest and ask themselves: “What’s really “working” well these days in the world?”
fed, investors, market, world
Monday, 30 May 2016 01:18 PM
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