Fed Chair Janet Yellen - "Noisy Data"
- Fed Chair Janet Yellen - "Noisy Data" The Open Market Committee of the Federal Reserve (FOMC), the body that determines the direction of interest rates, concluded its regularly scheduled two-day meeting Wednesday, June 18th. Voting members decided to keep the target level at which member banks loan excess reserves to each other at between zero and 0.25%. This rate, known as the Federal Funds rate, has been at this historically low level since the Fed, under then-Chair Ben Bernanke, lowered it from a target of between 0.75% and 1.00% on December 16, 2008, in order to stimulate economic growth. Also referred to as easy or accommodative, the current policy was set in place to combat the recessionary spiral the economy was tumbling into during the Fall of 2008 as the housing crisis set in. The above is of note due to the dual mandate that the Fed pursues. As amended by Congress in 1977 the Federal Reserve Act stating that “the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the economy and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Here it is in English – the Federal Reserve wants sustainable economic growth accompanied by moderate inflation in order to continually stimulate, but not overheat demand. At the current time this dual mandate allows the Fed to define the sustainable pace of economic growth at a real rate of 2.00% (Nominal of 4.00% less inflation) and an inflation rate of 2.00%. At the moment, in part due to the 2.90% drop in the first quarter which many (including us) view as an anomaly, year-over-year economic growth as defined by Growth Domestic Product stands at 1.50%. However, there exists a conflict on the other side of the dual mandate. Janet Yellen, the current Chair of the Federal Reserve looks closely at the Commerce Department’s Personal Consumption Expenditures index which has risen 1.60% over the past year. In addition to this, the Consumer Price Index, a measure of inflation at the Retail Level has risen 2.10% year-over-year. Therefore, the Fed should be reaching a point where inflation is becoming a concern. However, should the Fed begin to raise interest rates to choke off any inflationary tendencies, conventional thinking is that economic growth will begin to stagnate (even more than it has already!). During her press conference following the FOMC meeting, Ms. Yellen observed that “recent reading on, for example, the CPI index have been a bit on the high side, but I think it’s – the data that we’re seeing is noisy. I think it’s important to remember that, broadly speaking, inflation is evolving in line with the committee’s expectation.” Yellen observes that “the Committee has emphasized that we have the 2 percent objective for, as a longer-term matter, for PCE inflation and we would not willingly see a prolonged period in which inflation persistently runs below our objective or above our objective.” The words “longer-term” and “prolonged” in the preceding paragraph provides Yellen and the Fed with enough wiggle room to keep interest rates low even if inflation temporarily moves above 2.00%. We have noted on many occasions that we think this is an appropriate approach as inflating the economy to a certain extent is the safest way to exit this economic malaise. We also believe that this provides a floor under current stock market levels and that the risk/reward ratio remains skewed in favor of continuing to assume risk in your portfolio. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
- World Cup Fever Once every four years, the US gets gripped by a mild case of World Cup Fever. We stay loosely in touch with results and spend some of our time wondering about Belgium-Ivory Coast while the rest of the world “white knuckles” every set piece and yellow card. Americans tolerate soccer (AKA futbol), while the rest of the world basks in its glow. Why is this? Well, we grow up with baseball, American football and hoops with increasing doses of hockey and lacrosse. Soccer is not engrained in our psyches like it is in Latin America and Europe. Americans find soccer low scoring, boring and hard to understand. American investors can learn something from the rest of the world’s soccer fans. Investing should be like a soccer match, not a basketball game, for the vast majority of average investors. Good portfolios take a while to construct and require patience . Like a well constructed soccer “run,” they oftentimes don’t produce results like a soccer game (some anti-soccer folks would say they NEVER produce results). As a company, we at Fagan Associates emphasize diversification and patience to an extreme, but we feel these attributes enabled investors to weather the calamity of 2008 and enjoy the results of 2013. So, enjoy the soccer, the pageantry and tradition and remember that many times good portfolios can temporarily produce no positive results. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
