Fed Begins Tightening Process: Discount Rate Raised To 0.75% From 0.5%, Dollar Surges, Curve Pancakes

Thursday, February 18th, 2010

This article is a guest contribution by Tyler Durden, ZeroHedge.com.

Will the Steepener/Carry Trade/Long Stock bandwagon please proceed calmly in single file through the exit of the burning theater. Fed hikes discount rate by 25 bps - Hoenig, Plosser are finally heard. Futures plunge, dollar surges, 2s10s pancake.

Full Fed Press Release:

For release at 4:30 p.m. EDT

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

Source: ZeroHedge.com

Tags: Backup Source, Bandwagon, Board Approval, Boards Of Directors, Bps, Credit Loans, Depository Institutions, Economic Conditions, Federal Funds Rate, Federal Open Market Committee, Federal Reserve, Federal Reserve Banks, Federal Reserve Board, Fomc, Maximum Maturity, Normalization, Open Market Committee, Single File, Source Of Funds, Target Range, Tyler Durden
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China: Social Stability Through Economic Prosperity

Sunday, February 14th, 2010

By Frank Holmes
CEO and Chief Investment Officer

China sees a bubble ahead and is trying to avoid it – is that such a bad thing?

Isn’t this what we expect Ben Bernanke and the Federal Reserve to do here at home – take clear and decisive action to drain off excess liquidity in the economy before inflation takes hold?

The People’s Bank of China did just that after it saw that 1.4 trillion yuan ($204 billion) worth of bank loans were issued in January, more than the total loaned in the three previous months combined.

For all of 2010, the target loan amount is 7.5 trillion yuan, so it’s easy to see why the government might want to slow the pace a bit.

Forbes’ online headline was “China Tightens the Screws,” but let’s have a little perspective.

Barclays Capital predicts that the 0.5 percent increase in bank reserve rates (from 16.5 percent of deposits to 17 percent) will remove 300 billion yuan from the Chinese economy. That’s only 20 percent or so of the amount loaned in January.

And it’s not like cash is going to dry up – the People’s Bank plans to increase the nation’s M2 money supply by 17 percent this year. January’s M1 money supply report showed a 39 percent increase (chart above). Not exactly a screw-tightening.

China’s CPI rose 1.5 percent in January, which is not extreme, and the chart above from BCA Research shows that real estate prices in terms of per-capita income had not entered a bubble phase as of year-end. But perhaps the more telling number was wholesale prices – up 4.3 percent year-over-year and more than double the increase seen in December. This signals that higher inflation at the consumer level could be around the corner.

Markets are taking a hit based on this news – this shows how important China has become to the world economy. It surpassed Germany as the top exporting country by value at $1.2 trillion, and in January its exports were up 20 percent compared to a year earlier. Even better, its imports were up 85 percent year-over-year.

What we may actually have is a classic bull market in the making – one that climbs the proverbial wall of worry, which suggests that investors buy on corrections. The table below shows the standard deviation (sigma) over 10 years for the main stock markets in mainland China and Hong Kong. The weekly sigma for the Shanghai A-share market is plus or minus 5 percent, while its normal quarterly swings can be nearly 25 percent up or down.

It’s nearly impossible to pick exact tops and bottoms – adding to core positions after any correction greater than one sigma is a safer and more prudent way to invest.

Beijing is tending to its economy so it performs over the long term. This is central to its goal of social stability through economic prosperity, and it seems to be working – millions of households join China’s middle class every year.

We all know what can happen when an asset bubble grows huge and then bursts – we’re still recovering from 2007-08.

China is a long-term growth story, and how well it manages that growth will have an impact on all of us. A little caution now should be seen as preventative maintenance, and we all know that when we’re talking about cars or economies, that’s a good thing.

Tags: Bank Loans, Bank Of China, Barclays, Barclays Capital, Ben Bernanke, Chief Investment Officer, China, Chinese Economy, CPI, Decisive Action, Economic Prosperity, Emerging Markets, Excess Liquidity, Federal Reserve, Frank Holmes, Money Supply, Per Capita Income, Social Stability, Target, Wholesale Prices, World Economy, Yuan
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Fear, Gold and the Dollar

Sunday, February 7th, 2010

By Frank Holmes
CEO and Chief Investment Officer

The U.S. dollar is up this week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold has had a tough week.

The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S.

In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak.

This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system.

Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.

The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.

Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while the gold is showing signs of being oversold.

The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—dollar heading back and gold back up toward the mean.

In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace.

This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar.

