Commentary

Fisher Investments Editorial Staff

A Buyback Boost?

By, 09/17/2014

Who’s buying equities these days? If trade volumes are any indication, not many folks—at least according to headlines.[i] Which means, by Fleet Street logic, if stock buybacks are surging, corporations must be the only buyers—and without them, the bull would be in trouble, lacking buying power to drive stocks forward. But this theory ignores some key things, like how markets work—and how buybacks really influence them. Stock buybacks are groovy, but they aren’t the only thing driving this bull market.

Buybacks have been hot for this entire bull market, but 2014 has been especially gangbusters. US corporations bought back $338.3 billion of stock in the first half of 2014, the most of any six-month period since 2007. The number of companies with a repurchase program is the highest since 2008. At the same time, trading volumes are low, so headlines put two and two together (they think) and say if buybacks stop, the bull’s out of gas because regular folks just aren’t buying. 

This is sheer fallacy. Corporations aren’t the only buyers. They may get the most headlines, but with 329 and 164 billion shares changing hands on the NASDAQ and NYSE, respectively, year to date,[ii] it’s clear many, many others are trading too. The $338 billion in buybacks is a teensy share of the $6.5 trillion[iii] worth of shares that have traded hands in the NYSE this year alone—to say nothing of the many, many more that traded in the dozens of other trading venues in the US. Yes, volume has decreased in recent months—August had the smallest share volume in both the NASDAQ and NYSE for the year[iv]—but markets don’t need lots of activity to generate big moves.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Interest Rates

Words, Words, Words

By, 09/16/2014
Ratings184.083333

Janet Yellen shares a moment with ECB chief Mario Draghi at last month’s banker powwow in Jackson Hole. (Not pictured: The red pen Yellen might use to make some edits to the Fed’s policy statement.) Photo by Bradly Boner/Bloomberg via Getty Images.

So said Hamlet to Polonius in Act II, Scene 2, when asked what he was reading as he wandered the castle halls with his nose buried in parchment. We’ve always felt the same way about the forward guidance in the Fed’s meeting statements—the Fed’s supposed attempt at previewing future moves. They aren’t policy promises or prophesies. They’re just a bunch of words written in a language called Fedspeak, deliberately fuzzy so they don’t back the Fed into a corner. So we’re a wee bit puzzled by the punditry’s handwringing over the mere possibility of the Fed removing the words “considerable time” from its meeting statement this week. As in, changing the sentence saying, “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends …” Whether or not those two words go bye-bye, it says nothing about when rates actually will rise.

Commentary

Fisher Investments Editorial Staff

Does the US Stand Taller With a Strong Dollar?

By, 09/15/2014
Ratings74.857143

Cue the John Phillip Souza! The dollar is on the march higher lately, strengthening against most major currencies worldwide. And according to some, that’s proof the US economy has a leg up over the rest of the world! But currency strength or weakness doesn’t tell you much about economic vibrancy—and it tells you nothing about stock market direction. Our bullish outlook has nothing to do with the expected rise or fall of the greenback.

Currencies only move relative to one another, so arguably the best gauge of what “the dollar is doing” is the Broad Trade-Weighted US Dollar Index, which tallies the moves of the dollar versus 26 other major currencies, weighted by our total trade in each. Since reaching its low for the year on July 9, the dollar has risen fairly consistently versus most currencies. The Broad US Dollar Trade Weighted Index is up in seven of the last nine weekly reads, with the currency up over 2% during the span.[i] A narrower gauge measuring the USD against six currencies is up more, over 5% in the same period.[ii] (Unsurprisingly, most media accounts cite this second, bigger figure. More eye catching, we guess.)

The punditry’s explanations for these moves are many and varied. Some cite “political shocks” elsewhere—Iraq, Ukraine, the Scottish referendum—and claim these events made the dollar look that much greener. Others cite the eurozone’s uneven recovery. The US is their “safe haven,”[iii] if you will, from these global trouble spots. To many, a strong dollar also makes the US economy far more attractive than its peers.  

Commentary

Elisabeth Dellinger
Into Perspective, Personal Finance

Shinzo Abe Walks Into a Bar

By, 09/15/2014
Ratings74.357143

This is not a picture of Shinzo Abe walking into a bar, but we like how jolly he looks. Photo by Matt Cardy/Getty Images.

Here is a wacky idea for Shinzo Abe, the Prime Minister on a quest to revitalize Japan’s economy: Fly to the UK and have a beer or two with a fellow named Tim Martin.

Commentary

Fisher Investments Editorial Staff
MarketMinder Minute

MarketMinder Minute | Can Geopolitical Conflict Knock Stocks?

