Global Debt and the Risk to Capitalism

The Federal Reserve Open Market Committee issued its interest rate decision Wednesday afternoon,deciding to leave rates unchanged for now,and anticipating only two rate hikes this year,rather than four.They are not actively considering negative interest rates,unlike the European Central Bank,which has just implemented them.*
Markets and central banks globally are beginning to realise that there are negatives to negative interest rates,responded Bill Gross of Janus Capital Management,portfolio manager of the Janus Global Unconstrained Bond Fund and co-founder of PIMCO.It's a more dovish Fed.The Fed is still way above the market.Treasuries are fully priced at these levels.The Fed is connected to the stock market,but I don't think they're responsive to rates being at zero.It's a negative for the finance industry,for pensioners and for savers.They can't earn as much as they should.*
I think,to a certain extent,capitalism is at risk.It doesn't break down,but at the margin,it's hindered and it's hampered.The long term effect basically hampers investment by institutions like insurance companies.*
I think the Fed has an historical sense that Fed Funds should be at 3 or 4%.The real problem is,the tremendous amount of debt in the global markets.When debt gets up to a substantial level,things can de-lever.It's debt that has come to the forefront the past several years in the global economy,and that's what we need to worry about.*
An economy can't grow very fast if wages can't grow more than .6%.I think TIPS are a decent value,to the extent the Fed will reach their 2% inflation target.*
iShares TIPS Bond ETF (TIP),Janus Global Unconstrained Bond Fund;A (JUCAX)

The Fed's Rate Hike:What Was Behind It and What It Means

The Federal Reserve announced today that it is hiking the Fed Funds Rate,its iconic interest rate,by 0.25%.*
This action marks the end of an extraordinary seven-year period during which the Fed Funds Rate was held near zero,said Federal Reserve chair Janet Yellen at a post-announcement press conference.It reflects the Open Market Committee's confidence that the economy will continue to strengthen.The Committee judged that a modest increase in the FFR target is now appropriate.The labour market has clearly shown continued improvement.Overall,the Committee sees the risk to both the labour market and economic growth as being balanced.
Low energy prices and the appreciation of the dollar have weighed on inflation.Long-term inflation expectations remain anchored.In considering future policy decisions,we will carefully monitor progress towards our 2% inflation goal.The limit on inflation is due to transitory factors which we expect to slacken over time.An abrupt tightening could increase the risk of pushing the overheated economy into recession.*
It's important not to overblow the significance of this first move-it's only a quarter of a percent.The policy we judge to be accommodative.I continue to judge there is slack in the economy:the depressed level of labour participation and the high level of part-time employment.With rates close to zero,we have less room to respond to negative shocks.If we do not begin to slightly reduce the amount of accommodation,the odds are good the economy would overshoot our goals.
It doesn't mean we need to see inflation reach 2% before we move again.I'm not going to give you a simple formula for when we would move again.It could be on a variety of different forms of evidence,but I don't want to give a simple benchmark.We do expect inflation to be moving up,but we don't expect it to reach 2%.
All oil prices need to do for us to reach our inflation goal is stabilise.I certainly grant that we've seen a number of shocks,but we don't expect them to drop much lower;but to stabilise.Market expectations are for oil to stabilise for awhile and then move up.*
Were there an unexpected,persistent change in financial market conditions,we would need to take them into account.I do not think that expansions die of old age,but the economy does get hit by shocks,and there are significant odds that the economy hits some unforeseen shock that sends it into recession,and of course we would respond.Some European central banks have cut their overnight lending rates;we could study taking the overnight rates into negative territory.This is something we have contemplated-our options.It would be nice to have a buffer in the FFR,to have some ability to respond.We have a far more resilient financial system now than we had before the financial crisis,but we will be evaluating this carefully.*
For average Americans,the Fed's decision reflects our confidence in the US economy.We see an economy that is on the path of sustainable improvement.I hope they will take this to mean that conditions will continue to strengthen and job prospects will be good.Some consumer borrowing rates,some credit card rates (and adjustable rate mortgage and small business loan rates) may move up slightly.
Gradual rate hikes does not mean mechanical,evenly spaced hikes.We will be data-dependent,and as the conditions evolve,we will take them into account.*
We are constantly monitoring foreign economic developments;we understand that our fates are linked.We've made a commitment to the emerging market policy makers that we will communicate as clearly as we can to avoid spillover to the emerging markets.Our economy doing well is encouraging to other economies around the globe.We have taken care to avoid unnecessary negative spillover to the emerging markets,Fed chair Janet Yellen told the reporters.*
In sum,the Fed judges that the US economy is doing so well,they need to slow it down it a bit,so it doesn't overheat into high inflation and another recession.The way they do that is by raising the Fed Funds Rate,which raises the rates on certain consumer loans such as credit card balances and adjustable rate mortgages.

