|
During the dot.com bubble, from mid-98 to mid-99, the Fed was raising interest rates regularly. At each rise, the stock market fell back for a day or two, and then continued upwards. Much the same phenomenon was present during the period mid-2003 to mid-2005, when regular increases in the Fed rate scarcely slowed the rise in stock prices. The current series of rate cuts looks remarkably like the mirror image of these developments. In January stock markets seemed to be reflecting more frequently the outlook of the economy and showing a reduced dichotomy with bond markets, but the old habits of rebounding on Fed rate cuts die hard. |
|
|
|
This is what a fly on the wall heard at a meeting of US policy makers: |
|
|
|
Bush: Mornin’, guys. I’ve just about got on top of “sub-prime”, but now you’re hitting me with “CDOs”, “CDS” and “monolines”, and I’m lost. But I know folk are complaining, and I don’t want that in an election year. Besides I’ve got my legacy to worry about. Do something, and quick! |
|
|
|
Paulson: We could give money back to the American people in a tax cut. We could even let the middle classes have some of it, rather than just the rich. That way they’ll keep spending. But forget the poor; they don’t pay enough tax to worry about, and don’t seriously spend anyway. |
|
|
|
Bernanke: That’s not enough by itself. You’ve got to make borrowing cheap so that households can continue spending more than they earn. In fact, the best idea of all is drop interest rates below the inflation rate. That way, households have no incentive to save and every incentive to buy today, for tomorrow it’ll be dearer – except for housing, that is, but we’ll just have to let that sector go to hell. |
|
|
|
Paulson: Won’t interest cuts lower the dollar and increase inflation? |
|
|
|
Bernanke: Sure, but no more than your tax cutting. Listen, do want me to save the economy or not? |
|
|
|
Walker (the Comptroller): Forgive me, gentlemen, but do you not think our addiction to debt has gone a bit too far? Besides, we’ve got escalating health costs and the Federal Budget will not be able to handle the subsidies if we go on like this. Lowering interest rates, cutting taxes and weakening the dollar, isn’t that just giving another twist to the vicious circle until one day the world calls “time up”? |
|
|
|
Bush: Wrap up, Dave. You’re always worrying about tomorrow, and our problems are today. You don’t even have to face losing your job when the other lot get in. And won’t it be fun to watch them deal with the mess we leave them. Yup, that’ll be a legacy I can be proud of! |
|
|
|
Walker: But, Mr President, Sir, there are rumours that our currency is becoming the borrowing choice for the carry trade. |
|
|
|
Bush: I don’t know what you’re talking about, Dave, but do shut up! |
|
|
|
On his second anniversary as Chairman of the Fed, our hopes that Bernanke would be different have been dashed. He really is Greenspan Mark II. Faced with such “responsible” policy making by the leaders of the world’s largest economy, what are fixed-income investors on this side of the Atlantic to do? We rather think we have been consistent in our answer: quality bonds, ten years (but watchful) in USD and EUR, reduced USD exposure, increased role of linkers and, for the risk-taking part of your portfolio, emerging market bonds in local currencies. Better to focus on emerging markets with a surplus. That rather excludes Turkey, where we recommend profit taking. |
|
|
|
The monoline situation is very precarious and the repercussions would be so severe that we cannot imagine the US authorities not coming to the rescue, curiously enough at New York State level rather than Federal. |
|
|
|
Focus |
|
|
|
(!) USA: the Fed is open to accusations of over-reaction to the fall in stock markets. New housing sales at lowest since 1995 and price falls accelerating. Sales of durables quite high. Exports up through weaker USD? |
|
|
|
(–) France: consumer confidence in France at its lowest level for 20 years. The revelations of the SocGen saga are far from over |
|
|
|
(–) China : Premier Wen Jiaao foresees 2008 as a difficult year economically, with inflation the highest in ten years and a US slow down |
|
|
|
(+) Switzerland: record trade surplus in 2007 at nearly CHF 14 billion, up 15% on 2006. UBS AGM 27 February. Consolidated losses for 2007 CHF 4.4 billion |
|
|
|
(+) positive for bonds (–) negative for bonds (!) watch out (?) begs a question |
|
|