Tags: fed | invest | economy | rates

'Fed Speak': It's All Just Talk

Wednesday, 04 November 2015 07:44 AM Current | Bio | Archive

At the Dealbook 2015 Conference” in New York, Laurence Fink, chairman and CEO of BlackRock gave some noteworthy comments about investing for the long term in today’s short-term world.

You know, the world that is driven by quarterly returns, shareholder pressures, endlessly compressed news cycles and election campaigns that start before the last one has ended.

Again, he gave a strong warning, as he did in his April 17, 2015 letter to shareholders in BlackRock's 2014 Annual Report in which he wrote “… the unintended consequences of aggressive monetary policy are the biggest driver of (such) bubbles today. Yield-starved investors attempting to meet future liabilities are turning to lower-rated credits and longer-duration assets. Not only is this driving prices ever higher in certain asset categories, but it is also contributing to greater portfolio concentration in more volatile areas of the market than historical norms. The situation is worsening every day, as the pool of funds in search of returns grows larger…,”

He rang the alarm bell again about more specifically the fact that corporate America continues to borrow money to finance special dividends and stock buybacks and because of that companies in the Standard & Poor’s 100-stock index are disbursing 108 percent (!) of their earnings to shareholders, which is a situation that can’t last.

Hedge fund manager Stanley Druckenmiller, of Duquesne Capital, expressed his ongoing concerns about what he called the Federal Reserve’s quantitative easing “emergency measures,” which started in 2008 and that have pumped trillions of dollars into the financial system by buying back bonds and thereby having kept interest rates low, but that had now been going on for too long.

He said, “You’re pulling demand forward today; this is not some permanent boost. You are borrowing from the future … The chickens will come home to roost.”

Druckenmiller concluded, “I can see myself getting very bearish, I can’t see myself getting bullish,” but also added that some of his best returns had been made in “great periods of chaos.”

I think as a long-term investor, it might be not such a bad idea keeping Mr. Druckenmiller’s conclusion in mind for hereon forward.

That said, today’s Caixin China PMIs on Services and Composite, which covers both manufacturing and services, show business activity stabilized somewhat in October in China as the composite came in only fractionally below the neutral 50.0 value at 49.9, but was up from September’s 80-month low of 48.0.

Let’s hope it’s not a “topping” process with what’s going on in China, nevertheless one thing is clear, “For now at least, China isn’t experiencing a hard landing.”

By the way, UBS sees now a 15 percent probability China having a hard landing, and that is surely not enough to set off the alarm bells at the Fed. 

Remember, in the September FOMC minutes (released on October 17) we read: “Participants discussed the potential implications of recent economic and financial developments abroad for U.S. economic activity and inflation. A material slowdown in economic growth in China and potential adverse spillovers to other economies were likely to depress U.S. net exports to some extent.”

At present we don’t have a situation that would seriously justify the Fed from starting its long way to “normalization” at the next FOMC meeting in December.

In this context, the latest Manufacturing and Services PMIs from ‘Markit’ and ‘ISM’ for the U.S. don't point to lurking recession in the U.S.

The Markit Composite PMI for the eurozone wouldn’t give a serious reason for the Fed not to start raising rates in December as it shows a mild growth acceleration at the start of Q4 while quarterly GDP growth remains at 0.4 percent

Finally, and talking about “Fed speak,” today we’ll have:
  • Fed Governor Lael Brainard, who will participate in a panel discussing about bank supervision, at the ECB in Frankfurt, Germany.
  • Fed Chair Janet Yellen, who testifies before House Financial Services Committee on regulatory issues.
  • N.Y. Fed President William Dudley, who will give a press conference on economic outcomes.
  • Fed Vice-Chair Stanley Fisher, who will give a prepared speech at the National Economists Club, in Washington, D.C., after the markets close.

As the last message from the FOMC was relatively direct, let’s hope that some of today’s Fed speakers’ comments will learn us a little bit more about what the Fed's next move could be.

Of course, as Demosthenes, the great orator of ancient Athens, said, “All speech is vain and empty unless it be accompanied by action.”

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Of course, as the great orator of ancient Athens Demosthenes said, “All speech is vain and empty unless it be accompanied by action.”
fed, invest, economy, rates
Wednesday, 04 November 2015 07:44 AM
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