Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Commodities, Currencies, Interest Rates

What to Glean From Contradictory Coverage

By, 01/30/2015

Alright folks, fun Friday trivia time! What do oil, currencies and interest rates have in common? Time’s up! They are all things headlines are trying to have both ways these days. Situation X is bad, but when X flips to Y—the opposite—that’s bad too! Neither perception is quite right. These factors are all basically neutral for stocks fundamentally. But the contradictory coverage shows fear persists and economic expectations remain low—great for stocks.

Take oil. Last decade, folks feared high-and-rising oil prices would crush consumers and cause a crippling recession.[i] Yet now that oil is under $50 per barrel, few are dancing in the streets. Headlines occasionally call cheap gas stimulus, but many see cheap oil as bad. Some fret it will kill the shale boom. Some extrapolate that as an economic negative, pointing to mounting layoffs and shut-down projects in America’s shale fields—a true hardship for the folks impacted, but too localized a problem to disrupt growth nationwide. Particularly since many shale fields remain profitable at today’s prices, giving them an incentive to keep going.[ii]

Many headlines warn plunging oil prices are flashing red lights warning of some impending economic crash stock markets are ignoring. But stocks haven’t ignored anything! All sufficiently liquid markets are equally efficient and adept at pricing in widely known information. In this day and age, it is impossible for oil markets to move on something stocks aren’t aware of—all markets are equally aware. Stocks know oil is down. They know the culprit is sky-high supply, not cratering demand. Energy stocks are down, because falling oil prices hit oil producers’ margins, but other sectors benefit from low energy prices.  

Commentary

Fisher Investments Editorial Staff
Politics, Taxes, Reality Check

Reason #529 Why Stocks Love Gridlock

By, 01/29/2015
Ratings154.533333

Stocks like it when Congress looks like this (figuratively). Photo by Keystone/Stringer/Getty Images.

As a reminder, our political commentary is intended to assess potential market impact. We favor neither party, and ideological bias is dangerous in investing.

Commentary

Fisher Investments Editorial Staff
Developed Markets, US Economy, Across the Atlantic, Media Hype/Myths, GDP

Economic Growth Seems Plenty Durable

By, 01/28/2015

Should investors worry the developed world’s economic stalwarts seem to be slowing? Headlines think so. US December durable goods orders fell -3.4% m/m, “stirring growth concerns.” Q4 UK GDP grew 0.5% q/q, closing 2014 with “waning momentum.” But in our view, neither of these reports supports the notion the US and the UK are weakening—their underappreciated strength should still help drive this bull market.

Yes, on the surface, this was a yucky durable goods report. Excluding volatile transportation orders, orders were down -0.8% m/m. “Core” capital goods orders—non-defense capital goods orders excluding aircraft—fell -0.6% m/m. And since core capital goods are considered a leading indicator of business investment, some experts downgraded their estimates for Q4 GDP.

But context, as ever, is key. Durable goods data can be noisy, making it dangerous to infer much from one month’s movement. This bull market and expansion have seen many durable goods drops, but growth overall continued and markets marched higher (Exhibit 1). Heck, even the present four-month slide in core capital goods orders isn’t wonderful, but consider: Core capital goods orders fell in eight of nine months from December 2011 to September 2012—yet the US kept growing. This latest slide doesn’t automatically indicate a worrisome long-term trend.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Politics

Greek Government Theatrics and Other Reruns

By, 01/27/2015
Ratings204.725

Greek stocks plunged Monday and Tuesday as markets digested the anti-austerity Syriza party’s triumph in Sunday’s elections. With Syriza winning 149 of Parliament’s 300 seats, leader Alexis Tsipras was sworn in as Prime Minister Monday. His cabinet—a coalition with the Independent Greeks—took their seats Tuesday. Together, they have 162 seats—a workable anti-austerity majority. Perhaps that is why other eurozone leaders have already started digging in against Tsipras’ pledges to abandon the prior government’s austerity commitments—driving renewed fears of a disorderly Greek euro exit. Outside Greece, however, stocks largely sighed. Perhaps markets are used to this after five years of stalemates between eurozone leaders and Greece. Moderation and compromise prevailed each time, which seems likely this time, too. Anything is possible, but markets move most on probabilities, and a disorderly Grexit remains unlikely.

