No surprises from the Fed
July 27, 2017

Mint - Blain's Morning Porridge

No surprises from the US Federal Reserve last night. Unchanged rate talk and hints about reducing the balance sheet "relatively soon". We can go figure what "relatively" means when inflation picks up.

The stock market soared and VIX tumbled to a record low. Was that a warning about complacency? Since the 2008 crisis we've been here many times before – worrying about signals the economy is strengthening when suddenly it has dived weaker.

But, those us with longer memories can recall when the US economy has turned dramatically stronger – and in 1994 (yes, I remember it well), when the Fed acted prematurely, spiked the recovery and triggered what we'd now call a massive treasury market tantrum.

This time it feels very different (dangerous words). I suspect we are very much still on course towards normalization – a new kind of new normal: low rates, low inflation and steady state low growth.

· Stuff to watch today: Dovish Fed boosts stocks (record Dow) and dollar crashes. Lots of corporate results to wonder and worry about!

· Stuff to think about: Deutsche Bank's results show it's taken yet another thumping – difficult to see how it plays catch up and regains market relevance when it's still swinging the headcount axe. Where is the US economy when inflation remains so low? What are the risks to Europe of the low dollar?

Listening to the flow from our trading desks, clients and what I read on blogs and research, there are two distinct views on current markets:

1) Everything is a bubble about to burst. Financial asset prices are massively vulnerable to correction as central banks normalize and cut the market distortions of quantitative easing policies. Yada yada yada, been singing this song since QE began… (doesn't mean it's not right!)

2) The global economy is in the Goldilocks zone. We have an unbeatable combination of low interest rates, positive fiscal policy statements, strong political will, pent-up demand, plus technical factors suggesting markets can go higher. All in all, it's unbeatable, so pile into further stock market upside.

So where are we really? What do central banks know that we don't? (That is a rhetorical question – they are guessing as well.) Me? I'm waiting for a correction and then I'm putting my buying boots on…

My macro economist – Martin Malone – is a massive fan of further upside. (Happy to arrange for anyone to speak with him.)

He reckons global markets will drive higher – and he's been absolutely spot on so far this year! He's looking at central bank balance sheets, zero interest rates, forward guidance, positive output gaps, a shift from low inflation, low investment and low productivity towards far stronger political initiatives, policy action and private sector investment.

We're also seeing record corporate profits and massive savings from low energy costs. He's looking at a series of fundamental shifts across the economic factors that drive economies – and he discerns positives across the board.

He says: "The bottom line is economic efficiencies or run rate is much improved compared to any period of the past decade. Economists talk about growth broadening, but it's not just the economy. All public and private sector balance sheets are aligned with the current step up in economic efficiency."

I can't help be somewhat persuaded by Martin's obvious enthusiasm for the global recovery to finally break out of the last eight years of post-crisis lethargy. But, I'm nervous – too worried perhaps about the reality of the current political incompetency in the UK, US and elsewhere.

I'm nervous the positive energy won't be sustained, and I'm particularly concerned about the pernicious effects of inequality across economies where underemployment and travesties like zero hours contracts are inflating corporate profits. These might fill executive wallets but they don't create growth but resentment and potential social instability. But, hey-ho, get over it…

Are we still in a bull market in credit? Martin has also been looking at investment grade credits and concludes that even though investment grade (IG) credit has tightened back to 185 basis points, that's the exact average of the past six decades! With the global economy in "Goldilocks", he sees that as a clear bull signal and predicts 100 in 2018.

Again, I'm not so certain myself – the distorting effects of QE buying corporate paper isn't just what central banks have absorbed. It's the effect on market mindset that matters. Credit funds have been buying IG debt secure in the expectation central banks will buy it even as it tightens – it's been a no-brainer of a credit trade.

Fascinating article in the Financial Times yesterday pointing out the real beneficiaries of QE have been a limited number of global large corporate borrowers who've been filling their boots with cheap debt to meet QE appetite. How that promotes small and mid-sized enterprise growth by channeling money into the real economy beats me, but, hey, why worry.. it has kept interest rates low..

So...what can we conclude – the Fed is on hold, normalization is in the air, and the stock markets love the current market. Hm...thin summer markets and thin volumes…

No Porridge tomorrow...

