Banking Titans Goldman-Sachs, Morgan Stanley, JP Morgan Chase, and others have petitioned the Federal Reserve for an additional five-years to comply with 2010’s Volcker rule. This regulation was part of the Dodd-Frank financial reform law and it aimed to curb the trend of banks using their own capital for risky investments. President Obama officially endorsed this rule in his quest to eliminate the ‘too big to fail’ mentality that led to the events of 2008.
The banks have requested the five-year extension so that they have adequate time to exit investments that are difficult to sell, and now barred by law. The rule’s wording allows for a five-year extension if the funds are illiquid (funds in which the banks are contractually bound to invest). These banks have employed the service of the Securities Industry and Financial Markets Association lobbying group (SIFMA). Their contention is that Congress intended to allow for a suitable amount of time for banks to comply and they are merely seeking this accommodation.
Critics see this request as another way to circumvent the law, re-establishing the ‘too big to fail’ mentality. The Federal Reserve must now consider the request and has asked the banks to prove the illiquidity of these funds. They have already granted banks the maximum number of extensions concerning hedge funds and private equity funds. The Federal Reserve must walk the thin line between being too strict on financial institutions and appearing toothless concerning established regulations.
The Federal Reserve is at an important crossroads in financial regulation. They must not be unreasonably strict on financial institutions though they must enforce the established rules if they are to avoid another financial collapse. The enforcement of the Volcker Rule has been bent in the past to accommodate banks, this ruling may determine whether or not it will break.
Interest rates continue being obsessed over as much as the stock market with perpetual prognosticating about whether rates go up or down. While we all know interest rates have remained low for a while, all indications point to them staying that way for the longer-term. Evidence comes from the 10-year U.S. Treasury yield going to a record low of 1.366%.
However, as the Wall Street Journal notes in the above link, analysts partly blame central-bank bond buying as the result of lower interest rates. Regardless, the brunt of the blame goes on decades of debt-financed growth as just one aspect in heading this direction.
Due to recent lower interest rates, companies started to borrow more, yet also brought flat capital investing. All of this led to a major global debt that now exceeds what we saw almost a decade ago. In the U.S. alone, debts are climbing exceedingly, with reports we’re now at $19 trillion, or 106% of GDP.
So how does this affect interest rates far into the future? With debt undoubtedly continuing to climb and a more “boring” (yet stable) economy, will we see an entire generation pass before interest rates rise?
Becoming Complacent With a Stable Economy
While you’ll find many who think the economy is boringly safe now, it leaves one to wonder if we’ll get far too used to lower interest rates far into the future. It’s easy to get complacent when we continue to have record stock and bond prices.
Underlying this is a danger of getting too far in debt and causing serious issues for the country. It ultimately turns our economy into a psychological study on whether we need to maintain higher interest rates to temper our spending.
Hopefully nobody ever forgets the near financial collapse of the late 2000s due to too much borrowing and complacency. However, memories are always short, and having it too good for too long can usually breed forgetfulness.
The number of hedge funds with more than $1 billion in assets grew by 98 from one year ago, according to the latest report from Preqin released Friday, May 27, 2016. This statistic would seem to indicate that the rich funds continue to grow richer, but the percentage of assets managed by the $1 billion club actually dropped from 92 percent to 88 percent from the first quarter of 2015 to the first quarter of 2016, the report showed.
Among the reports other findings:
• Total assets under management by hedge funds stood at $3.13 trillion at the end of the first quarter, down from $3.16 trillion a year ago. Of that, $2.75 trillion were managed by firms in the $1 billion club, down from $2.78 trillion a year ago.
• Five new hedge funds established in 2015, including three that spun off from existing funds, joined the $1 billion club.
• The assets under management of funds in the $10 billion to $19.9 billion range ($675 billion) surpassed the assets of $20 billion-plus funds ($672 billion). Funds with $1 billion to $4.9 billion still are the largest sector of the fund market, controlling 27 percent of total assets managed by hedge funds.