Tsipras has a lofty wish-list, including abandoning tax hikes and spending cuts pledged by prior administrations, rehiring fired public sector workers, writing off a chunk of debt currently owed to the ECB, IMF and other official-sector creditors, and using funds earmarked for IMF and ECB debt service this year to fund a big social spending package. Creditors, predictably, aren’t too keen. They’re willing to talk, but they consistently say debt forgiveness is a non-starter—a message EU finance ministers reiterated Monday. Many believe the apparent stalemate, and the fact Greek banks can’t continue receiving ECB support after February unless a new “memorandum” (lingo for reform commitment) is signed, will force Greece to leave the euro and print drachmas to fund banks and spending.

Now, that probably sounds dire, perhaps plausible, too. But we’ve seen this movie before: The IMF/ECB/EU “troika” demands full debt repayment and tough austerity, or they won’t give Greece money. Greece grumbles and waffles. EU leaders remember they want to keep Greece. Greece remembers it wants to keep the euro. The troika redraws its lines in the sand. Greece’s government abandons its pledges and ignores voter backlash. They compromise. Lather, rinse, repeat.

Commentary

Fisher Investments Editorial Staff
Commodities

Blinded by Shiny Objects?

By, 01/26/2015
Ratings304.383333

Gold and silver are up a wee bit off their November 2014 bear market lows, and here is what some people have to say about it:

There’s a competitive currency devaluation coming. … Gold is your natural hedge against that.”

Gold, traditionally seen as maintaining its value against floating currencies, has prospered with markets on edge as central banks have attempted to deal with deflation in the wake of falling oil prices.”

Commentary

Michael Hanson
Capitalism, Into Perspective

Upside Risks Are the Riskiest

By, 01/23/2015
Ratings474.414894

“Man is dragged kicking and screaming toward his destiny.” – Carl Jung

We’ve figured out a way to worry about low oil prices. Low oil prices…bad! In the last decade, I spent a good portion of my life trying to talk folks off an investing cliff tied to high oil prices. Now we’ve gotten our wish—cheap and abundant oil tied to rapid technological advancements few foresaw—and many seem to hate it. Sure, cheaper oil is trouble for some energy companies and their employees, but on net, low oil prices tied to innovation driving up supply creates winners, too, and are an overall boon to the world economy by magnitudes.

We’ll surely lament many more “surprise” developments that will do the world great good: widespread natural gas use for vehicles (both cheaper and cleaner than today); water desalination technology changing the game for agriculture and general human access to water as we know it; laser technology advancements transforming a variety of fields from the armed forces to aviation; robotic automation lessening forever sheer human toil; breakthroughs all over the place in medicine from neurodegenerative diseases to nanotechnology to preventative systems.

Commentary

Fisher Investments Editorial Staff
Monetary Policy, Across the Atlantic, Media Hype/Myths

The ECB Will Buy Some Bonds

By, 01/23/2015
Ratings254.56


The ECB may consider putting a big Q to the left of this. Photo by Hannelore Foster/Getty Images

Breaking News out of Frankfurt: The ECB held interest rates stable! Just kidding, they actually cut their rate on four-year loans. Oh and announced the full-scale quantitative easing (QE) program pundits have long salivated over, which we guess is bigger news. Now that QE is reality, we fully expect headlines will laud it for stimulating growth, fret its potential end, argue over whether it will cause hyperinflation, fear it isn’t big enough, and so on. All happened in the US, UK and Japan, and we have little reason to expect different in the eurozone. We also don’t expect QE’s impact to differ: The ECB’s interference with long-rates should keep the yield curve flat, discourage bank lending and slow growth. But, though negative, ECB QE is too widely discussed and too small to flip this bull into a bear.

