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September US rate hike ‘less compelling’
  • AFP
  • AUGUST 27, 2015 7:27AM


[Image: 635714-60911ac2-4c3f-11e5-ac1d-a4bdd0bce0d9.jpg]
William Dudley said China’s slowdown could lead to slower global growth and less demand for the US economy.Source: Supplied
[b]A top US Federal Reserve official says the economic turmoil in China has eroded the argument for raising interest rates in September.[/b]
The need to begin normalising monetary policy next month “seems less compelling to me than just a few weeks ago,” said William Dudley, head of the Fed’s New York branch and a voting member of the rate-setting Federal Open Market Committee.
“The slowdown in China could lead ... to a slower global growth rate and less demand for the US economy,” he said.
He stressed that there were other factors involved in the FOMC’s monetary policy decision, and pointed to the mostly positive data coming out of the US economy recently.
However, he stressed, “at the end of the day, we’re concerned about the outlook, how is the economy going to perform in the future. It’s not just how we are performing today”.
“And there, international developments and financial market developments do have relevance because they can impinge and affect the economic outlook.”
Mr Dudley’s remarks were in response to questions during a briefing on the state of the New York regional economy.
The crash of China’s stock markets and the limited impact of Beijing’s efforts to calm the situation has raised fears of a greater-than-expected slowdown in the world’s second-largest economy that could drag down growth globally.
Some economists have called on the FOMC to not go through with a long-anticipated increase in the federal funds rate at its September meeting, given the global markets turmoil.
It would be the first interest rate increase in nine years, and would lift the fed funds rate from the zero level, where it has sat since the financial crisis of 2008.
Mr Dudley cautioned that sharp market movements in the short term would not necessarily change the picture for US economic strength.
It would take a “large and prolonged drop in the stock market” to significantly impact household wealth and convince people to slow spending and investment, he said.
“That could have implications for the outlook.” “It’s important not to overreact to market developments because it’s unclear whether it’s just a temporary adjustment or something more persistent,” he added.
Asked about recent comments from some economists that the Fed should reverse course and consider more stimulus, including reviving its quantitative-easing (QE) program, Mr Dudley said: “I’m a long way from QE; the US economy is performing quite well.”
AFP
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The Fed’s decision could be a tipping point for markets
  • BUSINESS SPECTATOR
  • AUGUST 26, 2015 12:29PM


Stephen Bartholomeusz
[Image: stephen_bartholomeusz.png]
Business Spectator Columnist
Melbourne