Tags: 1990s, Chief Investment Officer, Debt Problems, Economic Conditions, Economic Growth, Emerging Markets, Expectation, Federal Deficit, Federal Reserve, Frank Holmes, Gold, Gold Dollar, Magnitude, Midterm Elections, Monetary Base, Money Supply, Oscillator, Rally, Safe Haven, Stimulus, Strong Dollar, Trillion
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Give Bernanke A Break

Sunday, January 24th, 2010

As populist politicians, long on hypocritical outrage and short on fiscal rectitude, begin the witch hunt for the parties to blame for the Great Recession, fingers are being pointed at Federal Reserve Chairman Ben Bernanke. Their criticism is that Bernanke and the Fed contributed to the housing bubble by keeping short-term interest rates too low for too long early in the decade and then not increasing them quickly enough to snuff out escalating house prices.

In a recent speech, Bernanke pointed out that it was low real long-term rates (i.e. nominal rates less inflation) determined in the bond market that were a major contributor to the housing bubble, not the short-term interest rates engineered by the Fed.

The facts support Bernanke. As depicted in the following graph, real long-term rates trended downwards for much of this decade, hitting bottom just before Lehman’s failure in September 2008. Even the Fed tightening in 2004 and 2005 failed to push real rates up to the levels of the 1990’s. Long-term real rates were just too low and consumers got the message – instead of saving, they spent.

As depicted in the following graph, this view is also supported by the failure of long-term mortgage rates (in red) to respond to the increase in the fed funds rate (in green) in 2005-2006 as they had in previous tightening cycles.

In 1994-95 and 1999-2000, long-term mortgage rates were 2.0% or so higher than the fed funds rate as they peaked, while in 2006 the spread was in the 1.0% range. Monetary policy was less effective at driving up mortgage rates than previous cycles.

The real culprit in keeping long-term real interest rates low was the global savings glut that was in large part created by the recycling of U.S. dollars by China and other Asian countries. The chronically undervalued currencies of those countries have created a permanent trade imbalance and yawning current account deficit in the United States. In fact, Bernanke himself coined the phrase “global savings glut” in a speech that he made in March 2005. At that point, he warned that low real interest rates seemed to reflect an imbalance between global savings and investment – too much money chasing too few investments around the world.

Viewed from this vantage point, the seeds of the recent crisis were sown when China was allowed to join the World Trade Organization in 2001 in the absence of adequate safeguards to curb its policy of promoting exports through currency manipulation. The Great Recession is an unwelcome consequence of the structural faults that were allowed to develop in the world economic system.

Although China and other Asian exporters play leading roles, asset bubbles typically manifest themselves through the disparate actions of a cast of characters so there are many players to point fingers at. Blame the U.S. home buyer for thinking house prices always grow to the sky. Blame the bankers who sold collateralized mortgage securities to every Tom, Dick and Harry and, worse yet, kept some of this dreadful paper on their own books creating systemic risk for the entire financial system. An especially large share of the blame must go to the credit rating agencies who gave their AAA blessing to so much of this flawed paper. Blame also the mortgage brokers who turned “liars’ loans” into the raw material of defective investments as well as the financial engineers who mispriced the risk in a host of derivatives simply because they had never read a history book on the Great Depression. And finally politicians should look in the mirror – they consistently supported housing policies and programs that made housing accessible to buyers who couldn’t afford a down-payment let alone a house.

Instead of pointing fingers at Bernanke, his critics should lead a round of applause for his leadership of the Fed in initiating the dramatic increase in monetary expansion in March 2009 that was clearly the catalyst for the recovery in the stock market and the turn-around of the U.S. economy, however tenuous and fragile it may be. In addition, given the immense challenge faced by the Fed in unwinding its massive monetary stimuli, Bernanke’s second term should be confirmed by the Senate and he and his colleagues should be allowed to concentrate on steering the economy to terra firma.

This is vital. The recession and stock market collapse of 1937-38 that occurred after the initial recovery from the Great Depression was in part triggered by the Federal Reserve’s increase in bank reserve requirements. We cannot afford Bernanke and the Fed to get it wrong this time around.

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

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Tags: Asian Countries, Bond Market, China, Culprit, Current Account Deficit, Emerging Markets, Fed Funds Rate, Federal Reserve, Federal Reserve Chairman, Global Savings Glut, Hitting Bottom, House Prices, Housing Bubble, Lehman, Monetary Policy, Mortgage Rates, Recession, Rectitude, Term Interest, Term Mortgage, Trade Imbalance, Witch Hunt
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The Dollar Carry Trade is Collapsing

Friday, January 22nd, 2010

This article is a guest post by Vince Fernando, The Business Insider.

