Salient to Investors:
Jim Reid et al at Deutsche Bank said:
- Returns on 10-yr Treasury notes adjusted for inflation were an annualized 4.5 percent in the 100 years before the Fed and under 2 percent in the 100 years after the Fed was born in 1913, while the return on the S&P 500 was largely the same, 7 percent, in both periods.
- The CPI was 3 percent higher per year under the Fed than it was in the 100 years before.
- Nominal annual growth was higher under the Fed than before the Fed , but almost 2 percent a year lower at 3 percent after when inflation.
- The ‘Fed era’ coincided with the US moving from a rapidly growing economy to a more mature and the largest economy.
- The 5-year moving average of nominal global GDP is the weakest since the 1930s.
- The biggest 6 central banks have spent $7.5 trillion since September 2008.
- Many global assets have been inflated by QE and central banks may need to spend the next few years engineering higher nominal GDP to justify such valuations.
William R. Cline and Joseph E. Gagnon at the Peterson Institute for Intl Economics said Lehman Bros lacked collateral to pledge in return for aid, and when it filed for bankruptcy its net worth was as much as a negative $200 billion, while other institutions saved during the crisis, including Bear Stearns and AIG were arguably solvent and so the Fed could better play its role as a lender of last resort.
Brad DeLong at University of California, Berkeley, disagrees, saying Lehman’s bankruptcy was a disaster that could have been avoided had policy makers acted sooner to press Lehman into finding a buyer.
Peter de Bruin et al at ABN Amro Bank said:
- In 6 of the 7 periods of higher interest rates dating back to 1976, economic growth was still strong 2 years after rate expectations began to build, while private employment grew an average of 200,000 per month despite the 10-yr T-note yield rose by an average of 1.6 percent in the 180 days after each of the rate increases.
- Equities, commodities, the dollar and gold typically did well during the periods.
- As the Fed tapers, the US economy will accelerate in coming quarters, along with gains in equities and the dollar.
- Commodities, especially gold, may face headwinds.
Joel Peress at INSEAD said a study of 52 national newspaper strikes in 4 countries between 1989 and 2010 found trading volume fell 12 percent on stoppage days while the dispersion of stock returns was reduced by 7 percent: demonstrating that the media contribute to the efficiency of the stock market by improving the dissemination of information among investors.
Stephen Jen and Joana Freire at SLJ Macro Partners said the US could create a sovereign wealth fund that would be worth more than $3 trillion after two decades if it saved some of tax revenue from recently discovered shale oil and gas reserves. They said saving as Norway did, rather than spending as the UK did, supports the wealth of future generations rather than the lifestyle of the current one; they expect the US to spend the bonanza.
Alexander Koch at UniCredit said going back to 1980, beer price changes at Oktoberfest exhibit a Giffen paradox, where demand increases at the same time as the price.
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