When the sun rises on December 19th, I believe there’s an even chance that the Federal Reserve will have announced that they’ll begin tapering their bond-buying program that began in September 2012. I’d put 50/50 odds on an announcement of tapering their US$85 billion per month program of quantitative easing, and there are several fundamental reasons that back up my beliefs.
The potential federal budget deal that arose late in the day on Tuesday, December 10 between House and Senate negotiators is the most recent, albeit least important, piece of evidence paving the way for a December taper. Read more
The reason meteorologists aren’t held accountable for their rain or snow predictions is that weather forecasts are made in terms of probability statements rather than absolute outcomes. This is why we forget the thunderstorms that failed to materialize and forgive the snowstorms that nobody predicted – a 60% chance of rain turns into a sunny day; a 30% chance of flurries culminates as a blizzard. While a probability statement provides an out, it also is a barometer of confidence. And, in the case of financial forecasts, the market itself provides such a measure.
While 2013 has been a fantastic year for equity markets and risk assets in general, a dark cloud looms on the horizon. At some point, the Federal Reserve (Fed) will initiate its plan to taper; the beginning of the end of the latest round of quantitative easing will commence and the support for U.S. Treasurys and mortgage-backed bonds will fade. Rates must rise, “they” say. But does the “market” have a view? Read more
On the occasion of the scheduled fast food-workers strike today (Thursday, December 5), I thought I’d dip into the vault and repost something from earlier this year on a proposal to hike the federal minimum wage. Workers in around 100 U.S. cities are striking on demands that their wages be moved from the current federal minimum of $7.25 per hour to $15 per hour – that’s well ahead of what President Obama suggested in a State of the Union address back in February. What we look at in this post is why basic economics breaks down when talking about increasing the cost of labor. While you’re looking, you might want to check out a couple other posts I did on minimum wages: one on Washington state (who’s minimum wage is above the federal one) and one on the relationship between minimum wage and federal assistance.
Minimum Wage Hikes – or – What Econ 101 Didn’t Teach You
Your entry-level economics class taught you (or should have) that when the price of something goes up, less of it is consumed. This holds for cars, interest rates, widgets, and wages. So, during this week’s State of the Union address, when President Obama called for raising the federal minimum wage from its current level of $7.25 per hour to $9.00 per hour, and tagging the minimum wage to the cost of living, it drew a decent amount of criticism. Read more
Much has been made throughout 2013 about the three “arrows” of Japanese Prime Minister Shinzo Abe. While this deflation-fighting plan of monetary loosening, fiscal stimulus, and structural reforms has been broadly successful, I believe it will be the strength or weakness of the yen that will determine whether Japan’s economy emerges convincingly from its deflationary period in 2014.
Tapering is coming. And markets know it. The mere thought that tapering of the Federal Reserve’s quantitative easing (QE) program was due in September was enough to push many markets and currencies (especially emerging markets) significantly lower. So the question arises for the occasion of the actual tapering that’s likely to begin in 2014: have markets already reacted to tapering or is there more to come? Read more
Our research* shows that since 2008, European investors increasingly favour real assets, such as infrastructure and property. Before then it was mainly the preserve of large Australian and Canadian funds.
The search for yield and safe havens has created new patterns in investor behaviour, and these have grown stronger since.
Investors now recognise the value of real assets as vehicles generating real returns. Historically many investors shied away from such assets because of their lack of liquidity. However, the demand for yield is such that they are prepared to forego liquidity on larger parts of their portfolio to meet their investment targets, whether they are seeking return or inflation protection. As a result, institutional demand for infrastructure and utilities is on the rise. Read more
The use of the term duration has successfully been adopted by the high yield investment universe over the past few of years. Why? Because all else being equal, lower duration means lower interest-rate risk. And the number-one concern for fixed income investors over the past several years has been a fear of when interest rates will begin their rise to normal levels. In fixed income, if rates rise, the value of your bonds declines. And the longer your duration, the more pronounced your decline, again with the caveat all else being equal. The common way to explain duration is that it measures the sensitivity of the price of a bond to a change in interest rates and is expressed as a number of years. This is an extremely useful way to compare two fixed income investments where all else is equal. We have noticed that in a reach for yield, investors have invested in short duration high yield as a way to both gain the higher yield available in the high yield market while seemingly reducing risk by having a shorter duration portfolio. Read more