• 54 percent of hedge funds in the $1 billion club continued to grow during the past 12 months, with 9 percent remaining unchanged and 37 percent reporting losses.
• North America continues to dominate the $1 billion club with 479 fund managers controlling just over $2 trillion in assets. Europe’s 129 members manage $605 billion while Asia-Pacific and the rest of the world feature 60 managers with $123 billion in assets under management.
“With investors looking to invest in the largest funds and those with a proven track record through several market cycles, the $1 billion club will look to maintain and build on its leading position within the hedge fund industry in 2016,” said Amy Bensted, head of hedge fund products for Preqin.
Whatever your ranking in the hedge fund industry, Yulish & Associates stands ready to assist you in your accounting and management needs.
According to the minutes released of last April’s meeting, the Federal Reserve could raise interest rates this coming June, if the economy continues to grow as they expect. Members of the Fed’s policy-setting committee have said that recent data on the economy has made them more confident about inflation going towards their two percent target. In addition, they are less concerned about a global economic slowdown.
Based on the minutes, most members of this committee said that as long as economic growth continued throughout the second quarter, labor markets continued to strengthen, and inflation made progress, then it would make sense for them to increase the federal funds rate in June. Since we are on path to meet these conditions, many are assuming that an interest rate hike is on the horizon.
The Federal Reserve raised the interest rate for the first time in over a decade this past December, and is now looking to do so again. Earlier in the year they estimated that they would likely increase rates two times this year, but many predicted that there would be only one.
The impacts of a rate hike are always somewhat hard to predict. There is some volatility in the stock market whenever they expect a rate hike, and this goes for fixed-income, such as bonds, as well. With the economy on a slight upswing, it is interesting to see that the Federal Reserve thinks now is a good time for this rate hike to occur – signaling their belief that the economy is on the right track. We will have to wait and see whether or not they are right.
The hedge fund industry hasn’t been particularly rosy for the start of 2016. According to Hedge Fund Research’s global index, hedge funds had their worst performance since 2008, losing 1.9 percent in the first quarter.
This week, New York firm Third Point released a statement about their own struggles with hedge funds for investors — they’ve lost 2.3 percent in the first three months of the year. Well-known fund manager and Third Point founder Dan Loeb said in a letter to his investors this week that the industry’s performance was in a “catastrophic” period and compared it to the first inning of a “washout” baseball game. In other words, hedge funds are in tough times, and managers will find it challenging to generate returns above their benchmarks.
Complexity in markets over the past few months is largely to blame, especially due to:
- Value of the Chinese Yuan. Many investors bet on it to decrease, but it has stayed steady.
- Poor performance of big companies, including Facebook, Amazon, Netflix, Google, Valeant Pharmaceuticals International and Pfizer.
But opportunities exist for smart managers to identify good investments amid the growing complexity. Loeb recommended a few possibilities:
- Dow/DuPont. Strong, proven leadership of the pending merger combined with the ability for the new firm to make operational improvements and the potential of new spin-offs point to increased earnings.
- Anheuser Busch InBev/SAB Miller. This merger gives the new beverage company more power in the global marketplace and opens up new markets for some of Budweiser’s most popular U.S. brands. At the same time, Molson Coors, which will be the recipient of some SAB assets that have to be sold for anti-trust reasons, has the potential to become a stronger regional player.
- Time Warner Cable/Charter Communications. Operating efficiencies, the increased bargaining power with content providers and a bigger scale will open up opportunities to get more market share from competitors who provide high-speed data.
Loeb also identified Chubb and Danaher Industries as other companies that might be good investments.
So although hedge funds haven’t been performing well thus far in 2016, the upside is that the right fund managers can still produce positive results. Patience is key while seeking the right opportunities.
In recent history, the Federal Reserve took a major step in stimulating the U.S. economy by raising interest rates.
