Tags: Fed | Sheperdson | rates | oil

Layers and Players

By    |   Monday, 15 December 2014 10:01 AM

Here is a sample of business commentary in preparation for this week.

Tim Hayes, chief investment strategist at Ned Davis Research, sees the oil price decline as an indication of a significant buying opportunity heading toward the second quarter of 2015. He downplays the importance of the selloff in energy stocks, viewing it as "an excuse to sell losers," according to CNBC. Of course readers would expect to hear a positive story for the coming year, and this is an example of one.

Thomas Lee, managing partner of Fundstrat Global Advisers and former chief equity strategist of JPMorgan Chase, gave what he called a "contrary" view to CNBC of the decline in the oil sector —that it could constitute a washout that could lead to a rebound next year. Thus, this is another vote for a positive story for next year.

A question for readers is that assuming this is a washout, does a rebound come as quickly as early next year, or does there have to be a period of digestion, and does the rebound come after investors have looked for a rebound, giving up if it doesn't come, and the sector has to build a base to support perhaps a stronger rebound at a later, indeterminate time.

Most interesting were the remarks of Ian Shepherdson, chief economist of Pantheon Microeconomics, who has been credited as a good forecaster by The New York Times and talked about "What's Weighing on the Fed's plate" as the next meeting of the Federal Open Market Committee (FOMC) approaches.

Shepherdson told CNBC he is seeing evidence of labor markets strengthening so much that unemployment could drop to "a four handle," as signs of wage inflation appear. The point was made that this brings him into conflict with New York Times columnist Paul Krugman, who is holding out for more indulgence in the upward trend before any action is taken to slow it.

Shepherdson predicts the Fed will move relatively soon to change the language in the FOMC's communique following the meeting to withdraw the embedded reference to maintaining low rates for an extended period of time. Certainly his remarks bear watching to see if there is any evidence of this this week.

This is the classic issue of when the Fed should take away the proverbial punchbowl. The Fed has gone to great lengths to assure markets that the low-interest-rate environment will persist, but Chairman Janet Yellen has also said that there are no automatic triggers, and the Fed will act according to the data. Also, presume that one of the last things the Fed wants to see is to make a move toward higher rates and then have to reverse it.

Inflation doves are willing, even pleased to entertain some inflation, whereas a minority of vocal hawks has questioned all along whether quantitative easing helps to fulfill the Fed's mandate to promote economic growth with low inflation while also taking into account the effects on the banking system, which is still limping along under untold support from the Fed and Treasury.
Finally, if the FOMC does give a sign that it will change policy sooner, rather than later, how will markets react? Watching statements by legislators who represent Wall Street would convey the impression that Wall Street wants easing to continue and have hoped the Fed would "pause" in winding down the purchase of government and agency bonds.

This writer would point out that having intervened so strongly during and after the crisis episode of 2008, if trouble should occur anywhere in the financial sector, the Fed is likely to institute new asset purchase programs in order to support the financial sector or a particular segment of it.

(Archived video can be found here, here and here.)

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Here is a sample of business commentary in preparation for this week.
Fed, Sheperdson, rates, oil
Monday, 15 December 2014 10:01 AM
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