[b]Will they or won’t they? Should they or shouldn’t they? Against the backdrop of the gyrations in markets over the past week, the US Federal Reserve board’s decision on whether or not to start lifting US official interest rates is taking on an ever-sharper and more significant focus.[/b]
It is also sparking a debate, with former US Treasury Secretary Lawrence Summers even arguing for a resumption of quantitative easing, or the bond and mortgage-buying programs that the Fed ended nearly a year ago.
Certainly, the markets’ assessment of the likelihood of a rate increase has been shifting rapidly, moving from pricing it in as a near-certainty to what is now a low probability as it factors in the dramatic moves in markets that have occurred in the wake of China’s stockmarket crash, the devaluation of the yuan and the moves by the Chinese authorities to try to stimulate economic activity cutting its own rates and injecting liquidity into its banking sector.
The critical question that the Fed will no doubt grapple with is whether or not the turmoil in markets should deflect it from its primary concern, the state of the US economy, which is relatively healthy, and a return towards more normal pricing signals for risk assets.
Earlier this year the Fed’s vice-chairman, Stanley Fischer, made it very clear that while the Fed was cognisant of the international impacts of its decisions, it wasn’t the world’s central banker. Its responsibility and its actions were focused on the US domestic economy.
He acknowledged the Fed’s unconventional monetary policies (policies subsequently emulated by Japan and Europe) had driven post-crisis capital flows and caused a big increase in holdings of risk assets around the world, particularly in emerging markets.
‘Spillovers’ like the 2013 ‘taper tantrum’ should be expected as the US started to tighten monetary policy and the ‘path to normalisation’ might be somewhat bumpier for vulnerable economies, he said in a speech in May.
In other words, the Fed has been fully aware that as the moment of that first rate increase loomed, markets and capital flows would become more volatile, with implications for assert prices, currencies and the pricing of risk more broadly around the world.
The original QE policy initiated by the Fed in 2009 was designed to entice investors to take more risk in pursuit of positive returns and to drive up asset prices in the hope that would generate wealth and confidence effects that would trickle down eventually into the real economy.
One could argue about the effectiveness of the policy but there is no argument that the ultra-low yield environment and access to near-costless funding pushed investors into an ever-intensifying search for return, with an accompanying compression of risk premia even as exposures to risk increased.
Whether it is credit spreads in bond markets, or share prices, or property markets, or capital flows towards exposures to the one region that has produced significant growth — the China-inspired growth in the Asia-Pacific economies — the unconventional monetary policies being pursued by the major developed economies have led to an elevation and mis-pricing of risk.
The events of the past week or so may reflect some unwinding of those risk positions, which is ultimately necessary if capital is to be allocated more rationally and sustainably and the potential for another crisis like that in 2008 is to be reduced.
The events of the past week or so may reflect some unwinding of those risk positions, which is ultimately necessary if capital is to be allocated more rationally and sustainably and the potential for another crisis like that in 2008 is to be reduced.
There is, of course, the potential for what might simply be a ‘correction’ in markets to turn into a full-blown financial crisis given the many trillions of dollars that have been leveraged into risk positions around the globe. There is also the potential for destructive destabilisation in markets and economies if capital starts to fly back to the US as the US rates rise and the US dollar continues to appreciate.
The longer the Fed leaves US official rates near zero, the longer the mis-pricing of risk continues, of course, the greater the level of risk building within the global financial system. By delaying the start of the normalisation of US rates, the Fed might actually increase the level of risk and vulnerability in the global system.
If Fischer’s comments are taken at face value, however, the Fed isn’t going to be concerned about the impact on global markets or economies of a decision to lift rates, but only on what it might mean for the US economy.
The Fed is very aware, as Janet Yellen, its chair, has acknowledged, that delaying the start of the normalisation process creates risks of its own. The Fed might eventually be forced into a series of rate hikes at a pace and with a trajectory that is faster and steeper than it would prefer or the US economy could accommodate smoothly.
The decision will inevitably be finely balanced and, whichever way the Fed falls, there are likely to be significant impacts on markets.
There is a certain irony in the timing of the Fed’s September meeting, scheduled for 16 and 17 September. It was nearly seven years ago — on 15 September 2008 — that Lehman Bros filed for bankruptcy and the global financial crisis erupted.
That’s a very long time for an experiment with unconventional monetary policies — and all the intended and unintended consequences of those policies that have developed over those years and all the abnormal pricing of risks they have created — to be maintained.
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According to Tan Teng Boo, the recent dive in stock market is just the beginning... the sea water just retreated.
The Tsunami will come later... do you agree with him!?

Hear it out yourself:
http://www.bloomberg.com/news/videos/201...he-horizon-
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(27-08-2015, 09:54 PM)value:search Wrote: According to Tan Teng Boo, the recent dive in stock market is just the beginning... the sea water just retreated.
The Tsunami will come later... do you agree with him!?

Hear it out yourself:
http://www.bloomberg.com/news/videos/201...he-horizon-

Thanks, that link doesn't work - have reformatted it: Is Another Global Financial Crisis on the Horizon?

Interesting analogy he gave:
Apple, Google, Microsoft, Facebook, Amazon valued at $2T before the selloff, as much as the capitalisation of Frankfurt stock exchange which represents the 4th largest economy in the world. Sort of like Japanese Imperial Palace and grounds valued as much as the state of California before the Nikkei crashed.


The recent dive triggered numerous rare indicators.

One of them is highlighted at The Stock Market Hasn't Had a Selloff Like This One in Over 75 Years 
with a possible bullish anologue for the path forward...

[Image: 488x-1.png]


However a more sinister indicator is 4 consecutive 1% losses in the S&P 500. 
This is another very rare occurence, with some of them rather bullish but a few preceded crashes...