By, 09/15/2014
Ratings44.625

This MarketMinder Minute looks at the effects of geopolitical conflicts on the stock market.

Interested in market analysis for your portfolio? Why not download our in-depth analysis of current investing conditions and our forecast for the period ahead. Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Commentary

Fisher Investments Editorial Staff
Deficits

A Surplus of Fun Factoids About the Federal Deficit!

By, 09/12/2014
Ratings973.917526

When your next dinner party conversation turns, inevitably, to public finance, here are a few fun factoids you can “Wow!” all your guests with.

Thursday, the US Treasury reported that with 11 months of fiscal year 2014 in the books, the US deficit fell again on a year-over-year basis, to $589.5 billion—a 58% reduction from the peak, fiscal 2009’s $1.42 trillion. August 2014’s deficit was $128 billion, and the news media picked up the story, reporting it for what it is—a 13% year-over-year reduction in the deficit and just moved on. Of the last 30 Septembers, 24 posted a monthly surplus—so it seems likely even that $589.5 billion figure could drop. Perhaps to match the Congressional Budget Office’s (CBO’s) $506 billion forecast made last month! Absent were fears the US would morph into the next Greece, without the fun ruins.[i] Absent also were claims American austerity would crush demand. So what gives? Simple—sentiment is slowly catching up with reality, and the deficit is one way to see it.

In fiscal year 2007, the US federal government spent $162 billion more than it took in. But when recession arrived the following fiscal year, deficits rose to $455 billion, based on a slight dip in revenue and increased spending. The following year, fiscal 2009, crisis response boosted spending sharply, in the form of the American Recovery and Reinvestment Act (fiscal stimulus) and spending associated with other crisis response programs. Meanwhile, the feds’ tax receipts fell by $419 billion. The combination resulted in surging deficits, which peaked at more than $1.4 trillion. Exhibit 1 shows the progression from Fiscal 2007’s pre-recession low through the present.

Commentary

Fisher Investments Editorial Staff
Capitalism, Geopolitics, Media Hype/Myths

There Is Nothing About Terror to Fear But Fear Itself

By, 09/11/2014
Ratings414.207317

Thirteen years ago Thursday, Americans were tragically reminded terrorist attacks can happen at any time, without warning, and bring devastating loss of life. This is always true, but perhaps more on folks’ minds now with several Western leaders warning of the threat from US and EU passport holders fighting with ISIS in Iraq and Syria. For investors, being mentally prepared is important. We aren’t predicting an event (there isn’t any way to) and we pray the day never comes—but being aware of the possibility and potential market impact is key to maintaining discipline. Especially because your instinct might very well be to sell—yet history shows any market impact is typically fleeting.

Many folks take it as given that terrorist strikes on western soil are deeply negative for stocks—after all, the S&P 500 Price Index lost -11.6% during the first five trading days when markets reopened after 9/11, and full-year returns were -13%. Yet that -13% has far less to do with 9/11 than with the bear market that began nearly 18 months prior, on March 24, 2000, as the Tech Bubble burst. Stocks were down -17.3% in the year through September 10, 2001—before the planes hit. They actually rallied between 9/21 and the end of the year, as shown in Exhibit 1.

Exhibit 1: September 11th Attacks

Commentary

Fisher Investments Editorial Staff

Running of the Bears?

By, 09/10/2014
Ratings434.383721

Evidently, bears just became an endangered species—Wall Street bears, that is. Some notable long-time pessimists are changing their tune, leading some to wonder if the “capitulation of the bears”[i] typical of euphoric peaks is starting. It’s a fair question, though the fact folks are thinking about this is itself a sign sentiment is in check. Moreover, all it takes is some simple math to see these newly minted bulls aren’t exactly running wild with optimism.

In a full-fledged capitulation, you usually see some long-time permabears throw in the towel and jump on the super-bull bandwagon. They’re tired of being wrong year after year as stocks continually defy their “look out below!” warnings of doom and gloom. They’re tired of being made fun of by an increasingly optimistic punditry. So they give up and start forecasting 30% up years with the rest of them—a pretty fair sign sentiment is out of whack.

This isn’t what’s happening today. Though some experts are sunnier, plenty of doom and gloomers remain, and they aren’t yet the laughing stock of Wall Street. They’re journalists’ go-to sources for quotes to fill articles highlighting potential risks or threats, and they command reverence.  

Commentary

Emily Dunbar

Three Investing Don’ts for a Maturing Bull Market

By, 09/10/2014
Ratings1343.906716

While euphoria is far off today, it’s not too early to consider three key mistakes investors all-too-often make when it arrives. Source: Bloomberg/Getty Images.