Investment Issues:Fed Policy;China;Oil and Transport

The Fed hasn't learned the lessons of what they did 10 years ago,and I fear they're doing it again,said Stephen Roach,senior fellow at Yale University.Is a one percent rate hike going to restrain the economy?Absolutely not.If anything,the Fed is going to disappoint us in terms of how much it adjusts rates this year.They're in total denial that cheap money and an accommodative policy had anything to do with the train wreck of 08-09.The US really needs export growth as it contemplates the weakness of the American consumer.
I've been completely optimistic on China.It's slowed,but with a slowing that was implemented strategically.China's adamant about going to market-based systems.Defaults are a sign of health in this.
The Fed is fearful of doing its job as a steward of the real economy,Mr.Roach added.*
Volatility has to wring itself out,acording to Paul Schatz of Heritage Capital.The bulls have to make a new high here,or the Dow will slip below 17,000.We've been long TLT,the long Treasury bond etf,all of 2014,but we're getting close to taking some off the table.We're going to have oil in the 40s;eventually,we're going to have oil in the 60s.
If the historic trend following such a steep oil price decline is followed,CNBC floor reporter Bob Pisani pointed out,oil will be at 75.00 in the second half of the year.*
Actually,I think the decline in oil prices is going to help us,said CSX chairman and CEO Michael Ward.It's good for the consumer.We're seeing the volumes continue the same as they were before the decline.We fully pass on the lower fuel prices to our customers,based on the price of West Texas Intermediate crude.We were up about six percent in carloads.We see an uptick in virtually every market we serve.We expect to grow beyond the rate of the economy.There are some issues on the west coast now,but over time that may create more shipments through the east coast,the railroad executive explained.*
iShares 20+ Year Treasury Bond ETF(TLT),CSX Transportation(CSX)

Goldman Sachs and the Global Markets

We're in a better part of the cycle right now,said Gary Cohn,President and Chief Operating Officer of Goldman Sachs.Our results in 2012 were a direct reflection of what our customers needed and wanted to do,and we've been there to facilitate that.We have adapted our business to really accommodate and facilitate our customers' needs.
We are a fiduciary for our shareholders.We increased our dividend two times in 2012.
I think we've got our compensation right for our people.We're in a very competitive industry and the capital we have is human capital.The average 2012 pay was about 400k.
As I look out at 2013,I feel that we're in a relatively good position in terms of head count.We look at global GDP.If we see an upward move,that will stimulate our customers and we will hire people to serve them.
The zero interest rate policy will end at some point and that will be positive for our business.I'm fairly bullish about global stock markets.With blue chip stocks,you're long inflation and long global growth.
We can't be the buyer of last resort of fixed income.Somebody has to buy it.The zero interest rate policy clearly drives down currency values.
I think a sudden or dramatic backup in rates would be shocking to the market.I'm not sure that capital can come back into the market quick enough.Just because it's a bond doesn't mean it doesn't go down.Bond prices go down as interest rates go up.
Goldman Sachs(GS)

China's European Concerns

According to David Gosset,Director of the China Europe International Business School,you have a lot of worries in China about the European Union and Euro-zone.China wants them to succeed in order to counterbalance the U.S.
The big story for the business world for the next 5-10 years is the Chinese growth in consumer demand,which will shape global business.The EU has failed to lift restrictions on China,damaging its credibility in the Asian powerhouse.Europe has joined the U.S. in criticising China's failure to allow its currency to appreciate enough,resulting in trade imbalances.
On Saturday,December 25,China made a surprise hike in interest rates to cool off growth and prevent inflation.The move had only a brief,minor effect on global markets,if any-perhaps restraining them a bit.
The China Europe International Business School is located in Shanghai.Granting MBA degrees,it was officially established as an independent business school in 1994.

Osborn Decries Debt

George Osborn,the Conservative party's Shadow Chancellor of the Exchequer,its chief financial expert,has bitterly criticized British Prime Minister Gordon Brown's response to the financial crisis.Borrowing is out of control,,Mr.Osborn complained,mounting up massive national debt.Interest rates should be slashed.There's plenty of scope to stimulate demand with lower rates.We were already in pretty bad shape coming into this downturn,reducing our room for maneuver.We're in for a very difficult time and a recession.Government needs to be there to help.Monetary policy is the best tool,Mr.Osborn believes.The Bank of England and the European Central Bank will make interest rate decisions on Thursday.