Dollar strength at the end of 2009 sent the dollar carry trade (where by one borrows in dollars, then parks the proceeds in higher yielding assets) into a tailspin. This is why even small upward moves in the dollar could instigate substantial selling for 2009’s star currencies. For example, for the Australian dollar shown to the right.

Bloomberg: Funding the carry trade with the greenback lost money in December for the first time since February as the U.S. currency gained 4.8 percent against the euro amid growing confidence in the U.S. economy and expectations that the Federal Reserve will raise borrowing costs by June. Futures trading on Dec. 31 suggested a 62 percent chance the Fed would increase its benchmark to at least 0.5 percent by mid-year from a range of zero to 0.25 percent, up from 30 percent in November, Bloomberg data show. The Bank of Japan’s target rate is 0.1 percent.

Buying and selling high- and low-yielding currencies to take maximum advantage of global rate moves gained 19 percent from February to November, the carry trade’s best nine months since 2003, a Royal Bank of Scotland Plc index shows. The index fell 0.9 percent in December.

Few engaged in such an arbitrage will want to hang around should last year’s prevailing weak-dollar expectations be substantially reversed by persistent dollar strength.

[AA] Looking at the chart below of the dollar index, you can see that the dollar has rallied since the end of November, as a result of the accumulation of large short positions, not being covered. This has been a very profitable trade on both a currency pairs as well speculation in last year’s winning trades.

Currencies fared vary well against the dollar from an exchange rate standpoint as you can see in the following table:

* reflects the percentage change in the value of the non-USD currency compared to USD

Is it really a surprise that risk assets (commodities, the Canadian and Aussie dollars, equities, emerging markets) are selling off as institutional and hedge fund traders unload this increasingly squeezed short trade?

Read Bob Janjuah’s updated outlook for more insight on the short squeeze raising the dollar’s value - Janjuah points out that Senator-elect Scott Brown’s GOP victory in Massachusetts upsets Obama’s applecart so much so, that the resulting backlash will be for Obama to speed up plans for fiscal tightening, which means possibly a more rapid windup of the Fed’s quantitative easing, monetary tightening later this year.

Axel Merk puts it nicely, saying “In that context, the conventional wisdom that a country needs to have economic growth to have a strong currency is, in our assessment, wrong. Such a relationship only applies to countries that depend on foreigners to finance their deficits. In the U.S., foreigners finance the twin deficits; one of the reasons why the U.S. has economic growth as a top priority is to entice foreigners to keep financing U.S. deficits. Australia also has a current account deficit and, as a result, has a currency that is sensitive to economic growth prospects. Japan, however, traditionally finances its deficits domestically; as a result, the value of the yen is not very sensitive to changes in growth forecasts. The same can be said for the euro zone: because the euro zone does not have a significant current account deficit, in our assessment, the euro can do well in the absence of economic growth.

Source: StockCharts

Add my twitter feed: @vincefernando

Tags: Arbitrage, Australian Dollar, Bank Of Japan, Bank Of Scotland, Benchmark, Bloomberg, Business Insider, Canada, Carry Trade, Commodities, Currency Pairs, Dollar Index, Dollar Strength, Emerging Markets, Federal Reserve, Futures Trading, Global Rate, Greenback, Maximum Advantage, Nine Months, Percentage Change, Profitable Trade, Royal Bank Of Scotland, Royal Bank Of Scotland Plc, Tailspin, Target Rate, Weak Dollar
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SocGen’s Investment Strategy For 2010

Wednesday, January 13th, 2010

Société Générale (SocGen), France’s second-biggest bank, has told its clients to be bullish on commodities, stay with stocks and “anything but cash” in 2010. SocGen’s Chief Strategist Alain Bokobza spoke to CNBC on Jan. 11, 2010 about the investment strategy.

Fear of Double Dip to Prevent Bond Crash

Bokobza sees an ongoing momentum for growth in the U.S. with higher employment, as well as the emerging economies.  The consensus seems to be we are heading towards a bond market crash in 2010; nevertheless, fear of a double-dip will prevent a bond market crash.

The U.S. Federal Reserve and G4 countries are expected to stay on a near-zero interest rate for much longer than expected, which makes yield curve play attractive.

Yen - The Carry Trade Currency

Bokobza expects the U.S. Federal Reserve and the ECB to announce this summer that the monetary tightening process will start at the end of 2010 or in Q1 of 2011.  At the time of the announcement, i.e., this summer, carry trade will begin to switch from Dollar to Yen.

