Tags: Yellen | Greece | capital | bond

How 'Hawkish' Is Yellen? Could Bond Speculators 'Get Fingers Burnt?'

By    |   Tuesday, 26 May 2015 10:45 AM

In the first clip, Boris Schlossberg, managing director of BK Asset Management, assessed remarks of Federal Reserve Chair Janet Yellen as "not as hawkish" as some observers think, adding that "central banks fancy themselves as anticipatory institutions, but they're nearly always reactive in their policy." He looks for Yellen to await a couple more months of data on employment and wage growth before acting to "normalize" interest rates. Schlossberg noted a pattern of disappointing data that keeps the Fed from acting, which he expects to last a couple more months. Further, he attributes 80 percent of moves in the euro to a reaction to U.S. policy. The word "hawkish" was injected by the interviewer, and this writer would ask why anyone would think Yellen is hawkish just because she continually talks about raising rates but never does it.

Perhaps a more realistic view was offered by Todd Horowitz, founder of Averagejoeoptions.com, who joined this writer as doubting Yellen will ever raise rates, and Peter Schiff, who has flatly predicted she will not act but will eventually institute yet another round of quantitative easing. Horowitz said he is looking for stocks to short and has selected Netflix (NFLX) and Tesla (TSLA) as vehicles.

Nick Hungerford, CEO of Nutmeg, expressed "great fear" of the bond market. Without hesitation he stated a preference to remain in equities. Asked how this call is affected by the situation in Greece, he responded "not very" and joined those who have said that the situation has improved during the past couple years, stating, "There is so much more capital underpinning the banks and the financial systems that a Greek exit would have far less effect than it would have two or three years ago." He cited laws that require higher bank capital levels. As with the Fed's stated interest rate policy, this writer doubts that the regulatory policies of central banks will in fact be implemented, but Hungerford clearly represents the prevailing view.

Finally, David Kuo, CEO of The Motley Fool, described a bifurcated bond market that leaves speculators in a vulnerable position, because "for every 1 percent increase in the bond yield, you're talking about the possibility of a 9 percent fall in the bond price itself. That is really what people are very concerned about. If interest rates were to increase 2 percent, then you would actually see a 17 percent fall in bond prices." He said long-term investors "don't really have much to worry about," but short-term speculators expecting a further drop in rates "could get their fingers burnt." Kuo sees Yellen's recent remarks as responding to "a very dysfunctional bond market, simply because interest rates are too low." Kuo warned that if rates go up, speculators will get "creamed," and then "everybody starts selling bonds, and that is when you're going to get some opportunities in the bond market." This writer would point out that this could also be a time when the Fed would engage in yet another round of intervention to head off what the authorities seem to fear most, a spate of "fire sales" by investors caught on the wrong side of the boat.

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In the first clip, Boris Schlossberg, managing director of BK Asset Management, assessed remarks of Federal Reserve Chair Janet Yellen as "not as hawkish" as some observers think.
Yellen, Greece, capital, bond
Tuesday, 26 May 2015 10:45 AM
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