First, the details. The ECB will buy €60 billion of sovereign, agency and private debt monthly from March through September 2016 (although officials indicated the end isn’t set in stone). The aim, as has been widely reported for months, is to add just over €1 trillion to the bank’s balance sheet, bringing it back up near 2012 levels. National central banks will do 80% of the buying to get around EU treaty restrictions on the ECB financing governments (not the aim, but a concern some raised). No Greek debt will be purchased until at least July—probably wise, considering Greece has asked to default on ECB-held debt.  Like other QE doers, the ECB seeks to lower long-term interest rates to stimulate loan demand, increase lending and grease the eurozone economy’s wheels. The ECB theorizes this will boost inflation toward its 2% y/y target (it is presently -0.2%) and goose GDP by a few tenths of a percentage point.

Commentary

Fisher Investments Editorial Staff
Finance Theory

The Happy Medium

By, 01/22/2015
Ratings413.621951

In the 1989 movie Back to the Future II, Americans in 2015 drove flying cars and rode hover boards—but still used dot-matrix printers. Now, this movie was never meant as a forecast, so it can’t technically be considered wrong. Heck, a Delorean reaching 88 mph was a time machine, your cue to shut off the fact-o-meter. But that cars and skateboards are still earth-bound while printers use lasers (and some print in 3D) teaches a simple lesson: No one can accurately foresee what will happen in 10, 20 or 30 years. Today’s trends and hot frontiers don’t foretell what the world will look like decades from now—investing based on such factors is folly.

But that doesn’t stop some folks from trying. Recent advances in immunotherapy are driving excitement over the chance to cure cancer—and driving some folks into upstart Biotech stocks now. Frontier and smaller Emerging Markets are projected to have sky-high population growth, attracting demographic trend-chasers. A potential “drone revolution” has folks scouring for hotshot robo-stocks. Some say Energy’s recent sell-off is a can’t-miss opportunity to pile in and wait for an eventual glorious rebound.

We’ve no doubt the future will be amazing in unfathomable ways, with wondrous new technologies and investment opportunities. That has always been true. But trying to pick the eventual winners now is a fool’s errand. Things might play differently than you imagine! And even if you’re eventually right, it could take ages to play out, causing you to miss opportunities (and better returns) in the meantime.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths, GDP

China's Great Miss?

By, 01/21/2015
Ratings364.111111

It’s official: China grew 7.4% last year—its slowest growth rate in 24 years. Growth missed the official target and could drag down the global economy. And it’s only going to get worse. At least, that’s how headlines portrayed China’s latest slowdown. As ever, some perspective is in order. Despite the handwringing, slower growth isn’t a global expansion-killer or bull-market-ending nasty shock—a slower-growing China still contributes a ton to global GDP.

The way headlines tell it, you’d think 7.4% growth was a giant disappointment for China’s growth-obsessed government. Yet GDP didn’t really miss the target. Officially, the target was “about 7.5%.” “About” is a nebulous word, and most headlines skipped it and went straight for the 7.5%. Yet officials were always clear the target was a range. Days after Premier Li Keqiang announced the target last March, he and China’s Finance Minister said 7.3% or even 7.2% annual growth would qualify. So 7.4% isn’t a surprise or a miss—it’s in the target range. And just 0.3 percentage point slower than 2013. Status quo, folks.

Slower growth is also somewhat intentional. Officials didn’t set a lower target simply to keep expectations down. They realize slower growth is a byproduct of their ongoing shift from export-led growth to domestic consumption—their effort to keep China advancing long-term and curb recent excess. Last decade’s eye-popping growth was the fruit of a government-engineered, export and factory-led boom. It worked great when wages and Chinese manufacturing costs were low. But it couldn’t last forever. Wages and shipping costs rose. Labor became scarce, thanks to the one-child rule. Factories overshot to meet lofty local growth targets, creating oversupply in several industries. Polluted skies and rivers made the locals antsy. Citizens craved better working conditions and higher income potential—service-sector jobs. So, officials decided to overhaul their model, promoting services and deliberately dialing back manufacturing. They want high-quality growth, not just fast growth for fast’s sake. The slowdown is a tradeoff.