If history is any guide, this bull market likely ends with investors becoming too euphoric about stocks’ prospects—not seeing that expectations of a shimmering financial future outpace a dimming economic reality. This doesn’t appear to be all that close today, but the time to prepare yourself to shun over-optimism isn’t when it actually arrives, it’s beforehand. Now, this doesn’t mean you should squirrel away investible cash waiting for the drop. It just means you shouldn’t chuck your disciplined investing strategy due to emotion—on the upside or down. Here are a few principles to help guide you as this bull market matures.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

And Now for Something Completely Different

By, 09/09/2014
Ratings333.954545

Or not. Because, let’s face it, Monday’s financial news was dominated by a bunch of things that have dominated it for months. Like Scotland’s upcoming independence vote, China’s wobbly economic data, politicians pledging to do something about US corporate inversions, Japan’s struggling economy and yet more EU/Russia sanction talk. Headlines might promise some of these developments are game-changing, because that’s how you get eyeballs, but in our view, none should cause long-term investors to radically shift course.

We start in Scotland, where a weekend poll showed the “yes” vote pulling ahead for the first time, 51 to 49—and all manner of speculating and hand-wringing followed. Never mind that the pollsters simply tossed out the still-sizeable chunk of undecided voters, making its findings a wee bit dubious. And never mind that the other five major polling sources still show a sizeable (though narrowing) lead for the unionists. One poll was good enough to kick another round of “what if?!” speculation into overdrive—with much of it speculating on the political future of Prime Minister David Cameron and the opposition Labour Party (much of whose traditional support base is in Scotland) should independence win.

Last week, we wrote:

Commentary

Fisher Investments Editorial Staff
Deficits

A Surplus of Fun Factoids About the Federal Deficit!

By, 09/12/2014
Ratings973.917526

When your next dinner party conversation turns, inevitably, to public finance, here are a few fun factoids you can “Wow!” all your guests with.

Thursday, the US Treasury reported that with 11 months of fiscal year 2014 in the books, the US deficit fell again on a year-over-year basis, to $589.5 billion—a 58% reduction from the peak, fiscal 2009’s $1.42 trillion. August 2014’s deficit was $128 billion, and the news media picked up the story, reporting it for what it is—a 13% year-over-year reduction in the deficit and just moved on. Of the last 30 Septembers, 24 posted a monthly surplus—so it seems likely even that $589.5 billion figure could drop. Perhaps to match the Congressional Budget Office’s (CBO’s) $506 billion forecast made last month! Absent were fears the US would morph into the next Greece, without the fun ruins.[i] Absent also were claims American austerity would crush demand. So what gives? Simple—sentiment is slowly catching up with reality, and the deficit is one way to see it.

In fiscal year 2007, the US federal government spent $162 billion more than it took in. But when recession arrived the following fiscal year, deficits rose to $455 billion, based on a slight dip in revenue and increased spending. The following year, fiscal 2009, crisis response boosted spending sharply, in the form of the American Recovery and Reinvestment Act (fiscal stimulus) and spending associated with other crisis response programs. Meanwhile, the feds’ tax receipts fell by $419 billion. The combination resulted in surging deficits, which peaked at more than $1.4 trillion. Exhibit 1 shows the progression from Fiscal 2007’s pre-recession low through the present.

Commentary

Fisher Investments Editorial Staff
Capitalism, Geopolitics, Media Hype/Myths

There Is Nothing About Terror to Fear But Fear Itself

By, 09/11/2014
Ratings414.207317

Thirteen years ago Thursday, Americans were tragically reminded terrorist attacks can happen at any time, without warning, and bring devastating loss of life. This is always true, but perhaps more on folks’ minds now with several Western leaders warning of the threat from US and EU passport holders fighting with ISIS in Iraq and Syria. For investors, being mentally prepared is important. We aren’t predicting an event (there isn’t any way to) and we pray the day never comes—but being aware of the possibility and potential market impact is key to maintaining discipline. Especially because your instinct might very well be to sell—yet history shows any market impact is typically fleeting.

Many folks take it as given that terrorist strikes on western soil are deeply negative for stocks—after all, the S&P 500 Price Index lost -11.6% during the first five trading days when markets reopened after 9/11, and full-year returns were -13%. Yet that -13% has far less to do with 9/11 than with the bear market that began nearly 18 months prior, on March 24, 2000, as the Tech Bubble burst. Stocks were down -17.3% in the year through September 10, 2001—before the planes hit. They actually rallied between 9/21 and the end of the year, as shown in Exhibit 1.

Exhibit 1: September 11th Attacks

Commentary

Fisher Investments Editorial Staff

Running of the Bears?

