Tags: Jonathan Hirtle | Fed | Fleckenstein | Investors

Jonathan Hirtle Asks: 'What's Holding the Fed Back?'

By    |   Tuesday, 04 August 2015 10:26 AM

Barnaby Martin, head of European credit strategy at Bank of America-Merrill Lynch, is astounded that European companies are buying back debt at the same time that the European Central Bank is providing quantitative easing that could enable mergers and acquisitions and share buybacks.

But firms are buying back their bonds instead of investing, a theme that sounds familiar in the U.S. and may be part of the answer to why the Fed hasn’t raised interest rates.

There was a lot of chatter on CNBC about the administration’s announcement of the long-awaited clean-energy program.

Vishal Shah, managing director at Deutsche Bank, suggests that the plan was announced in anticipation of a conference scheduled for Paris in December.

An interviewer listed a number of initiatives that have failed globally and asked why Obama thinks he has to move now. Shah responded that costs of alternative energy have come down enough to enable it to be implemented over the next 15 years with minimal impact on rates.

When challenged by the interviewer, he insisted that the payback period is coming down drastically to two to three years.

Jonathan Hirtle, CEO of Hirtle Callaghan & Co., adds his perspective to the debate over when the Fed will finally raise interest rates, focusing on why the Fed doesn’t yet see sufficient inflation in the economy.

He mentioned two theories – that inflation is a function of money supply, and that it should be measured by rising wages and commodities prices, which are lacking.

Hirtle also pointed to concerns the Fed has over the prospect of further strengthening of the dollar. An interviewer asked whether the Fed would lose credibility if it acted without seeing evidence to back a rate hike that comports with its Dual Mandate to support inflation and employment.

He concluded with a somewhat confusing remark that a one-quarter percent raise would have little effect but if rates move as much as necessary to motivate investors, bond prices would suffer.

This writer would point out again that with an election looming in which Democrats expect to hold the White House and regain the Senate, senators have urged Fed Chairman Janet Yellen to hold off raising rates.

Contrarian Bill Fleckenstein, president of Fleckenstein Capital, continues to favor shorting this Fed-sponsored market.

CNBC's Melissa Lee began by asking why he continues to focus on “an area that has already been beaten down,” semiconductors.

Fleckenstein explained that he is planning to re-launch the short fund that he closed in 2009, based on the actions of the Fed.

He said he knew the Fed would print money, but he never dreamed of how far the Fed would go, and now “the Fed and the market are trapped.” He contends that the Fed can’t ease any further, so “the market’s on its own” and starting to show weakness beneath the surface.

While he acknowledges that market crashes are rare, he thinks the market is “very brittle” right now due to the activities of HFTs (high freuency-traders), ETFs (exchange-traded funds), and momentum investors,” so he doesn’t think there can be a “painless back door.”

Fleckenstein is pointing toward third quarter earnings, and he thinks Intel (INTC) has “some unique problems,” and he also sees problems with the Apple (AAPL) food chain, because iPhone sales haven’t hit their targets. He mentions Qualcomm (QCOM) and NXP Semiconductors (NXPI).

After getting Fleckenstein to confirm that he plans an October 1 launch, Lee asked him whether the plan is based on expectations that the market will be weak then, and he replied unequivocally, “yes.”

He said he wished he could snap his fingers and be short tomorrow.

This writer would add that when Fleckenstein says the Fed can’t ease further, he seems to be assigning zero probability to the idea that the Fed could buy stocks for its own portfolio.

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Jonathan Hirtle, CEO of Hirtle Callaghan & Co., adds his perspective to the debate over when the Fed will finally raise interest rates, focusing on why the Fed doesn’t yet see sufficient inflation in the economy.
Jonathan Hirtle, Fed, Fleckenstein, Investors
Tuesday, 04 August 2015 10:26 AM
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