Overall, the Dollar is expected to be fairly flat against the Euro by the end of this year; however, Yen, as the new major carry trade currency, would fall ”massively”.

SocGen’s Main Advice For 2010

With near-zero interest rates, getting out of cash and into other riskier assets such as equities or commodities should be the strategy this year.

• Anything but cash
• Stay in equities
• Expect rising M&A cycles
• No bond market crash
• Yen carry-trade
• Be a commodity bull

Refer to SocGen’s Cross Asset Research Report dated Jan. 4, 2010 from Scribd.com HERE, and below, for full commentary and recommendations.

Video Source: CNBC

Outlook 2010 (SocGen)

Tags: Alain Bokobza, Bond Market, Chief Strategist, Cnbc, Commodities, Commodity, Dollar To Yen, Double Dip, ECB, Emerging Economies, ETF, Federal Reserve, G4 Countries, Investment Strategy, Market Crash, Q1, SocGen, Societe Generale, Video Source, Yen Carry Trade, Yen Dollar, Zero Interest
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Inflation expectations approach pre-crisis range

Tuesday, January 12th, 2010

On the burning issue of inflationary pressures, Asha Bangalore (Northern Trust) yesterday remarked as follows: “Inflation expectations as measured by the difference between yields of the nominal US 10-year Treasury note and the 10-year inflation protected security are now at levels seen prior to the onset of the financial crisis in August 2007. As of January 8, the difference between the nominal yield and yield on the inflation protected 10-year US Treasury securities was 245 bps. Inflation expectations have climbed 28 bps during the last 20 trading days.

“The movements of inflation expectations will be watched closely in the near term.  The Fed’s ability to influence the course of economic growth will be prevented if inflation expectations become unhinged,” she said.

The minutes of the December 2009 FOMC meeting indicate that the staff did a special presentation on inflation and inflation expectations. The highlights of this discussion were reported as follows: “Evidence suggested that sizable shifts in the longer-run inflation expectations of households and firms had influenced the evolution of inflation over previous decades; in contrast, the anchoring of inflation expectations in recent years likely had damped somewhat the response of actual inflation to the recent economic downturn and to fluctuations in the prices of energy and other commodities. In discussing these issues, participants noted that they bear in mind the shocks hitting the economy and regularly monitor more than one measure of resource slack as they assess the outlook for economic activity and inflation. They also noted the importance of formulating monetary policy in ways that would work well across a range of possible economic structures rather than relying on any one analytical framework. Finally, they underscored the importance of keeping longer-run inflation expectations firmly anchored to help achieve the Federal Reserve’s dual mandate for maximum employment and price stability.”

Meanwile Peter Boockvar reported on The Big Picture blog as follows: “The 10 yr TIPS auction was good as the yield was about in line with expectations but the bid to cover at 2.65 is above the ‘09 average of 2.59 and the average over the past 2 yrs of 2.30. It’s the 2nd highest going back to 2000. Ahead of the auction, the implied inflation rate in the 10 yr TIPS was 2.45% which means if one believes inflation will run above that over the next 10 yrs on average then buy inflation protection and vice versa.”

“Bullish economic reports are most likely to lead to pressure on long-term interest rates and push inflation expectations into a new range. Having said that, a caveat is necessary, final demand in the US economy is significantly weak and it is unlikely to post robust growth until the final three months of the year. Therefore, it is reasonable to expect that inflation expectations will remain anchored in the months ahead,” concluded Bangalore.

Perhaps, but I am in no hurry to see my gold holdings protecting my portfolio against the biggest monetary reflation in human history.

Tags: Bps, Commodities, Dual Mandate, Economic Activity, Economic Downturn, Economic Growth, Economic Structures, Federal Reserve, Financial Crisis, Fluctuations, Fomc, Gold, Households, Inflation Expectations, Inflationary Pressures, Monetary Policy, Nominal Yield, Northern Trust, Shocks, Slack, Treasury Securities, Us Treasury, Year Treasury Note
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Byron Wien’s Ten Surprises for 2010

Tuesday, January 5th, 2010

Dead on target at the beginning of the new year, 76-year-old Byron Wien again published his annual list of surprises to expect in 2010. Wien, Vice Chairman of Blackstone Advisory Services and one of Wall Street’s best known veterans, has been publishing his list of economic, market and political surprises since 1986.

Reviewing Wien’s 2009 list, he was very accurate with the direction of most of his predictions.

He foresaw a second-half recovery in the US economy, and the S&P 500 Index rising to 1,200 (up from 903 at the end of 2008 to 1,115 by December 31, 2009). He also predicted: “The ten-year US Treasury yield climbs to 4% [up from 2.24% to 3.84%]. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.” Spot on.

