Sunday, August 28, 2011

Fed Chairman Bernanke's comments at Jackson Hole

Last Friday, U.S. Federal Reserve Chairman Ben Bernanke provided a widely anticipated speech at the Jackson Hole Economic Policy Symposium, an event where policy experts and academics annually gather to exchange views on emerging issues and trends. Below are selected excerpts from the speech - the complete text is at

“Our population is aging, like those of many other advanced economies, and our society will have to adapt over time to an older workforce. Our K-12 educational system, despite considerable strengths, poorly serves a substantial portion of our population. The costs of health care in the United States are the highest in the world, without fully commensurate results in terms of health outcomes.”

“the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”

“The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.

MY TAKE: The problems in the U.S. are well documented, but the road ahead remains unclear. While Chairman Bernanke also indicated that the Fed has additional tools to stabilize the economy, members of the Fed are divided on what actions to take (investors are hoping for more stimulus). Additionally, the ability for the current U.S. Congress and the President to address the hardest challenges of a generation is still a poorly executed work in progress. Investing involves assessing probable outcomes while navigating future uncertainties – coherent political leadership could reduce the uncertainty.

Sunday, August 21, 2011

The focus moves to Jackson Hole

Since 1978, central bankers, policy experts and academics have annually gathered at the Jackson Hole Economic Policy Symposium to exchange views on emerging issues and trends. Last year at this event, while global markets were under stress, Chairman Bernanke announced the QE2 stimulus plan that triggered a multi-month rally in risk assets such as commodities and equities. Since this past July, markets have significantly pulled back, and global economic dynamics remain unstable. Chairman Bernanke’s presentation at this year’s event will take place on Friday August 26.

MY TAKE: It is unlikely that an encore performance of QE2 will be announced at this event. In today’s environment, there is: 1) increasing distrust of central bankers, 2) less consensus among central bankers on how to address the challenges, 3) confusion within the political leadership of many G-20 nations and 4) a balancing act between deleveraging and insolvency among some global commercial banks. Resolving this global economic mess will likely require significant changes in political leadership and alterations to policy initiatives that will occur over a protracted period of time.

Sunday, August 14, 2011

Lessons from a wild week in the markets

Illustrating the past week’s global market gyrations are the following moves in the S&P500: Monday down 6.6%, Tuesday up 4.7%, Wednesday down 4.4%, Thursday up 4.6%, Friday up 0.5% and down 1.7% for the week. News driving the ups and downs included 1) the Standard & Poors downgrade of the U.S. long-term federal debt to AA+, from the top grade of AAA, 2) continued concerns about the Eurozone’s financial system, 3) slightly better than expected U.S. retail sales during July, 3) a decrease in U.S. consumer confidence, 4) the U.S Federal Reserve announcing that it plans to keep interest rates low until the middle of 2013, 5) a slight improvement in U.S. unemployment claim trends and 6) increased trading by high-frequency systems.

MY TAKE: Investing is a dynamic process requiring continual adaptation. As global markets showed increased stress in recent weeks, adhering to risk management strategies helped navigate the turbulence as “storm clouds” appeared. However, last week’s gyrations likely exposed flaws within some investment strategies. Learn from the markets – avoid taking reactive actions while in the middle of a storm. While we may have passed through its center, we are still in the storm.

Is volatility the "new normal"?

The VIX volatility index, considered a measure of market uncertainty, spiked to a level of 48 on Monday, driven by several of the factors mentioned above. By Friday, the VIX remained at a heightened level of 36. The last time the VIX reached 48 was during the “Flash Crash” on May 6, 2010.

MY TAKE: Some traders and investors thrive in "fast paced" markets when volatility rises above 20, but this environment can be challenging for longer term investors. While "buying on the dips” may work for some investors, this seems like a time to 1) remain cautious in the short-term, 2) research new investment ideas and 3) wait for a bit more market stability.
NOTE: In recent months, high frequency trading accounted for slightly over 50% of daily trading in the U.S. equity markets. Estimates suggest this level increased to 80% during August. These sub-second trading systems, which leverage high performance algorithms, computational servers and optimized communication services, often benefit from high volatility. Their increased presence many be magnifying it as well.

Sunday, August 7, 2011

Managing Risk Means Not Having to Say You are Sorry

In recent weeks, the consensus view in the investment community has quickly retrenched from expecting a strong second half for 2011 and beyond to concerns about: 1) limited visibility into 2012, 2) the Eurozone having its “Lehman moment” and 3) the potential for an economic double dip. Comments by Emerson Electric Co. CEO David Farr, this past week, captured the mood: "We're looking at slower growth” and "I can't tell you right now what the second half will be, I can't tell you what 2012's going to be, so don't bother to ask”.

Investing is a complex and multifaceted endeavor where success requires both having and executing a solid risk management strategy which assesses many factors that can alter the investment landscape. Please note that: 1) not every investment strategy is effective in all parts of the economic cycle and 2) diversification IS NOT risk management. More on this topic later.

Global Leaders Add to the Uncertainty

This week, as the U.S. Congress passed its “less than half baked” debt ceiling solution:

  • a CNN poll found that 77% of American respondents thought that members of Congress "acted like spoiled children." 
  • On Friday, the S&P rating agency downgraded the U.S. debt and China’s news agency said “To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means”. (Note: China it is the largest foreign holder of U.S. debt). 
  • At the same time, as the Eurozone’s financial problems increase, there is no clear leadership. When European Commission President Jose Barroso requested a review of Europe’s financial rescue fund, Rainer Bruederle, a former German Finance minister said the suggestion was “frantic ranting”. In Italy, in perhaps an act of “let’s shoot the messenger”, the government raided two rating agencies that were critical of the Italian government’s bonds.
The notion that the global economy is weak and fragile is not new news. Unfortunately, it is becoming evident that leadership and solutions are in short supply. In this environment, changes can be quick, unexpected and negative. Markets and investor Hate uncertainty. Proceed with caution.