By, 09/10/2014
Ratings434.383721

Evidently, bears just became an endangered species—Wall Street bears, that is. Some notable long-time pessimists are changing their tune, leading some to wonder if the “capitulation of the bears”[i] typical of euphoric peaks is starting. It’s a fair question, though the fact folks are thinking about this is itself a sign sentiment is in check. Moreover, all it takes is some simple math to see these newly minted bulls aren’t exactly running wild with optimism.

In a full-fledged capitulation, you usually see some long-time permabears throw in the towel and jump on the super-bull bandwagon. They’re tired of being wrong year after year as stocks continually defy their “look out below!” warnings of doom and gloom. They’re tired of being made fun of by an increasingly optimistic punditry. So they give up and start forecasting 30% up years with the rest of them—a pretty fair sign sentiment is out of whack.

This isn’t what’s happening today. Though some experts are sunnier, plenty of doom and gloomers remain, and they aren’t yet the laughing stock of Wall Street. They’re journalists’ go-to sources for quotes to fill articles highlighting potential risks or threats, and they command reverence.  

Commentary

Emily Dunbar

Three Investing Don’ts for a Maturing Bull Market

By, 09/10/2014
Ratings1343.906716

While euphoria is far off today, it’s not too early to consider three key mistakes investors all-too-often make when it arrives. Source: Bloomberg/Getty Images.

If history is any guide, this bull market likely ends with investors becoming too euphoric about stocks’ prospects—not seeing that expectations of a shimmering financial future outpace a dimming economic reality. This doesn’t appear to be all that close today, but the time to prepare yourself to shun over-optimism isn’t when it actually arrives, it’s beforehand. Now, this doesn’t mean you should squirrel away investible cash waiting for the drop. It just means you shouldn’t chuck your disciplined investing strategy due to emotion—on the upside or down. Here are a few principles to help guide you as this bull market matures.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

And Now for Something Completely Different

By, 09/09/2014
Ratings333.954545

Or not. Because, let’s face it, Monday’s financial news was dominated by a bunch of things that have dominated it for months. Like Scotland’s upcoming independence vote, China’s wobbly economic data, politicians pledging to do something about US corporate inversions, Japan’s struggling economy and yet more EU/Russia sanction talk. Headlines might promise some of these developments are game-changing, because that’s how you get eyeballs, but in our view, none should cause long-term investors to radically shift course.

We start in Scotland, where a weekend poll showed the “yes” vote pulling ahead for the first time, 51 to 49—and all manner of speculating and hand-wringing followed. Never mind that the pollsters simply tossed out the still-sizeable chunk of undecided voters, making its findings a wee bit dubious. And never mind that the other five major polling sources still show a sizeable (though narrowing) lead for the unionists. One poll was good enough to kick another round of “what if?!” speculation into overdrive—with much of it speculating on the political future of Prime Minister David Cameron and the opposition Labour Party (much of whose traditional support base is in Scotland) should independence win.

Last week, we wrote:

Commentary

Fisher Investments Editorial Staff

ECB’s Latest Move Spurs Currency War Chatter

By, 09/08/2014

In a much-anticipated move last Thursday, ECB President Mario Draghi announced another set of monetary measures designed to reinvigorate the eurozone’s economic recovery—including a bond-buying program many call quantitative easing (QE). The euro responded by hitting a 14-month low, leading some to think a weaker currency is Draghi’s ulterior motive—and bond buying is his shot in an often-feared, rarely seen “currency war.” But a currency war requires two participants, something that hasn’t happened over this expansion despite frequent worries—and considering a weak currency isn’t an economic panacea, it’s tough to imagine this time going any different.

Ostensibly, the ECB’s goal is to get money moving again. The bank cut its three main interest rates by 10 basis points, bringing the central bank deposit rate to -0.20%. Theoretically, charging banks to hold excess reserves at the ECB is supposed to stimulate lending, consumption and business expansion. But the rate has been negative for three months, and banks have simply shifted reserves to higher-yielding assets while continuing deleveraging.[i] Tiny rate tweaks likely won’t move the needle—which Draghi admitted, explaining the move was a technicality to bring all rates to their lower bound—ergo, bond buying, amount TBD, beginning in October and focusing on asset-backed securities (ABS) and euro-denominated covered bonds (debt backed by cash flows from loans held by the issuing bank).[ii] Draghi hasn’t called it QE, and unlike traditional QE, the ECB won’t buy government bonds, but the resemblance is striking, and the theoretical goal—boosting banks’ liquidity and lowering businesses’ and consumers’ borrowing costs—is the same.

