Is the UK Providing A Blueprint for a post “QE” World?
/in Investing/by Tom 2As we approach the jobs report later in the week, we need to be mindful that the greatest risk from an economic data standpoint isn’t of weakness, but instead inordinate strength, which could then sow the seeds of the market doubting “ZIRP.” It wouldn’t mean that stocks would sell off immediately, but as we look out over the coming weeks and months, the risk of the market losing confidence in ZIRP is the biggest threat to the stock market, and the better the economy gets, the higher the chances.
Luckily, though, we have a bit of a leading indicator for what might happen if and when the market does begin to lose confidence in the Fed’s ZIRP. The UK is somewhat of a “blueprint” for what we can expect here in the US, now that the Fed has started tapering QE and is relying more on “Forward Guidance” as a policy tool. The UK shifted its policies away from QE to “Forward Guidance” over the past year, and that has resulted in higher stock prices as the economy improves, higher bond yields and a stronger Pound (sound familiar?).
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Gold Capped by a Strong Downtrend
/in Investing/by Tom 2Gold Capped by a Strong Downtrend
The Economy: A Look Back and What’s Ahead (12.30.13)
/in Investing/by Tom 2It was a slow week economically given the Christmas holiday, but the data that was released was positive, and supportive of the growing view that we are seeing economic growth starting to accelerate. Last week’s highlight was…
The Economy: A Look Back and What’s Ahead (12.23.13)
/in Investing/by Tom 2Last Week
The FOMC decision to taper QE was the big news from an economic perspective, but beyond that, there were a few other notable takeaways that are important in light of the new trajectory of Fed policy.
Specifically, we learned last week that the economy in Q3 was stronger than we thought, that the manufacturing sector in December is a little slower than we thought and that the housing recovery is still ongoing, but concerns about a loss of momentum in the face of rising rates remain.
Starting first with the Fed, though, you all know by now the Fed announced it would “taper” its QE program by $10 billion a month (from $85 billion to $75 billion) starting in January. In a feat of monetary policy wizardry, though, the FOMC managed to taper QE yet come off somewhat “dovish.” They strengthened their “forward guidance” for keeping interest rates at 0%, saying the would keep rates at 0% well past 6.5% in the unemployment rate (thereby effectively raising the bar for when rates would start to rise). Overall the market welcomed the news, and stocks saw a big post-FOMC rally Wednesday afternoon. And bonds, while they did decline, largely “behaved.” It was the best-possible outcome for the Fed and for stocks.
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Fed Pivot to Forward Guidance Furthers Bear Case for Bonds
/in Investing/by Tom 2I remain skeptical of the “power” of forward guidance and think the switch away from QE to forward guidance as a primary policy tool only furthers the bearish case for bonds. And, my skepticism is rooted in experience and observation.
Although the rise in the Dollar Index yesterday got a lot of press, the one currency that was stronger vs. the dollar yesterday was the British Pound, which saw a 0.8% rally vs. the greenback—and that’s something that shouldn’t be dismissed, because I believe that what’s happening with the Pound, the FTSE and UK Bonds, may provide us a “road map” of sorts for what will happen to the Dollar, Bonds and stocks, now that the Fed is switching to “forward guidance” as its primary policy tool.
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What Could Go Wrong in ‘14—A Thought Experiment
/in Investing/by Tom 2The Pieces Are In Place For the Next Liquidity Crisis in the Markets – Here’s Where It Could Start
Why the Gaetz Withdrawal Sparked Yesterday’s Rally
/in Investing, Reports/by Tom EssayeWhat’s in Today’s Report: Why the Gaetz Withdrawal Sparked Yesterday’s Rally