Over My Shoulder | Mauldin Economics

Over My Shoulder

Michael Lewitt: Basket Cases

October 16, 2014

Michael Lewitt hits it straight down the fairway:

"We have been taught that bear markets do not begin until the yield curve inverts, which in turn is caused by aggressive tightening by the Federal Reserve. It is fair to ask whether this rule of thumb still applies when the yield curve and every other financial metric has been grossly distorted by five-plus years of zero interest rates and trillions of dollars of quantitative easing. Thus far in 2014, the 2/10 curve has flattened by about 75 basis points but is still steep at +186 basis points (as of October 14). Maybe markets will not require an inverted yield curve to decide that stocks should experience more than a run-of-the mill correction. Perhaps markets will decide that the failure of trillions of dollars of money printing and years of zero interest rates to create sustainable economic growth are reason enough for stocks to trade not at their current elevated valuations but at more modest levels that reflect more realistic (and lower) long-term growth prospects."

Download - TCS_10-15-14_Special.pdf

David Zervos: If only the DXY were in the SEP

October 8, 2014

Every now and then Zervos nails one. This one makes us think and plays right into my Code Red theme of currency wars. It is going to get serious in a few years. I really should follow this up with a letter at some point as the potential for things to get out of control increases with the dollar getting stronger and Japan and Europe pouring on the fuel.

"And from the current vantage point its very difficult to know how much of a tightening will occur in the US from rate raises, and how much will come from international forces. We could have the DXY at 125 and the FF rate at 1 percent in 2016. Or we could have the DXY at 100 and the FF rate at 2.75%. Both could be internally consistent with the same GDP, unemployment rate and PCE inflation forecasts. The difficulty as we look ahead is that pin pointing expectations for US rates and FX becomes increasing complex. We have to factor in policies from Europe, Japan and EM. The easy days of simple forward guidance are behind us. Its not just a BTD world because the Fed will always do more when things go wrong. In a world where growth recovers globally and policies normalize there are many asset price formations that could arise. There is no simple form of forward guidance."

Download - 141003_Zervos.pdf

Ben Hunt: “Going Gray”

October 8, 2014

Ben Hunt just continues to impress with his writing and thinking. It seems we are both worrying about the same thing: what does the world look like when monetary policy no longer works? This is his take on the question.

Download - 2014_10_01_Going_Gray.pdf