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Fed Up With The Fed
- 1. Fed Up Fed 27 February 2014 War Room
- 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck Product UpdatesScenario Updates
- 3. I. Market Update II. Fed Up Fed III. Scenarios IV. HiddenLevers Use Cases Fed Up Fed
- 5. Market Update Commodities Gains Stick Home Prices Taking a Breather Chinese Economy Pooped Markets Back in Black for 2014
- 6. Macro Snapshot Are home prices about to shift down with rates, or vice-versa? Commodities are rebounding, but copper (global indicator) is weak. Unemployment and CPI A-OK.
- 8. Fed 2014 – Consensus is Over Fed’s Lockhart: Expect a 2015 Rate Hike 19Feb Fed’s Fisher: No Rethinking Pace of Taper 14Feb Yellen inherits fractious Fed, minutes show 19Feb Fed’s Plosser: Taper Process Might Need To Be Quicker 14Feb Yellen stresses continued low-rate policy 19Feb
- 9. Fed 2014 – View on Inflation LOL – Fed worried about unemployment going to low: tight labor market = people get paid more = inflationary Inflation in check dollar stable Inflation should be higher as growth is higher Right now – softer spending + production Low inflation = Fed can maintain stimulus Focus on Core inflation, not short term commodities hijinks No inflationary pressure from tech sector doing well Core CPI sources: HiddenLevers
- 10. Fed 2014 – View on Unemployment sources: HiddenLevers, Fortune already irrelevant to retail expect volatility on days when data comes out youth unemployment 20% (still rising) headline number not a good snapshot labor market is increasingly complex Unemployment Lever is losing relevancy Fed – no more focus on top line unemployment for policy stance Don’t bank on previous Fed statements about 6.5% threshold Also losing relevancy in 2014 marijuana prohibitions celebrities in advertising
- 11. Fed 2014 – View on Taper source: BusinessInsider, Kiplinger, MarketWatch Depending on market reaction, rates may rise at a measured .05% per QE reduction, or at a more anxious .1% per step 10b/month trimming in place until April/May at least Given current trajectory, taper will finish by Q4 2014 (Goldman forecast) Given disagreement rising at the Fed, tread carefully.
- 12. Fed 2014 – View on Interest Rates FOMC Dec 2013 projections: • 1 year until first rate hike • 3 years until 2% fed rate. 2013 projection of 2015 rate hike still holds. Economists’ median forecast is rate hike in March 2015. source: Fed Reserve Bank SF, KKR
- 13. End of QE ---> rate hike 3-6 months of lag likely Inflation is good, but not too much commodities 2014 rise = inflation? too early Fed Up Fed – Recap unemployment top line = irrelevant
- 14. HiddenLevers FED UP FED – SCENARIOS
- 15. Fed Stress Tests Overview source: Federal Reserve “The … Dodd-Frank Act (DFA) stress tests are regulatory tools the Federal Reserve uses to ensure that financial institutions have … adequate capital.” Three scenarios released every Nov: • Baseline (Good) • Adverse (Bad) • Severely Adverse (Ugly) 2013 versus 2014 differences: • Equity downside risk much greater • Risk on = Loftier valuations • Baseline 10y yield forecast raised
- 16. Fed Stress Tests 2014: Baseline Scenario source: Federal Reserve, HiddenLevers Economic growth largely unchanged S&P up 10% from current levels 10y rates up 120bp by Q1 2016 Q4 2016 rose 4% 4.4% YoY
- 17. Fed Stress Tests 2014: Adverse Scenario Economy in slight recession 10y rates up almost 300bp by Q1 2016 S&P drop raised -25% -34% Stagflation Not Deflation
- 18. End of QE - Update CPI lower unemployment lower no stagflation source: HiddenLevers Goodbye Outlier Scenarios Bond Exodus now priced in Rates have risen, but so have markets HL was wrong Bond Exodus based off 1994 bond crash 10y yields coming in PIMCO dire straits: 2013 bond exodus, 2014 El-Erian exodus 10y yields
- 19. Scenario: End of QE Not Sure Easy Money, No Hangover Good Economy Back on Track Bad Deflation Strikes Back Inflation needs to be monitored. We will introduce a runaway inflation scenario if needed. For now, it is imprudent re QE We are back on track: 10y target = 3% S&P target = 1900 Scenario priced in Taper just began, and commodities spiking due to weather – deflation is paused
- 21. The Advisor Conundrum Am I too late to the equities rally ? Are bonds a safe harbor or a trap?
- 22. Winners + Losers (for the coming rate hike) Losers • Intermediate + long bond funds • Mortgage REITs, BDCs, utilities Winners • Individual bonds + bond ladders • Hold to maturity in HiddenLevers Summer 2013 bond funds sensitive to rates source: HiddenLevers
- 23. HiddenLevers Use Cases scenario Rising Interest Rates portfolio entry Fixed Income macro themes Rising Raters Winners scenario Fed Stress Tests scenario End of QE Fed up Fed
- 24. • Charting Redesign • Economic Data Center – Active Tab • Securities Risk Profile – fund characteristics • Fixed Income – option to hold to maturity • Grendel Integration – single sign on Coming soon – Risk Monitoring Alpha: - Run scenarios against whole book of business - Auto stress test run nightly, summary stats emailed - Basic dashboard showing most at risk portfolios Product Update