Posts Tagged inflation
What To Expect From QE II
Posted by Oksana Grebenjuk in Trading Markets on Октябрь 29th, 2010
Nearly everyone in the game expects Ben Bernanke’s gang to announce another round of quantitative easing (defined as the direct purchase of bonds) at the conclusion of the November 3rd FOMC meeting. However, given that this particular tool has a very brief history of use, there is quite a bit of discussion over what we should expect from the program.
First, the expectations in the markets are for the FOMC to announce the commencement of a bond buying program that will total somewhere in the vicinity of $300 billion to $500 billion by the end of January. Anything short of $500 billion could be viewed as a disappointment to traders as the market is now clearly set up to «sell the news.»
Given the Fedspeak that has been provided recently, we would expect the Fed to say that they will assess the situation at the end of January and decide from meeting to meeting whether «additional accommodation» is needed. Thus, look for the FOMC to start small and be «data dependent» going forward. However, it is important to understand that Ben Bernanke is likely to err on the side of too much stimulus so as to avoid any possibility of a Japan-style deflationary cycle.
So, what’s the plan? We expect to see the FOMC make purchases of bonds in the 2-year to 10-year range. The goal is to push longer-term interest rates lower in the hope that investors will stop hoarding short-term bonds and take more risks by moving out the yield curve, take on more credit risk, and investing in equities and/or real estate. Read the rest of this entry »
Are There Bubbles All Around?
Posted by Oksana Grebenjuk in Investing on Октябрь 26th, 2010
One thing we learned in the 1990s and the 2000s is that there can be asset bubbles in the economy without growth in either money stock variables or increases in consumer (flow expenditure) price inflation. The financial system seems to be flexible enough so that it can leverage up where it wants to even though monetary policy and consumer spending seem to be «in control». This is the lesson of modern «financial engineering.»
However, the monetary statistics are not benign for most of the time period from January 1961 up to September 2008. During this time period, the monetary base which is supposedly under the control of the Federal Reserve System rose at a compound annual rate of slightly more than 6%. Total credit during this time period rose much more rapidly. Consequently, the United States experienced a period if «credit inflation» that dominated everything going on during this 47 years or so. This secular inflation drove the financial innovation that took place as the whole financial system took on more-and-more leverage and more-and-more risk.
Since September 2008, the Federal Reserve has caused the Monetary Base to increase explosively by more than 130%. However, the banking system is not lending and much of these funds seem to have ended up on the balance sheets of the banking system. Excess reserves in the banking system went from about $2 billion in August 2008 to almost $1.2 trillion in February 2010. Excess reserves for September 2010 averaged slightly below $1 trillion.
Even with all of these excess reserves, the current concern is whether or not the economy will go into a period where prices actually decline. That is, might the United States be headed for a period of deflation? Read the rest of this entry »
Earnings-yield on S&P 500 at two decade-high
Posted by Oksana Grebenjuk in Favourites, Fund Markets on Октябрь 6th, 2010
The earnings yield (EY) on the S&P 500 index is now above 7 percent, which is typically the kind of yield an investors would get from an average junk bond.
EY amounted to 7.09 percent for the S&P 500 as of June 30, 2010 — the highest quarter-end level in two decades.
This either means that stocks are very cheap (relative to bonds) and might make an attractive buy; or that investors have such a pessimistic view of the economy that they expect earnings growth to slow down over the next few quarters (or even years), given the grim economic backdrop.
EY is simply the earnings per share for the recent 12-month period divided by the current market price per share.
Generally speaking, if the EY of a broad stock index is less than the rate of the 10-year Treasury yield, stocks could be considered overvalued. If the earnings yield is higher, stocks might be considered undervalued relative to bonds
Traditionally, stock investors have demanded an extra risk premium of several percentage points above the risk-free rates of Treasuries to compensate for the greater risk inherent in owning equities. Read the rest of this entry »
Who Is Going To Be Wrong: The Bond Market Or Stock Market?
Posted by Oksana Grebenjuk in Fund Markets on Октябрь 4th, 2010
One of the more bizarre contradictions of the recent rally in equity markets, is the complete refusal by the bond market to budge from its deflation/recession view. In most cases, the equity and bond markets trade according to the same economic outlook.
If the market believes inflation/growth is on the way, stocks rally and bonds fall (yields rise). Conversely, when the outlook is for deflation/recession, equities fall and bonds rise (yields decline).
However, there is currently a deep divide today as the stock market (and commodity market for that matter) trades like growth and inflation are on the way, but the bond market is holding to its deflation/recession view. Below is a 3 year chart which compares the 10 year treasury to the SP 500.
You can clearly see that while the two can briefly diverge, they eventually converge on the same economic consensus. So the question is which market is right and which one is wrong? To be honest I really don’t know at this point. Read the rest of this entry »
What Inflation Means For Investors
Posted by Oksana Grebenjuk in Favourites, Investing on Сентябрь 27th, 2010
During a period of inflation, a dollar purchases less goods and services than in the past. Inflation is negative when it comes to most investments because it undermines real asset values and increases required yields. Smart investors know that purchasing dividend stocks with a yield greater than four percent and buying dividend stocks are two effective ways to deal with inflation.
Growth stocks are shares in companies with expected above-average earnings growth in relation to the market. These stocks do not usually pay dividends because the company instead uses the earnings for capital project re-investments. Many technology companies are considered growth stocks.
Investors should be aware that some growth company stocks are not classified as such. In many cases, growth company stocks are undervalued. This creates an ideal situation for an investor because there is the opportunity to purchase the stock at a bargain price. Inflation affects the price/earnings ratios of companies, so investors should put their money in companies whose growth can offset this situation.