However, others argue Draghi’s stated objective is a smoke screen, claiming this is actually a competitive devaluation, or more colloquially, a “currency war.” They claim Draghi wants to race other nations to get the (perceived!) weak currency edge in exports.

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings813.882716

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
Ratings874.109195

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 , The Wall Street Journal, 09/17/2014

MarketMinder's View: Don’t you feel like the title of this article should have an exclamation point or two after it? “Read the Full Text of the Fed’s Statement!!!” Just kidding, here’s one of the more dull things you’ll ever read (boldface ours): “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” Zzzzzzzzzzzzzzz. [Drools on keyboard.] And yet whether the two bolded words would be in this statement has led to a whole lot of misplaced handwringing this week. Talk is cheap, especially fedspeak. Which is basically marketing spin. For more, see our 09/16/2014 commentary, “Words, Words, Words.” About the only meaningful part of this Fed statement? That they will slow quantitative easing bond buying again, to a pace of $15 billion in October. Which is no surprise.

By , The New York Times, 09/17/2014

MarketMinder's View: A few things about this. One, globalization is not synonymous with the decline of US manufacturing. In fact, many US manufactured goods source parts from other places around the world, which is what globalization is: an interconnected global economy where nations specialize in what they do best and trade flows move freely. It would be to our great detriment if globalization “retreated.” Second, there is no decline in US manufacturing. US manufacturing output has steadily risen despite fewer workers in the industry. Why? Because technological advance is the real key that’s destroyed American manufacturing jobs. See it for yourself in this chart we created on the St. Louis Federal Reserve’s wonderful website comparing US industrial production and US manufacturing employment as a share of total payrolls. We manufacture more with fewer workers, and that’s good for the economy, not bad. To paraphrase Milton Friedman, we could go hire a bunch of folks to dig ditches with spoons. Employment would skyrocket. But is this a good use of scarce capital? In case you want even more on this, maybe read Todd Bliman’s 11/09/2010 column, “The Ever-Evolving Economic Engine” or this 04/28/2014 article by Businessweek’s Charles Kenny, “Why Factory Jobs Are Shrinking Everywhere.” It’s easy to blame China and foreigners, riling up the xenophobia, but the facts don’t comport to that theory very neatly.

By , Vox, 09/17/2014

MarketMinder's View: So the claim here is Obama, by not nominating two more “unemployment fighters” to the FOMC, has doomed America to many to years of unemployment because the Fed hasn’t been as accommodative as—wait for it—the UK(!). This is just plain ol’ backwards. First, the linkage between monetary policy and employment is not nearly this direct. Second, quantitative easing—the policy launched with the intent of boosting hiring—wrongheadedly flattened the yield curve, a disincentive for banks to lend because it meant the spread between banks’ funding costs and interest revenues were lower (less profitable lending). Bank lending is the transmission mechanism for the Fed’s policy to reach the real economy, so a lower yield spread will work against the Fed’s intent to “stimulate” growth, which begets hiring. But the big miss here is the commentary involving the UK. The UK recovery was back and forth until the Bank of England ended quantitative easing. They stopped buying bonds long before the US started winding down its program, and their economy accelerated! The Fed actions cited here as “unwisely tightening monetary policy” are the very actions that caused the UK economy to perk!

By , The Wall Street Journal, 09/17/2014

MarketMinder's View: We guess the desired reaction to “For Now” is something like, “Oooooooooooooooooooo! A potential downgrade!” But when you read the rationale, it’s a little more like, *yawn*. It’s all predicated on the long-run costs of social security, which is an entitlement program that could be altered at any point, like it has been historically. Second, it cites the dollar’s status as a reserve currency as the factor allowing the US to “carry more debt than other nations.” Yet Japan doesn’t have the world’s reserve currency and it does have more than twice the US’s debt load as a percent of GDP. The pound is also not the dominant reserve currency, and yet it has similar debt levels and low rates. See, Moody’s has it backwards. The simple truth is the vast amount of outstanding US Treasury securities is what allows the dollar to be the biggest player in the forex reserve market. Anyway, it’s a ratings agency—which aren’t exactly known for displaying oodles of forecasting prowess.

Global Market Update

Market Wrap-Up, Wed Sept 17 2014

Below is a market summary (as of market close Wednesday, 09/17/2014):

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.1%)
  • UK Equities: MSCI UK (+0.5%)
  • Best Country: Denmark (+1.7%)
  • Worst Country: New Zealand (-1.4%)
  • Best Sector: Materials (+0.4%)
  • Worst Sector: Energy and Consumer Staples (-0.2%)
  • Bond Yields: 10-year US Treasurys rose .06 to 2.63%

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.