Commentary

Fisher Investments Editorial Staff
Currencies, Media Hype/Myths

The Swiss Miss: Media’s Take on the Franc’s Fallout

By, 01/20/2015
Ratings664.234848

Headlines globally remained stuck on Switzerland Friday, spouting nonstop warnings, lessons and overall hype. To us, it all seems fairly out of proportion. Switzerland is tiny, and the franc’s wild ride is a textbook case of a currency peg gone bust. The writing was on the wall, and the global implications here are miniscule—this is nowhere near enough to end the bull market. Nor is it evidence of festering global weakness.

Here’s a roundup of the major stories, which we read and analyzed so you don’t have to.

Francs, Fear and Folly
Paul Krugman, The New York Times

Commentary

Michael Hanson
Capitalism, Into Perspective

Upside Risks Are the Riskiest

By, 01/23/2015
Ratings474.414894

“Man is dragged kicking and screaming toward his destiny.” – Carl Jung

We’ve figured out a way to worry about low oil prices. Low oil prices…bad! In the last decade, I spent a good portion of my life trying to talk folks off an investing cliff tied to high oil prices. Now we’ve gotten our wish—cheap and abundant oil tied to rapid technological advancements few foresaw—and many seem to hate it. Sure, cheaper oil is trouble for some energy companies and their employees, but on net, low oil prices tied to innovation driving up supply creates winners, too, and are an overall boon to the world economy by magnitudes.

We’ll surely lament many more “surprise” developments that will do the world great good: widespread natural gas use for vehicles (both cheaper and cleaner than today); water desalination technology changing the game for agriculture and general human access to water as we know it; laser technology advancements transforming a variety of fields from the armed forces to aviation; robotic automation lessening forever sheer human toil; breakthroughs all over the place in medicine from neurodegenerative diseases to nanotechnology to preventative systems.

Commentary

Fisher Investments Editorial Staff
Monetary Policy, Across the Atlantic, Media Hype/Myths

The ECB Will Buy Some Bonds

By, 01/23/2015
Ratings254.56


The ECB may consider putting a big Q to the left of this. Photo by Hannelore Foster/Getty Images

Breaking News out of Frankfurt: The ECB held interest rates stable! Just kidding, they actually cut their rate on four-year loans. Oh and announced the full-scale quantitative easing (QE) program pundits have long salivated over, which we guess is bigger news. Now that QE is reality, we fully expect headlines will laud it for stimulating growth, fret its potential end, argue over whether it will cause hyperinflation, fear it isn’t big enough, and so on. All happened in the US, UK and Japan, and we have little reason to expect different in the eurozone. We also don’t expect QE’s impact to differ: The ECB’s interference with long-rates should keep the yield curve flat, discourage bank lending and slow growth. But, though negative, ECB QE is too widely discussed and too small to flip this bull into a bear.

First, the details. The ECB will buy €60 billion of sovereign, agency and private debt monthly from March through September 2016 (although officials indicated the end isn’t set in stone). The aim, as has been widely reported for months, is to add just over €1 trillion to the bank’s balance sheet, bringing it back up near 2012 levels. National central banks will do 80% of the buying to get around EU treaty restrictions on the ECB financing governments (not the aim, but a concern some raised). No Greek debt will be purchased until at least July—probably wise, considering Greece has asked to default on ECB-held debt.  Like other QE doers, the ECB seeks to lower long-term interest rates to stimulate loan demand, increase lending and grease the eurozone economy’s wheels. The ECB theorizes this will boost inflation toward its 2% y/y target (it is presently -0.2%) and goose GDP by a few tenths of a percentage point.