- The Miners are Dancing Is this the long awaited migration from bonds to stocks, where interest rates run significantly higher? The stock market rallies as the run up in rates coincides with an improving economy. We have witnessed numerous head fakes over the past year, where the ten-year rate darted higher and the talking investment heads spouted their mantra of “bonds to stocks” rotation. The latest “GOOD” economic news has been the improving sales numbers from automakers. Several sources now project US car sales will approach 17 million annually, spurred on by transformative vehicle technology and (more importantly) an aged car population. Many times there have been so called “tells” signaling higher rates and an improving economy that it is as if all the canaries are keeled over and the miners remain safe and happy deep underground. We have witnessed a stronger utility average, a rallying ten year and weak job numbers all pointing to a stock market correction, yet the market has ground its way higher. Conversely at times we have seen stronger rates supposedly signaling that improving economy, yet somehow rates have remained lodged between 2.5% and 3% on the ten year US treasury. Our biggest concern is this: “ what’s an average investor supposed to do”? What should she/he listen to? What “breaking news” (isn’t there always breaking news?) deserves attention? Here’s our game plan for that maturing CD or that 401k that you have to rollover, or that inheritance that needs a home. IGNORE that short term mentality that sensationalizes daily activity and glorifies trading. It's your money and it shouldn’t be treated like a wad of bills lodged in the pocket of your khaki short- you’ve worked for your portfolio. Our theories are to be disciplined, be diversified and only invest money that you aren’t going to need in the short term. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc . or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
- Reasons for a Historically Weak Economic Recovery To understand why the current economic recovery has been so weak one must first examine the causes for the preceding recession. First and foremost, let us define a recession in terms that are generally accepted within economic circles, as two consecutive quarters of negative growth in Gross Domestic Product (the monetary value of all goods and services purchased within the United States). What differentiated the prior recession which officially ended during third quarter of 2009 was the root cause. Most recessions are brought about by rising interest rates. In order to slow an overheating economy, the Federal Reserve raises short-term rates, thereby increasing borrowing costs. As a result of these increased borrowing costs, consumers and businesses alike reduce their borrowing until interest rates once again decline to more attractive levels. Once this occurs, borrowing recommences. This past recession was not brought about by higher interest rates but rather by the fact that consumers and businesses alike became overleveraged. Both had too much debt on their balance sheets. In order to help the process of unwinding or deleveraging in which consumers and businesses pay down this debt the Federal Reserve did lower rates. However, businesses and consumers are reluctant to begin borrowing in earnest until they deleverage. And that takes time. Therefore, the historically slow pace of economic growth ever since the economy bottomed in 2009 cannot be cured by low interest rates. It is a question of demand, and once again, the passage of time that will allow the completion of the process of deleveraging. The lowering of interest rates as well as other unconventional steps taken by the Federal Reserve over the past five-plus years in order to first stabilize and then help grow the economy has, in our opinion, been nothing short of brilliant. However, that is only part of the equation. In addition to the nature of the recession, what has hampered the pace of this economic recovery, is a lack of a Fiscal Policy implemented by Congress and the Obama Administration. We will let Wikipedia define fiscal policy: “In economics and political science, fiscal policy is the use of government revenue collection and expenditures to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand and the level of economic activity.” More or less, the dysfunction in Washington has prevented the implantation of an effective fiscal policy to deal with the current economic environment. Economic recoveries are built on the backs of the housing and labor markets, both which have been recovering, but at a modest pace at best. For instance, despite the recent pick-up, Sales of New Homes are nearly sixty-six percent below their peak set back in July 2005 of 1,279,000 units. Furthermore, the Median Existing-Home Sales Price remains 12.42% below their all-time high of $230,300 set back nearly eight years ago, July 2006. If as we stated above that recoveries are built on the back of the housing market, then let us take one step further and note that the housing market is built on the backs of first-time home buyers. In addition to more stringent terms demanded by lenders, over the past ten years student debt has tripled to more than $1 trillion while wage growth has been somewhat stagnant. In fact, according to the Federal Reserve Bank of New York, student loan delinquencies have surpassed that of credit card balances for the first time. Certainly, overwhelming student debt coupled with stagnant wage growth is not the recipe for a booming housing market. Also not in the recipe for a strong recovery is a relatively weak labor market. As of the most recent report from the Bureau of Labor Statistics, a record 92,594,000 Americans were not in the labor force during April. This combination of Americans dropping out of the labor force coupled with a rising population helped push the labor force participation rate down to 62.8%, the lowest level since March 1978. As noted above, only time heals balance-sheet recessions, but we believe this length of time can be shortened if politicians can craft a sound fiscal policy, one that initially focuses on jobs and one that addresses the crushing level of student debt. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
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