1 in Oct 2008:
[Image: united-states-stock-market.png?s=indu&v=...2=20120101]

1 in Jun 1928 and 1 in Jun 1930
[Image: united-states-stock-market.png?s=indu&v=...2=19400101]

We have just seen another 1 on 25 Aug 2015...
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(27-08-2015, 09:54 PM)value:search Wrote: According to Tan Teng Boo, the recent dive in stock market is just the beginning... the sea water just retreated.
The Tsunami will come later... do you agree with him!?

Hear it out yourself:
http://www.bloomberg.com/news/videos/201...he-horizon-

I think Tan Teng Boo is more a market timer rather than a value investor. He predicted a crash in 2011 and held on to huge amount of cash but that didnt happen. Now he is predicting another one. He might be right this time I think.
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(28-08-2015, 07:17 AM)Bibi Wrote:
(27-08-2015, 09:54 PM)value:search Wrote: According to Tan Teng Boo, the recent dive in stock market is just the beginning... the sea water just retreated.
The Tsunami will come later... do you agree with him!?

Hear it out yourself:
http://www.bloomberg.com/news/videos/201...he-horizon-

I think Tan Teng Boo is more a market timer rather than a value investor. He predicted a crash in 2011 and held on to huge amount of cash but that didnt happen. Now he is predicting another one. He might be right this time I think.

I had looked at Mr. Tan's funds, as candidate for my study, but I had dropped them. I agree with Bibi, Mr. Tan is a smart manager, but more of a market timer, than a value investor. The iCapital Global Fund, for e.g. has CAGR of 3.5%, over the last 8 years till April 2015. May be due to his bet on the "crash" which has never arrived till April 2015. Will the current "crash" able to compensate him for the lost opportunity cost? Let's see...

http://www.capitaldynamics.com.sg/en/icgf_performance

(share a view, based on initial findings on Mr. Tan)
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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I recall chatting with a friend who is a fund manager a number of years ago. He had just been featured in the Straits Times so I complimented him on the publicity. He told me he was upset with the article as he had been misquoted. The article had said that according to him, timing is not important at all. He told me, "IT'S ALL ABOUT THE TIMING!" Big Grin

(and this chap is an award winning fund manager for many years in a row for the universe he targets, outperforming all his peers)
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(27-08-2015, 09:54 PM)value:search Wrote: According to Tan Teng Boo, the recent dive in stock market is just the beginning... the sea water just retreated.
The Tsunami will come later... do you agree with him!?

Hear it out yourself:
http://www.bloomberg.com/news/videos/201...he-horizon-

It's all about weighing the pros vs the cons, and IMO, now the risks outweigh the perceived potential benefits.
sure, you can go in guns blazing now, pick up equities and you might be right, and profit a little.
But if you're wrong... it can be a multi year disaster (assuming no stop loss)

We all need a bit of caution right now.
It's better to miss the boat first, and catch another boat later and arrive at the destination a bit later, rather than risk catching a sinking boat.
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(28-08-2015, 08:03 PM)swakoo Wrote: I recall chatting with a friend who is a fund manager a number of years ago. He had just been featured in the Straits Times so I complimented him on the publicity. He told me he was upset with the article as he had been misquoted. The article had said that according to him, timing is not important at all. He told me, "IT'S ALL ABOUT THE TIMING!" Big Grin

(and this chap is an award winning fund manager for many years in a row for the universe he targets, outperforming all his peers)

The ultimate benchmark, is the long term performance. If your friend is serious, and his performance is outstanding over years. I reckon he has a very rare talent. A talent of market insights, and able to time it right consistently over years.

The talent is different from knowledge and skill, which is transfer-able, or learn-able. We can only admire them, rather than learn from them.
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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(30-08-2015, 09:57 PM)CityFarmer Wrote: The ultimate benchmark, is the long term performance. If your friend is serious, and his performance is outstanding over years. I reckon he has a very rare talent. A talent of market insights, and able to time it right consistently over years.

The talent is different from knowledge and skill, which is transfer-able, or learn-able. We can only admire them, rather than learn from them.

Noted. Pondering and trying to break it down...

1) Determine value and safety margin
- need knowledge and skill (learnable for most people)

2) As prices fluctuate (and especially volatile in modern times), establish when difference between value/ safety margin and price is big enough to execute transaction (buy or sell) ie. timing
- need market insight (can this be acquired from experience or reading/observing?)
- need luck (sometimes)
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