Leveling the Playing Field

October 26, 2015

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Know how I know my college football team has become irrelevant? I was at my sons baseball
game for the start of the PSU game on Saturday, taping the game to watch when we got home. I
was trying to avoid group texts and the internet when I mistakenly clicked on espn.com in
between inningsand there was not a single mention of the score. I was safe.
I realized then that I was in no danger of accidentally stumbling across a scoring update. PSU is
6-2 and bowl eligible, yet critics would point out that the quality of opponents has been pretty
lowbut hey, we can only play the teams they put in front of us, right? Its not our fault the
teams we play are terrible! We (usually) beat the teams you put in front of us! That mantra
sounds awfully familiar, where have I heard that beforewaitI know.
PSU is basically the Carolina Panthers of college football! A totally fraudulent record and an
overinflated view of self-worth
Last weeks newsletter focused on how a dovish FOMC was likely to become more dovish in
2016 following the year end rotations. But after last week, a case could be made that global
central banks are becoming increasingly dovish as well.
On Thursday, the ECB reiterated its commitment to QE through at least September 2016 and
Draghi suggested that the central bank could ramp up bond purchases beginning at the December
meeting.
Then on Friday, China surprised markets with another rate cut and slashing reserve requirements,
both intended to spur growth back towards 7%. Following previous rate cut announcements by
China, US yields have fallen on fears of a faltering economy. But Friday saw US yields climb why?
The slowdown in China over the last year was new and worrisome and central bank rate cuts
only confirmed those fears. But everyone knows the Chinese economy is slowing, so
accommodative moves by the government send a reassuring message to the markets that China
stands ready to aggressively tackle the downturn. That means RISK ON! Rates ran up across
the curve and the 10T closed Friday at 2.08%.
Heres a back of the envelope overview of some central bank policy at major nations. Even the
Holds are dovish in reality. Switzerland is negative and Russia is on hold after cutting rates
6% this year, they just happen to be on hold right now.

Tightening
USA
UK?
Mexico
South Africa
Turkey

Hold
Australia
Canada
Switzerland
India
Russia

Easing/QE
China
Eurozone
Japan
Norway
Sweden
USA?

The US and the UK are the only major countries considering rate hikes, and the probability of a
hike is dropping rapidly. You may notice that we put the US in both the Tightening and the
Easing/QE category, an ambiguous suggestion usually reserved for the most conservative
economist.
Under the Easing/QE category, we put the good ole USA there because another round of QE
feels like a real possibility at some point in 2016. Isnt a rate hike coupled with QE just another
round of Operation Twist?
As for tightening, we still believe Yellen wants to hike, if for no other reason than to have some
ammo if needed in the future. Plus, the Fed has been talking about a rate hike for nearly 18
months at this point. Not hiking when the UR is at 5% strains credibility, a commodity the Fed
already sorely lacks.
But the FOMC wont hike this week, for a variety of reasons. Two consecutive disappointing
job results, minimal inflationary pressures, global headwinds, debt limit, etc. Retail sales last
week disappointed, which could portend bad news for this weeks GDP release. Also, numerous
central banks have tried hiking since the Great Recession began 8 years ago, and all had to
reverse course and cut rates again.
Furthermore, things have only gotten weaker since the last FOMC meeting, so if they didnt hike
then, how do they hike now? Behind closed doors I wonder if the Fed thinks they missed their
window or if they are glad they held off?
Wednesdays statement is unlikely to see a dramatic change from the last FOMC statement,
which surprised markets in its dovishness. This weeks statement should reiterate the Feds belief
that conditions needed to justify a hike are not far off and all with me nowdata dependent.
The Fed will get two more rounds of job data and another GDP reading before the December
meeting. The FOMC isnt being coy it honestly doesnt know if it will hike before year end.
But they cant afford to allow expectations to backslide, especially after spending so much time
and energy getting the market to treat each meeting as a live one. The statement will strike a
balance between data dependency and accommodation.

The statement will be very similar to the September meeting, likely including this section
perhaps verbatim:
"The Committee anticipates that it will be appropriate to raise the target range for the federal
funds rate when it has seen some further improvement in the labor market and is reasonably
confident that inflation will move back to its 2% objective over the medium term."
One caveat the Fed has expended considerable energy reminding markets that inflation doesnt
need to be at 2% for the first hike, only that the Fed needs to be reasonably confident that long
term inflation is trending towards 2.0%. Although wage inflation is non-existent, dont forget
that core CPI in September came in at 1.9%, the highest reading in a year. And the Cleveland
Feds Median Core CPI came in at 2.5%, the highest since 2009.
Were not saying inflation is running rampant, but maybe, just maybe, its creeping into the data
the Fed tracks and gives the hawks something to hang their hat on.
And if the monthly job growth slowdown from 250k+ to 125k+ is really a function of
approaching full employment and not an economic slowdown, isnt it possible that wage
pressure is the next area that inflation could start to show up?
We believe the only way the T10 sees 3.50% in the next few years is if inflation picks up
substantially or if the Fed is viewed as falling behind the curve (implying inflation will pick up
substantially). Subsequently, inflation readings are just as important for the long end of the
curve as they are for FF expectations.

I am writing this newsletter ahead of Sunday nights Panthers/Eagles game. To say I have a lot
riding on the outcome of this game is like saying the NFL wants you to know they support breast
cancer awareness. I have multiple wagers with multiple clients, most involving me wearing a
Panthers jersey to our next meeting. There is no doubt the Eagles are worse than I expected this
year, but my position isnt that they are better than the Panthers, just that the Panthers arent as
good as their record suggests.
I know I should want the Panthers to do well. Charlotte has been my home for as long as my
original hometown outside of Philly. The city feels more energetic when the Panthers are doing
well. And honestly, once I get past Jerry Richardsons absurd handling of the Greg Hardy
situation, or the Banana Joes cheerleader incident in Tampa, or the Rae Carruth murder trial, or
Fred Lane being murdered by his bank robbing wife, or paying 58 year old Jake Delhomme
$363mm over 18 months (all numbers approximate), or pouring more money into three running
backs than the rest of the team combined, or the wine and cheese crowd, really the only offensive
thing about the Panthers is those ridiculous teal jerseys. Real men dont wear teal! It clashes
with the pink. Everyone knows that.
For the love of God Eagles, please pull through! You owe me after that Dallas game!

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