Turning Points: Janet Yellen vs. the World

With next week’s Federal Open Market Committee (FOMC) meeting, much attention is focused on the US Federal Reserve.

As is often the case, various Fed members have come out with publicly conflicting statements. On 26 August, Fed chair Janet Yellen signaled that the US economy is looking strong enough for a rate hike. On 12 September, Lael Brainard, who serves on the Fed’s board of governors, sounded more dovish, suggesting that the Fed would be wise to maintain easy money. The International Monetary Fund (IMF) even jumped into the fray, warning that global economies may be too soft to absorb a rate increase.

Given the extraordinary circumstances in which the financial world finds itself, academics and analysts alike are starting to give some thoughtful discussion to the longer term impact of negative interest rates. Can negative rates actually heal the economy? Or do they cause more harm? Can the central banks ever return to normal monetary policy?

So many unprecedented questions.

Meanwhile, global economies continue to sputter while markets are at or near all-time highs. Some are now speculating that the monetary bubble is nearing its final days. But dynamic markets keep changing.

So it is a slippery slope. For instance, in an apparent shift, Chinese investment in US real estate is ramping up sharply. The wealth created in and departing China is now supporting US real estate prices. Perhaps Chinese investors have grown wary of parking its capital in Canada as real estate prices there enter the stratosphere.

Here’s a wrap-up of key issues affecting global markets for fundamental investors.

Currencies

• The IMF is warning the Fed that economies are too soft to raise rates. (Mises Institute)
• “US Dollar May Rise as Fed Fuels Rate Hike Speculation” (DailyFX)
• “Jim Rogers: The US Dollar Might Turn into a Bubble” (Business Insider)
• “Brace for ‘VaR Shock’ — How the Bank of Japan May Be about to Unleash a Global Selloff” (Zero Hedge)

Commodities

• “Copper Outlook Dims as ‘Wall of Supply’ Hits Slowing Demand” (Reuters)
• “Citigroup Sees No Significant Wave of Copper Supply Looming” (Bloomberg)
• “What Iron Ore Shipments Tell Us about the Outlook for Iron Ore Prices” (Market Realist)

China’s Direction

• “Copper Is Flashing a Warning Sign for China’s Economy” (Business Insider)
• “The Price for China’s High Growth Could Be Slow Growth Everywhere Else” (Forbes)
• “Chinese Cash Pours into US Real Estate” (Wall Street Journal)

Credit Markets

• “Bond Investors Cash Out in Europe, Head to US” (Wall Street Journal))
• “Barclays: Credit Markets Died When Bank Dealers Left” (ValueWalk)
• “As central banks run out of bonds to buy, they flood corporations with cheap money.” (Morningstar)
• “VIX and Junk Bond Spreads Are Out of Whack” (Zero Hedge)

Derivatives

• “Money Was Ignored and the Global Economy Is Ill” (Real Clear Markets)
• “Regulators See Dangers in Clearinghouses” (Wall Street Journal)

Energy

• “OPEC Market Report Crushes Hopes for a Production Freeze” (24/7 Wall St.)
• “Global Oil Demand Closing In on Supply, Executives Say” (Wall Street Journal)
• “Oil Discoveries at 70-Year Low Signal Supply Shortfall Ahead” (Bloomberg)
• “MIT Spinoff to Market Breakthrough Batteries by 2017” (Fortune)

The Euro Crisis

• “Negative Rates Will Stay for Another Five Years, JP Morgan Warns” (CNBC)
• “What Two Years of Negative Rates in Europe Tell Us” (The New York Times)
• “Nobel Laureate Joseph Stiglitz Says the Euro Needs Big Reform” (The New York Times)

Hedge Fund Money

• “Carl Icahn Increases Allergan Stake” (Fortune)
• “Ken Griffin’s Citadel Securities Is Muscling into Credit Derivatives” (Bloomberg)
• “Some of the Biggest Hedge Funds Are Bleeding Cash” (Bloomberg)

Interest Rates and Central Banks

• “Fed’s Dennis Lockhart: ‘Serious Discussion’ of Interest Rate Hike Needed” (USA Today)
• “ECB’s Mario Draghi Has Run Out of Magic as Deflation Closes In” (The Telegraph)
• “Bank of Japan Risk: Running Out of Bonds to Buy” (Wall Street Journal)
• “Bank of Japan Looks to Clarify Policy Confusion” — but markets remain bewildered. (CNBC)

Japanese Debt and Inflation

• “Pimco’s Baz Says Japan in a Bind as Total Debt Tops 600% of GDP” (Bloomberg)
• “S&P Affirms Japan’s Debt Rating” (Reuters)
• “Japan’s Debt Burden Is Quietly Falling the Most in the World” (Bloomberg)

The Stock Market

• Capitalization ratios are nearing all-time highs. (Yardeni Research)
• “Superman and Stocks: It’s Not the Cape (CAPE), It’s the Kryptonite (Cash Flow)!” (Musings on Markets)

Follow the Bubble

• “The Implosion Is Near: Signs of the Bubble’s Last Days” (David Stockman’s Contra Corner)
• “Canada Is in Extreme Bubble Territory — Here’s How to Profit” (ValueWalk)
• “Will the Fed Finally Put an End to Hong Kong’s Property Bubble?” (MarketWatch)
• China’s debt bubble may be ready to explode. (Zero Hedge)

Time Capsule

Many central bankers and central bank watchers alike believe that the Fed and its counterparts around the globe have figured out how to tame inflation. Citing a wide range of abstract policies and esoteric tools, they look to the “proof” that inflation has been largely under control and falling for the past 35 years. However, correlation does not equal causation. So perhaps fiat currency plus globalization plus persistent current account imbalances have been responsible for easing wage pressures in an easy money era. If so, what happens if globalization ceases to bring about low-wage substitution? What happens if globalization reverses altogether (for any reason)? These are exactly the questions that Marc Flandreau tackles in “Pillars of Globalization: A History of Monetary Policy Targets, 1797–1997.” It makes for a fascinating read.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: US Federal Reserve