Commentary

Fisher Investments Editorial Staff
Finance Theory

The Happy Medium

By, 01/22/2015
Ratings413.621951

In the 1989 movie Back to the Future II, Americans in 2015 drove flying cars and rode hover boards—but still used dot-matrix printers. Now, this movie was never meant as a forecast, so it can’t technically be considered wrong. Heck, a Delorean reaching 88 mph was a time machine, your cue to shut off the fact-o-meter. But that cars and skateboards are still earth-bound while printers use lasers (and some print in 3D) teaches a simple lesson: No one can accurately foresee what will happen in 10, 20 or 30 years. Today’s trends and hot frontiers don’t foretell what the world will look like decades from now—investing based on such factors is folly.

But that doesn’t stop some folks from trying. Recent advances in immunotherapy are driving excitement over the chance to cure cancer—and driving some folks into upstart Biotech stocks now. Frontier and smaller Emerging Markets are projected to have sky-high population growth, attracting demographic trend-chasers. A potential “drone revolution” has folks scouring for hotshot robo-stocks. Some say Energy’s recent sell-off is a can’t-miss opportunity to pile in and wait for an eventual glorious rebound.

We’ve no doubt the future will be amazing in unfathomable ways, with wondrous new technologies and investment opportunities. That has always been true. But trying to pick the eventual winners now is a fool’s errand. Things might play differently than you imagine! And even if you’re eventually right, it could take ages to play out, causing you to miss opportunities (and better returns) in the meantime.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths, GDP

China's Great Miss?

By, 01/21/2015
Ratings364.111111

It’s official: China grew 7.4% last year—its slowest growth rate in 24 years. Growth missed the official target and could drag down the global economy. And it’s only going to get worse. At least, that’s how headlines portrayed China’s latest slowdown. As ever, some perspective is in order. Despite the handwringing, slower growth isn’t a global expansion-killer or bull-market-ending nasty shock—a slower-growing China still contributes a ton to global GDP.

The way headlines tell it, you’d think 7.4% growth was a giant disappointment for China’s growth-obsessed government. Yet GDP didn’t really miss the target. Officially, the target was “about 7.5%.” “About” is a nebulous word, and most headlines skipped it and went straight for the 7.5%. Yet officials were always clear the target was a range. Days after Premier Li Keqiang announced the target last March, he and China’s Finance Minister said 7.3% or even 7.2% annual growth would qualify. So 7.4% isn’t a surprise or a miss—it’s in the target range. And just 0.3 percentage point slower than 2013. Status quo, folks.

Slower growth is also somewhat intentional. Officials didn’t set a lower target simply to keep expectations down. They realize slower growth is a byproduct of their ongoing shift from export-led growth to domestic consumption—their effort to keep China advancing long-term and curb recent excess. Last decade’s eye-popping growth was the fruit of a government-engineered, export and factory-led boom. It worked great when wages and Chinese manufacturing costs were low. But it couldn’t last forever. Wages and shipping costs rose. Labor became scarce, thanks to the one-child rule. Factories overshot to meet lofty local growth targets, creating oversupply in several industries. Polluted skies and rivers made the locals antsy. Citizens craved better working conditions and higher income potential—service-sector jobs. So, officials decided to overhaul their model, promoting services and deliberately dialing back manufacturing. They want high-quality growth, not just fast growth for fast’s sake. The slowdown is a tradeoff.

Commentary

Fisher Investments Editorial Staff
Currencies, Media Hype/Myths

The Swiss Miss: Media’s Take on the Franc’s Fallout

By, 01/20/2015
Ratings664.234848

Headlines globally remained stuck on Switzerland Friday, spouting nonstop warnings, lessons and overall hype. To us, it all seems fairly out of proportion. Switzerland is tiny, and the franc’s wild ride is a textbook case of a currency peg gone bust. The writing was on the wall, and the global implications here are miniscule—this is nowhere near enough to end the bull market. Nor is it evidence of festering global weakness.