However, the Fed released official documents on Wednesday (April 6th), which reveal that the nation’s central bank is not certain when it will make its next move toward experimentation with economic stimulation.
Last December, the Federal Reserve raised the nation’s interest rates from zero to somewhere between 0.25 and 0.5 percent. During an official meeting, which the Fed held in March 2016, top central banking executives voted against raising interest rates again this year.
This final decision was made due to slow growth for the global economy and severe market volatility occurring domestically. Minutes from the March meeting were also released this week. The information from these official reports by the Fed shows that officials there are at odds over what the U.S. central bank’s next move should be.
A few central banking officials warned at the last meeting that waiting too long to raise interest rates again would lead to the Fed having to act more boldly in a precipitous fashion in the long-term if nothing is decided upon soon.
According to The Washington Post, officials have agreed that any future decision on raising interest rates will strictly be “data dependent.” This means that if the U.S. economy grows stronger than expected, interest rates will rise more abruptly.
A couple of the Fed’s major supporters of stimulus have publicly voiced their desire to raise interest rates, at least, two more times this year. These officials have also publicly stated that they do not agree with the collective expectations of market speculators on Wall Street.
However, The Post also reported that Wall Street investors are betting that the Federal Reserve will only make one move toward rising interest rates over the remainder of 2016.
The Bureau of Economic Analysis revised and released gross domestic product figures on Friday, February 26. The revisions give a mixed bag for the United States economy moving forward. However, leading up to the report, many analysts were expecting a downward revision for GDP growth.
The gross domestic product estimate changed from an increase of 0.7 percent in the fourth quarter 2015 to 1.0 percent. The strong dollar, weak international trade, and disappointing domestic spending had some speculating economic growth in the United States was lower in October, November, and December. Will the change curb talk of America sliding into a recession?
Highlights of the second estimate include:
- Gross domestic product saw an increased 1.0 percent to the annual rate in the fourth quarter of 2015.
- In the third quarter, real gross domestic product increased 2.0 percent.
- The cause of the deceleration was a decline in personal consumption expenditures, non-residential fixed investment, and exports.
- Gross domestic purchases increased only 1.2 percent in the fourth quarter, compared to 2.2 percent in the third.
- The price index for gross domestic purchases was up 0.4 percent in the fourth quarter, compared to a 1.3 percent increase in the third.
- Calculated excluding food and energy, the gross domestic purchases price index increased 1.0 percent versus 1.3 percent in the third quarter.
- Fourth quarter current-dollar GDP increased 2.0 percent (or $88.2 billion) compared to 3.3 percent (or $146.5 billion).
- The 2015 real GDP increased 2.4 percent, the same as 2014.
Overall, despite positive growth, the economy in the United States continues its sluggishness. Businesses should remain cautious. The outlook for 2016 is more of the same. Many economists are forecasting the United States will continue the current rate of growth, restrained by the strong dollar, weak exports, and lackadaisical business investment.
According to Mohamed El-Erian, the chairman of President Barack Obama’s Global Development Council, the Federal Reserve is no longer in a position to guide the steps of our U.S. economy.
In a financial news blog post published by the New York Times on February 16th, El-Erian reportedly said he feels there is fear among leading U.S. economists that the nation’s current monetary policies will not solely be enough to raise the living standards of most working Americans.
The Federal Reserve’s executive leadership was largely in favor of the economic stimulus package that got passed through by a predominantly Democratic leadership group in Congress, which was in power shortly after President Obama took office in his first term.
However, a subsequent partisan power shift in Congress occurred after the mid-term election of 2010. This caused gridlock on Capitol Hill. Since then, close to nothing got achieved in Congress collectively to create “real economic growth” for the U.S. economy.
So the effort to revive the nation’s economy basically fell on the shoulders of the Federal Reserve, which subsequently orchestrated some revolutionary monetary policies that included ending the Fed’s bond-buying activity and raising interest rates.
