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The Three Towers

Brouwer & JanachowskiNovember 20, 2015

All three major central banks held policy meetings in October and recently published minutes. Here’s what they said:

Subject

Federal Reserve

ECB

Bank of Japan

Risks

·   Balanced between inflation and employment

·   Clearly visible for financial and growth

·   Financial system

GDP

·   Downside risk

·   Growth is a problem

·   Slowing

Unemployment

·   Upside risk

·   Possibly tightening

·   High and rising

·   And they don't have the tools to do anything

·   Favorable

Rates

·   Remaining low

·   Open for December hike

·   Negative and staying that way

·   Stable and low

Confidence

·   Increasing

·   Needs more

·   Some improvement

QE

·   No mention

·   Through 2016 at least and possibly more

·   Continue, although effect diminishing

Inflation

·   Moving to 2% but risk to downside

·   At 0.1% and delay in achieving 2% target

·   Some rising expectations

Financial Stability

·   Better but still out there

·   Volatile and elevated

·   Nervous

Monetary Policy

·   Tightening

·   Very easy

·   Very easy

With all the talk about globalization, we are looking at three different and fragile worldviews.

  1. USA: There were plenty of caveats in case things don't work, but the tone was that a December hike was appropriate. The Fed has one more data point to work with before now and then, the November payrolls. Unless they are a disaster, they are likely to vote for a rise. The problem is slow and nervous growth.
  1. Europe: QE is working slowly. Deflation risk remains and some key lending figures are growing. Some 60% of German Bunds have negative rates so the expected results of higher asset prices are already in place. The problem is zero growth.
  1. Japan: In Japan they do things differently. Their QE is QQE (Qualitative Quantitative Easing) and they have been buying not just government debt but nearly a $100bn of corporate bonds, ETFs, equities and REITs. Again, asset prices have done just fine: stocks are up 14% this year. Their problem is negative growth.

Back to U.S. equities: We have noted that earnings are weak this quarter, down 0.3% against a sales decline of 3.4%. Energy, materials and tech are the worst hit because of the combination of strong dollar, weak industrial growth and global slowdown. But the services sector is doing well and, at around 84% of the economy, much more important than the headline industry numbers. Here are the two ISM (a measure of business confidence) numbers clearly showing strength in the services sector.

Blog112015

Bottom Line: This year looks like a repeat of 2011. The 10-Year treasury is settling into a 2.0% to 2.3% range and equities are coming in flat. We expect this market to stay in place until year-end.

Christian Thwaites, Brouwer & Janachowski, LLC

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