Tag: george yacik

The Fed Makes It Official

Posted on by George Yacik

The Fed recently enacted what the experts are calling a historic policy change. More accurately, it’s the official acknowledgment of what the Fed has already been doing, namely keeping interest low, seemingly forever. What it also means is that it sharply alters the old 60-40 investment mix, to something more like 80-20 or 80-10-10.

The Fed is basically assuming that inflation will be nonexistent – or, at least manageable – for the foreseeable future and is, therefore, willing to let it run “hotter” for longer than it used to before it steps in and raises interest rates. But is that a realistic assumption? Nearly unanimously, Fed officials have been touting the party line that the economy is bad – despite numerous reports that show it is snapping back pretty strongly – and is likely to stay that way or get even worse – which may not be the case. The stock market certainly doesn’t seem to be buying that.

What the Fed seems to be doing is baking in the cake its already oversized role in the economy (and society) and keeping it that way “for as far as the eye can see.”

As I noted in my previous column, cynics might draw the conclusion that the Fed is purposely dumbing down its economic forecasts so as to cement its role for the long-term. Jerome Powell’s streamed announcement at the Jackson Hole summit pretty much made that de facto.

So what does that do for your portfolio? Given that the Fed has now determined that rates will stay low for the foreseeable future, do bonds have any place in your portfolio? What would be the point? Continue reading "The Fed Makes It Official" →

Reasons To Be Cheerful

Posted on by George Yacik

According to the Federal Reserve, the economy is in danger of hurtling over another cliff. Still, recent economic statistics and market indicators paint a much more hopeful picture – the S&P 500 just hit a new all-time high, gold is falling, and bond yields are rising. Which story are we supposed to believe?

On the one hand, we have the recent economic statistics. On Friday, the Commerce Department reported that retail sales rose another 1.2% in July, pushing them above pre-pandemic levels. If that’s not a classic V-shaped recovery, I don’t know what is. While the headline sales figure came in below expectations of a 2.0% rise, the prior month’s 7.5% increase was revised upward to show an 8.4% jump. Excluding autos, July sales actually beat estimates, rising 1.9% versus a Street forecast of 1.5%.

Also, on Friday, the Fed itself reported that industrial production rose 3.0% last month, in line with estimates. In comparison, the capacity utilization rate rose more than two percentage points from the previous month to 70.6% and its fourth big monthly increase in a row.

The day before, the Labor Department said initial unemployment claims continued to drop, falling well below one million for the first time in several months and down sharply from a peak of near seven million in March, a reverse V-shaped drop.

The financial markets seem to be buying it. Last week the yield on the benchmark 10-year Treasury note rose above 0.70% for the first time since late June, putting it up 20 basis points just in the previous 10 days. Gold is down more than 5% from its August 6 high. And of course, the S&P 500 has wiped out all of this year’s losses, including the 33% drop in February and March, when a good portion of the U.S. was going into lockdown. Continue reading "Reasons To Be Cheerful" →

Let's Move Forward, Not Back

Posted on by George Yacik

Since the beginning of the coronavirus crisis, the Federal Reserve has probably done more to try to ease the financial pain of businesses, consumers, and institutions than just about any other organization on earth with their monetary policy. It’s lowered interest rates, purchased trillions of dollars of assets – some of which, like corporate bonds, it’s never bought before – eased bank capital requirements, and increased existing or created new lending programs to help Americans weather the storm and get back on their feet.

Now the president of the Minneapolis Fed and a current voting member of the Fed’s monetary policy committee is calling on people to suffer a few more weeks in quarantine in order to get the virus under control and the economy back on an upward trajectory – as if it weren’t on that already.

“If we were to lock down really hard, I know I hate to even suggest it. People will be frustrated by it,” Neel Kashkari told CBS’s Face the Nation program. “But if we were to lock down hard for a month or six weeks, we could get the case count down so that our testing and our contact tracing was actually enough to control it the way that it's happening in the Northeast right now. That’s the only way we’re really going to have a real robust economic recovery.”