Here’s a roundup of the major stories, which we read and analyzed so you don’t have to.

Francs, Fear and Folly
Paul Krugman, The New York Times

Commentary

Fisher Investments Editorial Staff

Switzerland Declares Currency Neutrality

By, 01/16/2015
Ratings384.118421

Fancy metalwork adorns the edifice of the Swiss Central Bank. Photo by Bloomberg/Getty Images.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%. It is moving the target range for the three-month Libor further into negative territory, to between -1.25% and −0.25%, from the current range of between −0.75% and 0.25%.

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings833.885542

With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.

MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).

To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).

Research Analysis

Elisabeth Dellinger
Reality Check

Inside Indian Taper Terror

By, 11/08/2013
Ratings174.294117

When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.

The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.

Exhibit 1: Emerging Markets Foreign Equity Inflows

Research Analysis

Brad Pyles

Why This Bull Market Has Room to Run

By, 10/31/2013
Ratings884.102273

With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.

Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.

Research Analysis

Christo Barker
US Economy

Let’s Call It FARRP

By, 10/10/2013
Ratings93.777778

While the rest of the country fretted over taper terror, government shutdown and debt ceiling limits, the Federal Reserve tested its Fixed Rate Full-Allotment Reverse-Repo Facility (a mouthful—let’s call it FARRP) for the first time September 24. FARRP allows banks and non-banks, like money market funds and asset managers, to access Fed-held assets—i.e., the long-term securities bought under the Fed’s quantitative easing—via securities dealers’ tri-party repo (and reverse-repo) market for short-term funding. (More on repos to follow.) FARRP aims to address what many feel is a collateral shortage in the non-bank financial system caused by too much QE bond buying concentrating eligible collateral on the Fed’s balance sheet, where it doesn’t circulate freely. As a result, many private sector repo rates turned negative. But, should FARRP be fully implemented, the facility could actually hinder some assets (in this case, high-quality, long-term collateral like bonds) from circulating through the financial system—much like quantitative easing (QE) locked up excess bank reserves. A more effective means of freeing collateral in the repo market is tapering the Fed’s QE.

Repurchase agreements, or repos, are used to generate short-term liquidity to fund other banking or investment activity—a means to move liquidity (cash) from one institution to another. In a repo, one party sells an asset—usually long-term debt—agreeing to repurchase it at a different price later on. A reverse repo is, well, the opposite: One party buys an asset from another, agreeing to sell it back at a different price later. In both cases, the asset acts as collateral for what is effectively the buyer’s loan to the seller, and the repo rate is the difference between the initial and future sales prices, usually expressed as a per annum interest rate. The exchange only lasts a short while—FARRP’s reverse repos are overnight affairs to ensure markets are sufficiently funded. In the test last Tuesday, the private sector tapped the facility for $11.81 billion of collateral—a small, but not insignificant, amount.

FARRP’s first round is scheduled to end January 29, and during that time, non-bank institutions can invest between $500 million and $1 billion each at FARRP’s fixed overnight reverse-repo rates ranging from one to five basis points. A first for repo markets: Normally, repo and reverse-repo rates are free-floating, determined by market forces. Another of FARRP’s differentiating factors is private-sector need will facilitate reverse-repo bids instead of the Fed. Ideally, FARRP’s structure will encourage unproductive collateral to be released back into the system when it’s most needed—and new sources of collateral demand may help ensure this. Swaps, for example, are shifting to collateral-backed exchanges due to Dodd-Frank regulation—meaning more collateral will be needed to back the same amount of trading activity. Collateral requirements for loans will likely also rise.