Dividend stocks provide passive income to investors throughout their holding period. During times of inflation, investors should purchase dividend stocks with yields higher than four percent. This will allow the amount of dividend income to outpace the inflation rate. If the dividend growth rate is increasing, these investments will yield an even more positive result. Read the rest of this entry »
IMF warns of global economic slowdown
Posted by Oksana Grebenjuk in Trading Markets on Сентябрь 13th, 2010
The International Monetary Fund (IMF) has issued a warning that global economic growth is likely to slow towards the end of 2010, largely due to continued weakness in the financial sector and a confidence crisis in some individual nations.
The Fund recommends that the most developed countries to reduce their budget deficits and increase export volumes in order to alleviate the problem. IMF also suggested that the Asian and emerging markets concentrate more on stimulating internal demand and less on export growth.
The faltering housing market in the U.S. — the source of the global crisis — as well as the fragile sovereign debt market in Europe were highlighted as key issues to be tackled.
In tandem with The International Labour Organization (ILO), the IMF is hosting a joint conference in Oslo, Norway this week to find new ways to create jobs and sustain the economic recovery.
In a published interview ahead of the conference, IMF’s chief economist Olivier Blanchard on a number of topics the Oslo confab will discuss.
«We want to make unemployment, and the costs of unemployment, more prominent in current policy discussions,» he asserted, citing that about 34-million people worldwide have lost their jobs during the crisis. Read the rest of this entry »
Optimism…Pessimism…And A Bit Of Perspective
Posted by Oksana Grebenjuk in Budget, Favourites on Сентябрь 6th, 2010
Here’s how I’m tempted to summarize today’s release of the August employment report from the U.S. Bureau of Labor Statistics: more of the same. That theme fits nicely with comments this morning from Atlanta Fed President Dennis Lockhart, in a speech at East Tennessee State University. Here he calls for a little perspective:
«Some commentators are reading recent economic data as suggesting the onset of a second recession and deflationary cycle. Quite naturally, business people and consumers aren’t sure what to believe.
«At the last meeting of the Federal Open Market Committee (FOMC) in Washington, the committee made a decision that has been widely interpreted as signaling declining confidence in the strength and sustainability of the recovery….
«In my remarks today, I will provide a less alarmist interpretation of recent economic information and the Fed’s recent policy decision. I will argue that, generally speaking, there was too much optimism in the early months and quarters of the recovery and now there may be excessive pessimism.»
One point is that recoveries are not generally linear affairs: Read the rest of this entry »
Consumer Spending in U.S. Rises More Than Forecast
Posted by Oksana Grebenjuk in Favourites, Trading Markets on Август 30th, 2010
Consumer spending in the U.S. rose more than forecast in July, exceeding gains in incomes, a sign the improvement will not last without more jobs.
Purchases rose 0.4 percent, the most since March, after little change the prior month, Commerce Department figures showed today in Washington. Incomes climbed 0.2 percent, less than projected, and the savings rate dropped.
Disposable incomes, or the money left over after taxes, dropped for the first time since January after adjusting for inflation, showing the lack of jobs is hurting Americans’ spending power. Companies from Intel Corp. to J. Crew Group Inc. are cutting forecasts as unemployment and flagging confidence prompt households to scale back.
“This, so far, is allaying near-term double-dip concerns,” said Derek Holt, an economist at Scotia Capital Inc. in Toronto, referring to fears the world’s largest economy will tip back into a recession. “It nonetheless showcases very lackluster growth in the U.S. economy.”
Stock-index futures fell after the report, extending earlier losses, and Treasury securities rose. The contract of the Standard & Poor’s 500 Index was fell 0.3 percent to 1,060.3 at 8:54 a.m. in New York. The yield on the benchmark 10-year Treasury note dropped to 2.60 percent from 2.65 percent late on Aug. 27. Read the rest of this entry »
Investing In South Korea: Why This Emerging Market Is A Perfect Contrarian Opportunity
Posted by Oksana Grebenjuk in Investing on Август 27th, 2010
The mere mention of this country’s name can cause the «Risk-o-Meter» to nudge higher. But it’s got nothing to do with the nation’s own economy or growth prospects.
Rather, the problem resides to its immediate north in the shape of the contentious Kim Jong-Il and the saber-rattling North Koreans. Their South Korean neighbors live with the constant threat of violence erupting at any moment – especially after North Korea allegedly torpedoed one of South Korea’s warships in March.
But the likelihood of a full-blown war is slim. Why? Because the United States still has some 28,500 troops in South Korea. And thanks to the long-standing U.S.-South Korea alliance, any North Korean attack would effectively be an attack upon the United States, too.
Even Kim Jong-Il knows that’s a bad idea and would end disastrously for his rogue nation.
And for investors, the overblown geopolitical climate is just one reason why I’m convinced that now is the perfect time to buy into this contrarian situation. But there are more… Read the rest of this entry »
ECB Governor: Rates On Hold
Posted by Oksana Grebenjuk in Banks on Июнь 14th, 2010
European Central Bank governor Athanasios Orphanides indicated in an interview with Dow Jones Newswires that interest rates in the euro zone will remain on hold for many months, urging European politicians to tackle yawning inefficiencies in fiscal governance.
If Europe’s leaders fail to get their act together, then another financial crisis or debt crisis may well be around the corner, he warned.
Speaking in an interview following the ECB’s policy-setting meeting on Thursday, Mr. Orphanides said the outlook for consumer price inflation in the euro zone remains benign, despite the recent uptick in prices.
Core inflation, which excludes volatile components such as energy and food, has been trending down, he said, pointing to slack private consumption in the 16 countries that make up the euro zone.
«In light of these developments, I do not view high inflation as a concern,» said Mr. Orphanides, who was born in Cyprus and educated at the Massachusetts Institute of Technology. Read the rest of this entry »
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