“Now, if we don't do that and we just have this raging virus spreading throughout the country with flare-ups and local lockdowns for the next year or two, which is entirely possible, we're going to see many, many more business bankruptcies, small businesses, big businesses, and that's going to take a lot of time to recover from to rebuild those businesses and then to bring workers back in and re-engage them in the workforce. That's going to be a much slower recovery for all of us.”

If we take his advice and do another “hard lockdown” for six weeks or a month, how many more businesses will fail, and how many more people will be laid off or lose their jobs permanently in the meantime? Continue reading "Let's Move Forward, Not Back" →

What To Expect From A Biden (And Bernie) Fed

Posted on by George Yacik

Now that Judy Shelton has passed the first big hurdle to be confirmed as a member of the Fed – passing muster with the Senate Banking Committee by a 13-12 party-line vote – let’s assume that the full Senate will confirm her. While it’s not a slam dunk, Republicans do control the chamber by a 53-47 majority, so even if Mitt Romney votes against her, as he says he will, she’s probably in.

Despite what her many detractors believe – that she has the power all by herself to return the U.S. to the gold standard and direct the Fed to do whatever President Trump wants – that probably won’t happen unless Fed chair Jerome Powell resigns or Trump figures out a way to remove him without triggering a massive global financial panic safely. Even then, it’s a fantasy. So Shelton is probably going to be confirmed, and nobody is going to die as a result.

So let’s turn instead to what a Fed under a President Biden might look like. Luckily, the former vice president has publicly revealed what he has in mind, in a short and concise 110-page press release entitled, “Combating the Climate Crisis and Pursuing Environmental Justice,” the product of a “unity task force” set up by Biden, and former presidential candidate Bernie Sanders, whom I guess wrote most of it. I’ll save you the trouble of pouring through it unless you’re feeling masochistic.

Granted, there’s only a little (fortunately) in the tome that deals with the Fed. Indeed, through the magic of word search, I found that there are only eight references to “Federal Reserve” in the document, but what’s there is enlightening about their thinking. No, there’s nothing in there about Fed monetary policy, I suppose to respect the Fed’s independence. Continue reading "What To Expect From A Biden (And Bernie) Fed" →

Why It's Different This Time

Posted on by George Yacik

The other day I completed a survey for my brokerage company, and one of the questions they asked was, "Is the current crisis worse than the 2008 financial crisis?" A couple of months ago, when our state and region were mostly in lockdown, I would have answered with a resounding and unhesitating, "Yes!"

Now I'm not so sure. Admittedly, I don't live in one of those states where the virus is now spiking, and things here are close to back to normal, so maybe my vantage point is too subjective. Nevertheless, I would have to say this crisis is far from as bad as the previous one, which may explain why the stock market has behaved the way it has, namely prices are off only a little from where they began the crisis, with only that short, sharp drop in February and March.

One reason, of course, is that the economy, as a whole, has rebounded strongly over the past couple of months as most of the country has reopened, at least to some degree, even as millions of people continue to work remotely. But the main reason is that that the lessons we learned from 2008 have been brought to bear in this crisis, namely that the government and the Federal Reserve have thrown much more money and resources at the problem than they did 12 years ago, which has mitigated the damage to a great degree.

As we've seen in the second-quarter earnings reports released so far by the big banks, the measures taken after 2008 to make sure they've built up enough capital to withstand another global crisis have paid off. Other than Wells Fargo (WFC) – which is still in the Fed penalty box, forbidden to grow assets – which reported a big loss, the other big banks reported flat Goldman Sachs (GS) or reduced JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) earnings compared to a year ago. It could have been a lot worse. Who would have thought they'd be able to pull that off three or four months ago? Let's give the Dodd-Frank Act and Fed capital requirements the props they deserve. Continue reading "Why It's Different This Time" →