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What We're Reading

By , InvestmentNews, 01/29/2015

MarketMinder's View: Add this to the list of misperceived takes on the fiduciary standard: That it incents advisers to take too little risk, increasing the likelihood an RIA won’t achieve sufficient growth to reach client goals. But this totally miscasts the fiduciary standard, right out of the gate. The fiduciary standard does basically two things. It requires disclosure of conflicts of interest (in ADV IIs, normally) and it states that the adviser must have a reasonable basis for believing his/her/their recommendation puts their clients’ interests ahead of their own. That’s it, folks. If the market falls and folks’ returns are negative as a result, that on its own doesn’t say anything about the fiduciary standard. As we have written here many times, the rule doesn’t make the adviser, the adviser’s values make the rule meaningful. For more, see Todd Bliman’s 11/14/2013 column, “The Compass.”  

By , The Wall Street Journal, 01/29/2015

MarketMinder's View: The term “currency war” has been tossed around lately due to recent moves by different central banks. Though attention-grabbing, it seems inappropriately applied. A currency war—or, technically, a competitive devaluation—is a country’s deliberate effort to weaken its currency and make its exports cheaper, theoretically boosting growth. In addition to the underlying fallacy here—countries in today’s globalized economy usually can’t increase exports without imports rising, negating that “advantage”—there isn’t evidence a competitive devaluation is actually happening. Singapore, cited here as a player in an alleged currency war due to its announcement that it would weaken its dollar, has always used currency valuation as its primary monetary policy tool—it doesn’t use a target overnight interest rate, as opposed to the US Fed, which uses fed-funds. And Switzerland, which made the most news recently when it stopped defending its currency floor, deliberately strengthened the franc, not usually what happens in a currency war. Finally, the US and UK both ended quantitative easing some time ago, currencies strengthened and their economies lead the developed world growth. Where is this evidence a weak currency is so growth goose-y?             

By , InvestmentNews, 01/29/2015

MarketMinder's View: Err … President Obama’s proposal to tax 529 college savings plans lasted a week before he dropped it—it didn’t get far. Now we aren’t saying it’s impossible for Congress to change tax laws and remove some of the advantages of education and/or retirement savings accounts. Tax laws probably won’t be identical to today’s  20 or 30 years from now. But, trying to predict what tax rules—or anything—will look like in the distant future isn’t a useful exercise for investors, given markets don’t look any further than 30 months out (and focus more on the next 12-18 months). A retirement planning reality is that there isn’t certainty about anything 20 or 30 years from now. Traditional IRA tax benefits could vanish. The entire annuity industry could blow up. Every pension the world over could become insolvent. Those are all possibilities, but the probability any of them happen—or that Roths suddenly get hit with a sweeping tax—is extremely low today.

By , The Economist, 01/29/2015

MarketMinder's View: Some correct and some off-base views here. We’ll start with the good stuff: The discussion of maturity transformation and how the difference between banks’ funding costs and loan-interest revenues weighs on their margins is good and rare in media. But the rest of this piece is overwrought and off. For one, quantitative easing (QE) doesn’t erase the threat of deflation in the eurozone—it actually amplifies deflationary pressures because it weighs on banks’ profit margins. Unless you think eurozone banks have all of a sudden gone Marxist and aren’t profit motivated (they haven’t), you can probably see this discourages lending, and without lending, money supply doesn’t grow—dis- or deflationary. Also, weakening the euro may make exports more attractive but it also makes imports more expensive—and for businesses competing in the global economy, the effect is largely zero sum. QE didn’t work in the US or UK and it hasn’t worked in Japan—and we don’t see the eurozone being the exception to the rule.   

Global Market Update

Market Wrap-Up, Thursday Jan 29 2015

Below is a market summary as of market close Thursday, 1/29/2015:

  • Global Equities: MSCI World (+0.3%)
  • US Equities: S&P 500 (+1.0%)
  • UK Equities: MSCI UK (-1.0%)
  • Best Country: USA (+1.0%)
  • Worst Country: New Zealand (-3.8%)
  • Best Sector: Information Technology (+0.8%)
  • Worst Sector: Energy (-1.0%)
  • Bond Yields: 10-year US Treasury yields rose 0.03 percentage point to 1.75%.

Editors' Note: Tracking Stock and Bond Indexes

Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.