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The Fed’s disappearing act

Brouwer & JanachowskiMarch 18, 2016

A busy week for economic data, most of it good. The S&P 500 rose for the fifth straight week. The broad market is now up 12% in little over a month, up 2% year to date but still down 2% for the last twelve months. Emerging Markets, bonds, treasuries, TIPS and U.S. Small Company stocks are all positive of the year. Here's what caught our eye:

  1. The Fed: all chances of rapid rate increases disappeared on Wednesday. The Fed left rates unchanged. They saw risks to the global economy, low inflation and low wage increases. There’s a tussle going on at the Fed. Some believe wage pressure is around the corner. Others that inflation expectations are too low, which hurts business confidence. The most interesting point we saw was this:dot1

This is the famous “dot plots”, where Fed governors, both voting and non-voting, estimate rates up to three years ahead. The graph shows where the Fed thought rates would be now (2016) a year ago (2015). And what they think now for 2016 rates. As you can see, the estimates all came down. This is a pattern. The Fed talks about normalization somewhere in the future. But it never comes and they lower growth and rate assumptions. That was enough for the market to bid stocks up and keep bonds level.

  1. Two Good Things: First, the budget doesn't get much attention these days. But we look at it. Receipts are up. Deficits are down. This year the deficit may drop below 2% of GDP. The 40-year average is 3.2%. Second, the household debt-service ratio (all debt as percent of income) dropped to a near 35-year low of 10%. Why are these good? Because one thing that can kill a bull market stone dead is excessive leverage. And we don't have that in the private or government sector.
  1. And one of caution: the CPI came out this week. Prices dropped month over month and the yearly rate is at 1.0%. But the tailwind of lower energy prices (down 20% to 30% depending on how oil is used) and lower food prices (many food items are energy driven) helped. Tucked away in the details were 3% to 5% increases in health care and medical costs, and clothing. Core inflation was up around 3.6%. So the inflation worry is not completely off the table. One more reason for us to like TIPS. It’s cheap insurance.
  1. Here's one to show the grand kids: the Japanese Ten-Year government bond dropped below 0%. What do you do if your own government charges you to lend? Well, you buy U.S. Treasuries, as this week’s custody holding of foreign buying shows. Another reason we like Treasuries.dot2

Bottom Line: it feels like the correction phase is over. The market is not yet fully confident but a quarter of better earnings should bring in buyers. We hear there are exceptional amounts of cash on the sidelines. While that’s not always a reliable indicator, it tells us that we should see less volatility.

Other:

Warren Buffet doesn't like to meet management

And Warren again “if you have a good business, your idiot nephew could run it”

SEC on 12b-1 funds (boring but important)

Automatic braking coming to your car

The World Happiness report is out and the U.S. is number….

--Christian Thwaites, Brouwer & Janachowski, LLC

 

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