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

No surprises from the US Federal Reserve last night. Unchanged rate talk and hints about reducing the balance sheet "relatively soon". We can go figure what "relatively" means when inflation picks up.

The stock market soared and VIX tumbled to a record low. Was that a warning about complacency? Since the 2008 crisis we've been here many times before – worrying about signals the economy is strengthening when suddenly it has dived weaker.

But, those us with longer memories can recall when the US economy has turned dramatically stronger – and in 1994 (yes, I remember it well), when the Fed acted prematurely, spiked the recovery and triggered what we'd now call a massive treasury market tantrum.

This time it feels very different (dangerous words). I suspect we are very much still on course towards normalization – a new kind of new normal: low rates, low inflation and steady state low growth.

· Stuff to watch today: Dovish Fed boosts stocks (record Dow) and dollar crashes. Lots of corporate results to wonder and worry about!

· Stuff to think about: Deutsche Bank's results show it's taken yet another thumping – difficult to see how it plays catch up and regains market relevance when it's still swinging the headcount axe. Where is the US economy when inflation remains so low? What are the risks to Europe of the low dollar?

Listening to the flow from our trading desks, clients and what I read on blogs and research, there are two distinct views on current markets:

1) Everything is a bubble about to burst. Financial asset prices are massively vulnerable to correction as central banks normalize and cut the market distortions of quantitative easing policies. Yada yada yada, been singing this song since QE began… (doesn't mean it's not right!)

2) The global economy is in the Goldilocks zone. We have an unbeatable combination of low interest rates, positive fiscal policy statements, strong political will, pent-up demand, plus technical factors suggesting markets can go higher. All in all, it's unbeatable, so pile into further stock market upside.

So where are we really? What do central banks know that we don't? (That is a rhetorical question – they are guessing as well.) Me? I'm waiting for a correction and then I'm putting my buying boots on…

My macro economist – Martin Malone – is a massive fan of further upside. (Happy to arrange for anyone to speak with him.)

He reckons global markets will drive higher – and he's been absolutely spot on so far this year! He's looking at central bank balance sheets, zero interest rates, forward guidance, positive output gaps, a shift from low inflation, low investment and low productivity towards far stronger political initiatives, policy action and private sector investment.

We're also seeing record corporate profits and massive savings from low energy costs. He's looking at a series of fundamental shifts across the economic factors that drive economies – and he discerns positives across the board.

He says: "The bottom line is economic efficiencies or run rate is much improved compared to any period of the past decade. Economists talk about growth broadening, but it's not just the economy. All public and private sector balance sheets are aligned with the current step up in economic efficiency."

I can't help be somewhat persuaded by Martin's obvious enthusiasm for the global recovery to finally break out of the last eight years of post-crisis lethargy. But, I'm nervous – too worried perhaps about the reality of the current political incompetency in the UK, US and elsewhere.

I'm nervous the positive energy won't be sustained, and I'm particularly concerned about the pernicious effects of inequality across economies where underemployment and travesties like zero hours contracts are inflating corporate profits. These might fill executive wallets but they don't create growth but resentment and potential social instability. But, hey-ho, get over it…

Are we still in a bull market in credit? Martin has also been looking at investment grade credits and concludes that even though investment grade (IG) credit has tightened back to 185 basis points, that's the exact average of the past six decades! With the global economy in "Goldilocks", he sees that as a clear bull signal and predicts 100 in 2018.

Again, I'm not so certain myself – the distorting effects of QE buying corporate paper isn't just what central banks have absorbed. It's the effect on market mindset that matters. Credit funds have been buying IG debt secure in the expectation central banks will buy it even as it tightens – it's been a no-brainer of a credit trade.

Fascinating article in the Financial Times yesterday pointing out the real beneficiaries of QE have been a limited number of global large corporate borrowers who've been filling their boots with cheap debt to meet QE appetite. How that promotes small and mid-sized enterprise growth by channeling money into the real economy beats me, but, hey, why worry.. it has kept interest rates low..

So...what can we conclude – the Fed is on hold, normalization is in the air, and the stock markets love the current market. Hm...thin summer markets and thin volumes…

No Porridge tomorrow...

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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