12 Years of VP vs Noise
Sharing the ideas and experiences that have influenced our work
Yesterday’s FOMC saw the first tapering of bond purchases by the Fed, by $10 billion per month. To soothe markets, the Fed also reinforced its forward guidance, making it “stronger and longer”, by a promise to leave the Federal Funds rate close to the zero bound “well past the time that the unemployment rate declines below 6.5%”.
One of the points we have emphasized to clients in the past two months is that many of our indicators suggest that long rates in the US may not rise as aggressively as the consensus expects. In other words, the Fed might stay more dovish than the market expects and tapering, should it occur, is already priced in.
Nothing comes for free and with the eurozone periphery deflating its way to a currency account surplus the aggregate external balance of the euro area has increased to its highest level ever at more than 2% of GDP. Coupled with tighter liquidity (less euros sloshing around), improved sentiment and repatriation ahead of AQR the EUR has seen strong support this year.
December is indeed a good month to be long the stock market especially in Decembers that follow strong annual returns. We have seen a couple of such analyses in the past few weeks and thought that we would chime in here.
Amid the choppy grind higher in US equities one key aspect for investors to look for is the prospect of the long-run relative bull market in small caps to end. If we look at the straight price ratio between the S&P 500 and the Russell 2000 it is now close to an all-time low (only piped by the trough in 1984).
Australian banks have grown in size hugely in recent years. Astonishingly, Commonwealth Bank of Australia is the tenth largest bank in the world, despite Australia having a far smaller population than China, the US and the UK - the other countries who have banks in...
One of the themes that we have been highlighting this year is the growing bubble in corporate bonds. It is pointless in the first instance to discuss whether super easy monetary policy that has fueled this bubble is appropriate or not. The main thing for investors to countenance is that the current monetary policy regime is having unintended consequences through the formation of a bubble in increasingly scarce liquid fixed income instruments.
There are some notable reasons for near-term reasons for optimism in the UK. The housing market seems to be picking up, industrial production growth is looking up together with PMI data and the equity market has done well. All these are real and significant signs of a better economy in the UK, but the structural challenges remain.
Our real narrow money index continues to decline and is sending an increasingly bearish cyclical signal for the global economy and commodity prices. Our real narrow money index has now declined for 4 months running and is now tracking below 7% for the first time since October 2010.