Practical analysis for investment professionals
14 September 2016

Turning Points: Janet Yellen vs. the World

Posted In: Weekend Reads

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

Commodities

China’s Direction

Credit Markets

Derivatives

Energy

The Euro Crisis

Hedge Fund Money

Interest Rates and Central Banks

Japanese Debt and Inflation

The Stock Market

Follow the Bubble

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

About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, is a content director at CFA Institute, where he focuses on economics and alternative investments. Previously, he served as CEO at the online technology company he founded, Chaos Management, Inc. Prior to founding Chaos Management, Rimkus served as director of large-cap equity products for BB&T Asset Management, where he led a team of research analysts, regional portfolio managers, client service specialists, and marketing staff. He also served as a senior vice president and lead portfolio manager of large-cap equity products at Mesirow Financial. Rimkus earned a bachelor of arts holds a BA in economics from Brown University and an MBA from the UCLA Anderson School of Management. Topical Expertise: Alternative Investments · Economics

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