In his recent interview with The Times, El-Erian shared that national financial analysts saw “high finance” as the latest catalyst for the U.S. economy.
He also shared that an “added value chain” has been another chosen vehicle to aggressively drive the U.S. economy. This includes switching emphasis on manufacturing and agriculture to a focus on revitalizing technological growth in America.
El-Erian also suggested that he believes more investment must happen in a “real economy” in order to offset the Fed’s new inability to steer the nation’s economic growth.
To read more about Mr. El-Erian’s opinions about the Federal Reserve and his take on the need for America’s continued participation in the evolving globalized world economy, click here.
The hottest commodity in 2016 appears to be vision, as many investors find theirs clouded by recent developments. Wall Street’s optimism for 2016 has not only been flagging but developing a feeling of desperation as it prepares to regroup after the long holiday weekend. December’s Federal Reserve hike in short-term interest rates and the end of year data revealing that retailers had their lowest sales year since 2009 was difficult enough for investors to digest coming into the new year. The unfolding concerns in both the oil industry and China’s economy are of increasing concern as investors weigh their options.
Hopes for stabilization in the oil market are taking a hit with last week’s closing seeing the 6% drop in price putting oil at the lowest it’s been since 2003. Iran’s announcement that it plans to dramatically increase oil production in an already saturated market, after international sanctions were lifted Saturday, is only adding to the growing uncertainty.
The Shanghai Composite took its second plunge this year and slipped into a bear market leaving some investors concerned that China’s instability could profoundly influence global markets with downward pressure. Speculation regarding the possibility that the downturn is China simply experiencing short term growing pains to their over-inflated market as the country transitions from a product export based economy to a service economy is not universally shared. Optimistic analysts point out the likely hood that American and European markets will eventually benefit as China’s capital leaves.
Wall Street’s weigh in after the holiday weekend would encourage a trend of stabilization did nothing to soothe market observers as the selloff continues unabated this week. As anxious investors are faced with such volatility, they are increasingly turning towards safe haven markets like gold and bonds. That may not yield benefit they hope for, however. Industry experts point out that none of the leading economic indicators foreshadow an American recession and long term portfolio planning will pay off for savvy stock market investors who take advantage of the market’s course corrections to find smart investment opportunities. Investors who can see past the hype of a flooded oil market and China’s economic upheaval have the best chance of turning a profit this year.
The Federal Reserve released the minutes of its December 2015 meeting on January 6th. After anxiety in the markets before the release, the response from investors is mute. Stocks, which were down already on China fears and geopolitical uncertainty, remained unchanged.
The minutes reveal that, “some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics.”
Inflation continues to remain low. The Fed has forecast four rate hikes this year, while market expectations indicate two rate hikes. The minutes state that for some of the 10 member committee, “the risks attending their inflation forecasts remained considerable.”
These concerns arise from continuing growth in the value of the dollar and from further potential oil price shocks. Inflation has remained below the Fed’s 2% target due primarily to a strong dollar, stagnant wages and falling energy prices.
While markets welcomed the rate hike in December, the current instability will likely continue for at least the short-term. Investors are currently migrating assets into safe havens at phenomenal pace. Treasury yields dropped to a four-year low on release of the Fed’s minutes as Treasury prices surged. Continuing downward pressure of oil prices which have weighed on inflation combined with the worldwide exodus to safe havens “is expected to keep Treasury yields from rising in any significant way,” Kathy Jones, chief fixed-income strategist at Schwab Center for Financial Research, told Market Watch. Gold prices are up in what has been golds best rally since October.
In the overall picture, slower than expected growth in China, plummeting oil prices, and geopolitical instability are all contributing to a rough start in 2016. Investors are moving assets to safety due in part to instability and in part because of an eroding confidence in the Fed’s outlook of the economy. With the uncertainty in inflation and wages, expect the Fed to raise rates gradually. The Federal Reserve marked the end of the financial crisis with the December rate hike, but expect a long and bumpy road to normalization of monetary policy.