Steven J Cohen CFA

Originally Published Jun. 13, 2016

• Eight years on from the Great Recession
• US unemployment rate is reaching pre recession levels
• But Fed rate hikes could lead to another stock market crash

We are now eight years on from the global catastrophe of the “Great Recession”, but with the US stock market (SPY, DIA, QQQ) banging up against all time highs and global stock market indices (ACWI) recovering to all time peaks reached twelve months ago, can one assume all is swell the global economy?

Unemployment levels in the US are fast approaching levels pre Recession and in Europe it is finally showing meaningful reduction from the peaks of 2013 a story repeated in many of the worlds largest economies.

The policies to get us here have been a mixture of both traditional and extreme. From the US we’ve had traditional government spending unmet by tax collection together with interest rate cuts, to the extreme with the Central Bank purchasing the government debt with conjured money. Europe has avoided expanding government spending but have gone to the far side of extreme with negative interest rates. Japan is using all of the above and China has gone the way of massive relaxation of lending restrictions to the private sector that comically sloshes around.

If all was well with the world it would be time to stop these policies, and indeed the US stopped magically producing money several months ago and have even had an interest rate increase.

However the information content of the developed world government bond markets (BWX) are signalling something very sinister, most are providing a yield around the current inflation rate or, expectations of no inflation usually caused by coming slow growth or recession. This indicates that we are again in the era of potential policy mistakes.

In an appraisal of the policies that have already been installed, US government debt relatively reaching WWII leaves very little room for further support unless in desire of a centrally planned economy. The EU have been late to the party on cutting interest rates and conjuring money but should be applauded for government austerity in the face of a reducing tax base. Japan has morphed into a basket case but China continues to grow at an envious rate for the time being. Unfortunately negative interest rates for retail and corporate banks have not made them lend more but punished pension plans, mainly due to increased financial regulation.

Even more comical than which quarterly bubble private lending is funding in China, is that they have embarked on empowering the private sector, where as the US is empowering the government and the previously failed establishment. It is in fact a shame that the US information technology revolution of the last forty years have passed their rulers and central bankers by. Today “community” platforms (LC, TREE) are enabling borrowing from highest quality risk takers, to increase productivity and create growth, with enviable interest rates and data collection to the lender. Central bankers, however, continue to support their former work alumni and ignore calling for mandates to fund “community” platforms.

In support of the old school at the US Federal Reserve, they correctly watched the stock market or as they call it “data” to help determine when to make their first interest rate rise, but now is the time to start waiting for yields in their unsupported bond market (TLT) to recover. Although employment is at high levels, US central bankers can be relaxed with their inflation mandate, as corporate profitability is very tight, lay-offs are preferable to reduced margins.

There is little room for error but a policy mistake can take us back to the last decade including a stock-market crash.

Originally Published 19th January 2015.

Last Thursday the Swiss National Bank (SNB) suspended it’s support for a Euro floor against it’s currency of 1.20, the Euro promptly fell 45% against the Franc. i.e. Swiss investors lost 45% in value of their European assets. Eventually the Euro recovered for a loss on the day of 17% to settle near levels of the August 2011 Franc crisis. The Swiss stock market also fell 15% in two days, implying the only safe haven were Swiss Franc denominated bonds and cash accounts. However the SNB also lowed the target deposit rate to negative 0.75% per annum, whilst holders of 10 year Swiss government bonds have to pay 0.13% per annum (pa) for that pleasure.

Whilst the timing of the decision was a surprise the market reaction was supreme shock, only days before a member of the SNB publicly supported the previous policy. The previous policy was also beneficial to growth and price stability in the Swiss economy. After the announcement investors, traders and global companies scrambled to hedge their exposure, supplemented by any future SNB commitment to foreign exchange stability already losing credence. In sympathy with the SNB the Swiss economy at only the 20th largest economy in the world, inhibits the risk tolerance for limiting external influence.

The Swiss Banking industry has a long history in lacking moral discrimination of deposit ownership. Swiss regulators also condone misrepresentation by financial intermediaries (when referring suspect money drug traffickers or terrorists to them). All-in Swiss financial system participants are the most rational in the world. Some may therefore not be surprised in a conflict between Swiss words and deeds.

Investors with Swiss liabilities, long investment horizons and generating non-investment income in Swiss Francs: should continue to seek growth in the equities of high growth areas and value companies (the US stock-market has outperformed the Swiss currency by 5% pa over the last 30 years); maintaining fixed income in the major trading block currencies with potential for recovery back to fundamental levels before increasing allocation to Swiss fixed income. Those with short investment horizons and not generating non-investment income in Swiss Francs, continue to be inhibited by negative domestic interest rates and domestic equities that are presently penalised by an uncompetitive exchange rate.

Steven J Cohen CFA, BSc (Econ) Hons Lond. 19th January 2015.

Originally Published July 26th 2010.

On February 25th 2009 the Fed released details of how US banking organizations were to be assessed to ensure that they had sufficient capital to perform on an ongoing basis. The S&P 500 closed that day on 764.9 and, reached a further inter-day low of 666.79 on March 6th 2009. Since then, the S&P 500 had reversed direction, to reach a high of 1219.8 on April 26th 2010.

However by July 1st, the S&P 500 had fallen-back to it’s year to date low of 1010.91. On July 14th the FOMC released minutes of their June meet that included the phrase “the economic outlook had softened somewhat” and on July 21st Bernanke release his “economic outlook remains unusually uncertain” testimony. Could these pronouncements be as significant in allowing a bottom to form as the Fed’s stress test announcement?

Bernanke served as a member of the Fed Board from 2002 and became Chairman on February 1st 2006. He will always be fondly remembered for his November 2002 speech that included both the terms “printing press” and “helicopter drop” in a discussion on how to prevent deflation. In his role of Chairman, he tried to prevent the financial market crisis with upbeat economic assessments, to no avail. He now appears to have learnt that a candid assessment, allows markets to respond to the expected monetary policy changes quicker.

He was certainly complicit in the bubble’s that formed, leading to the financial crisis. He’s certainly THE MAN who knows the necessary policy responses to that financial crisis. Now his communication to market participants has improved. And, in his January 3rd 2010 speech he has even accepted that, monetary (secondarily to regulatory) policy should be used to prevent damaging asset price bubbles. A well rounded Central Banker appears to have developed.

CME 30-day Fed Fund Futures are now indicating that, the FOMC may increase the federal funds rate (from their sub 0.25%) to 0.50% only in Sept 2011. This still gives the S&P 500 plenty of time to recover, till it will have to start discounting the interest rate rise.

Published July 26th 2010.