Wien also expected the gold and oil prices to climb to $1,200 and $80 respectively - a feat accomplised in December.

He believes his ten surprises have at least a 50% chance of occurring at some point during the year. Although this is not a very high probability, his predictions nevertheless make for stimulating reading. His list for 2010 follows below.

1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor’s 500 operating earnings come in above $80.

2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end.

3. Heavy borrowing by the US Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, “The suits are finally listening”.

4. In a roller coaster year the Standard and Poor’s 500 rallies to 1,300 in the first half and then runs out of steam and declines to 1,000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors.

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain.

6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000.

7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020.

8. The improvement in the US economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected.

9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the US market.

10. Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the US and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal.

Source: PR-inside.com, January 4, 2009.

Tags: 10 Year Treasury, Advisory Services, Blackstone, Byron Wien, Central Banks, Deflation, Economic Market, Federal Funds Rate, Federal Reserve, Gold, Interest Rate Policy, Money Supply, oil, Oil Prices, Rapid Growth, Reluctance, S 500, Target, Unemployment Level, United States Economy, Us Treasury, Vice Chairman, Weak Dollar
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The Fed Agenda

Tuesday, December 22nd, 2009

In this video clip, CNBC’s Steve Liesman talks to Chicago Federal Reserve President Charlie Evans. This is an excellent interview about the Fed’s policies and preparedness for withdrawing liquidity from the economy.

Source: CNBC, December 21, 2009 (hat tip: Paul Sandison).

Tags: Advertisement, Agenda, Cnbc, Economy, Federal Reserve, Hat Tip, liquidity, Preparedness, Steve Liesman, Video Clip
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SWOT: Economy and Bond Market

Sunday, December 20th, 2009

The Economy and Bond Market

Treasuries yields were little changed this week as the Federal Reserve more or less reiterated its stance on monetary policy. Inflation data for November was released this week and, as can be seen in the chart below, it has turned the corner and is back in positive territory on a year-over- year basis. Deflation concerns are likely to subside over the next few months as all measures of inflation have turned noticeably higher.

Strengths

• Industrial production in November rose 0.8 percent, faster than expected.
• Leading economic indicators rose 0.9 percent in November and have now risen eight straight months.
• Housing starts bounced back nearly 9 percent in November, after falling 10 percent in October.

Weaknesses

• Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) were reported this week and are now solidly back in positive territory. Combined with last week’s import prices report, which also showed a sharp year-over-year increase, the case can be made that inflation has returned to a normal level and monetary policy may need to be adjusted sooner rather than later.
• Initial jobless claims have climbed higher in the past two weeks after making significant improvement in November.
• Abu Dhabi came to the rescue of debt-plagued Dubai this week, but concerns surrounding Greek and other European debt remain.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• The Fed reiterated its monetary policy stance this week. On the surface nothing really changed, but it is incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.

Tags: Abu Dhabi, Accommodation, Bond Market, Consumer Price Index, Deflation, Economic Recovery, Federal Reserve, Housing Starts, Import Prices, Index Cpi, Inflation Data, Initial Jobless Claims, Leading Economic Indicators, Market Economy, Measures, Monetary Policy Stance, Producer Price Index, Producer Price Index Ppi, Significant Improvement, Treasuries
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TIME Person of the Year

Thursday, December 17th, 2009

TIME managing editor Rick Stengel explains why the magazine chose Federal Reserve Chairman Ben Bernanke as 2009’s Person of the Year.

Click here for the article.

Source: TIME, December 16, 2009.

Tags: Article Source, Federal Reserve, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Managing Editor, Person Of The Year, Rick Stengel, Source Time, Time Person Of The Year
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Bill Gross: Fed to Keep Rates at Zero Through 2010

Tuesday, December 8th, 2009

The Federal Reserve will keep interest rates near zero in 2010, but longer-term rates will gradually tick higher because of supply and demand, Bill Gross, founder of Pimco, told CNBC Monday.

“We have a lot of supply and perhaps not as much demand to satisfy that supply, and that may actually reinforce the move towards higher rates on the longer end of the yield curve,” he said.

Gross said that stocks will perform “alright” in the long term, but investors should not expect double-digit returns as the Fed pulls excess liquidity out of the markets.

Source: CNBC, December 7, 2009.

Tags: Advertisement, Bill Gross, Cnbc, Excess Liquidity, Federal Reserve, interest rates, Investors, Move Towards, Stocks, Supply And Demand, Yield Curve
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