Beruflich Dokumente
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Quarterly Commentary
Summer 2013
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Tapering Stimulus
he financial industry rarely has a challenge when coming up with clever headlines to describe the markets. Our newsletter gets its title from recent investor re- The US Fed action to the mere hint that the US Feder- bonds to keep bond That is the theoretical concept and to al Reserve (the Fed) may reduce or prices high. This ac- be fair, the low interest rate environtaper its monthly $85 billion bond purment which the Fed has helped to crechase program. Since bond prices and tion has helped to ate has helped the recovery in US real interest rates move in opposite directions, keep interest rates estate. In addition, the US auto indusinvestors have taken great comfort in Fed at generational lows. try has powered up and automobile bond purchases since they have provided production has rebounded strongly. fuel for financial markets while at the same time These vital segments of the US economy are espekeeping interest rates anchored near generational cially important because they are able to generate lows. so many spinoff jobs. The reason that the Federal Reserves bond buying is so important to the markets can be seen by lookContinued on page 2
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As of the first quarter of 2013, the worlds central banks had injected over $12 trillion of stimulus into their respective economies since the start of the global financial crisis. This is in addition to cutting interest rates to near generational lows. Markets have now become accustomed, if not reliant, on accommodative monetary policy. This reliance became apparent through investors reaction to even the hint of stimulus tapering. On May
clarify what Bernanke meant to say. It should be noted that the minutes from recent Fed meetings reveal that Bernanke was not alone and had support from other Fed governors to begin trimming monetary stimulus if necessary. What Bernanke actually said according to the transcripts from the Federal Reserve is that the improving labor markets and the expected gradual rise in inflation towards its targeted two percent rate would dictate further policy actions such that, if the subsequent data remain broadly aligned with our current expectations,we would continue to reduce the pace of purchases in measured steps through the first half of next year.
If that were not enough to make the markets to perhaps rethink their reaction, Bernanke also stated that he wanted to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook. In short, the Fed will look at the data and decide the appropriate course of action in the future. Perhaps the most important variable in determining Fed policy will be US jobs data. Even the traditional main focus of inflation will likely play second fiddle to the unemployment rate. As the chart on page 3 shows, the US economy has been able to add over 7 million jobs over the last 40 months. Although this might sound impressive at first, the job additions work out to less than 200,000 jobs per month. To put this into perspective, the US economy needs to generate about 350,000 jobs per month to keep up with the growth of the labor force
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serves created by the Federal Reserve amounted to about a $70 increase in the money supply. However, after the financial crisis, this has dropped to only a meager $1.50 increase in the money supply. A rising money supply acts as a source of energy for the economy. The excess reserves that are not being borrowed by consumers and businesses (lent by banks) is now approaching a staggering $2 trillion.
and to keep the unemployment rate on a downward trend. Also disguised in recent US labor data is the sobering fact that the number of US workers with part-time jobs who have indicated that they would prefer a full-time position if possible sits at 8.2 million the highest in eight months. In comparison, 11.8 million Americans are unemployed. It bears clarifying that the official unemployment rate does not take into account individuals who have simply given up looking for work or are unable to search for work for various reasons. These individuals total an additional 2.6 million. Although the unemployment data is humbling to policy makers, on a positive note, wages have begun to turn up and the average work week has also been improving since the recession ended.
Goldilocks Growth
Financial markets may be able to handle a stimulus exit if the global economy can continue to grow at a goldilocks pace of not too hot and not too cold. In such a scenario, bond markets will be relieved that the pace of tapering will be gradual. Meanwhile equity markets may hope to offset the gradual drag of higher borrowing costs through a slow and steady rise in corporate earnings. Unfortunately, second quarter 2013 reported earnings are not too spectacular. Sales growth is coming in at
Policy Limits
On the one hand markets are dreading the day the Fed eases back on its stimulus, yet on the other, the Feds policies have not been effective for the millions of people looking for full time employment. The job creation gap is putting a spotlight on the limits of monetary policy.
Equally frustrating for the Federal Reserve is that despite injecting trillions of dollars of capital into the US banking system the lack of credit creation from banks has been lacklustre. Simply put, banks arent lending enough and households and busiChart Source: Market Watch, US Department of Labor nesses are reluctant to take on debt. In some ways this amounts to a failure by businesses and consumers to take sufficient the lighter end of expectations and companies are inadvantage of the Feds current generosity. dicating global challenges remain. These challenges arise from Europe continuing their austerity and debt Growth in bank lending is a vital element for the Feds struggles, China and India showing slowing economic efforts to succeed. Ultimately, every bond purchase growth and Brazil the engine of Latin America by the Fed ends up increasing the bond sellers bank floundering with a bout of rising inflation and slowing reserves. Reserves are the amount that a bank can economic growth. Brazils economic challenges can lend out. Historically, as excess reserves were lent be highlighted by the fact that the consensus forecast out by the US banking system, each dollar of refor Brazils economy calls
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Even in the face of reduced Chinese commodity demand, Canada may surprise economists to the upside. With roughly 75% of Canadian exports heading to the US, strength in the US economy may serve to offset other growth anchors. The firming of oil prices has also been a boon to the critical Canadian energy sector which has faced challenges due to constrained distribution channels as we noted in our last newsletter. If recent retail sales numbers in Canada are any indication of what is in store for the Canadian economy then the Bank of Canada's projections for the Canadian economy will likely be revised upward for 2013 with retail sales rising 1.9% in May vs. an expected 0.3% consensus gain amongst economists. Clearly, markets are watching the economic data around the world. In particular, US data is being filtered through the lens of whether or not it will lead to higher interest rates. In Europe the focus is whether or not the data can continue to confirm that the European economy has escaped its long recession. For China, the markets will likely want to see continued stabilization of the economy and a sign that tighter lending is bringing property prices down to a sustainable level. The big three economic blocks of Europe, China, and the US will decide which way the economic recovery goes from here.
for a 2.3% growth rate while inflation has increased to 9.4%. Currently, Brazils economy is achieving the lowest economic growth rate in 24 years. To be sure, much of the front page exuberance about Brazil has faded.
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