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Trading Secrets: The Feds Maginot Line
by Tad Rivelle of TCW Asset Management,
It has been six years since the Fed zeroed out rates and still we wait for assisted growth to become real growth. Beginning with the recovery summer of 2010, the Fed has proclaimed that cheap money would rocket the economy to escape velocity, launching an organic, self-sustaining economic recovery. Instead, central bank policy has vaulted asset prices into the stratosphere even as wages wait their turn on the launch pad. Low rates have failed to deliver the goodies, but the Fed has its story and is sticking to it.
Trading Secrets: Understanding the Boom and the Bust
by Tad Rivelle of TCW Asset Management,
It isn?t what you earn ? it is what you keep that matters in investing. While systematically underwriting too little risk may mean that you do not earn all that you might, underwriting too much towards the end of a business cycle can be disastrous. With this in mind, it becomes obvious that timing an investment strategy may be the most important single decision an investor needs to get right. But how is one to know where you are in the cycle?
Trading Secrets: The Godot Recovery
by Tad Rivelle of TCW Asset Management,
With this recovery, prosperity has always been just around the corner. It wasn?t supposed to be this way. True, the massive fiscal and edgy new monetary measures enacted in the wake of the 2008 crisis kept the economy?s heart beating. The Fed deftly executed its role of lender as last resort, and for this we should all be grateful. What has become steadily less clear is why, five years after the crisis, the Fed remains committed to its zero rate policy. Are artificially low rates truly the secret sauce that takes a weak recovery and makes it strong?
Should You Walk Away from a Fed that Prints Money?
by Tad Rivelle of TCW Asset Management,
Either the markets or the Fed itself will come to accept that financial repression is a box canyon whose only escape is by climbing out through higher rates and wider spreads on risk assets. Staying risk on requires the investor to underwrite the exacerbating risks inherent in an economy that is being given bad signals and is accumulating a menagerie of mispriced assets and bad loans. Yes, you should walk away from a Fed that prints money.
Bernanke's Taper Tinkering
by Tad Rivelle of TCW Asset Management,
For at least the past five years, the Fed has cast an exceedingly long shadow over the capital markets. For this reason, understanding Fed policy has been central towards proper guidance and direction of investor capital allocations. Since Chairman Bernankes trial ballooning surrounding a potential taper of the Feds QE policy, longer maturity Treasury interest rates have soared over 100 basis points.
The QE Lemon Has Been Squeezed Dry
by Tad Rivelle of TCW Asset Management,
Weve just witnessed the dress rehearsal for the end of the Feds Quantitative Easing (QE). Markets that had learned to stop worrying and love the financial repression have been given reasons to fear the interest rate cycle. For five years we have lived with a central bank that has used, or abused, a zero rate policy and QE to effectuate the Great Risk-On trade to cure the ills of the Great Recession.
Trading Secrets: And All Our Yesterdays
by Tad Rivelle of TCW Asset Management,
Markets work. Not because they are perfect, but because they self-correct. Inherent to their functioning is the ability for buyers and sellers, borrowers and lenders, to freely express their predilection to engage in commercial transactions as proxied by the price mechanism. This is all utterly basic. So, why are the capital markets in general, and the credit markets in particular, not to be trusted to operate without the price and quantity guidance of the Federal Reserve? I
The Valley of Debt: Will You Walk Away from the Fed and Its Money?
by Tad Rivelle of TCW Asset Management,
Regardless of your philosophy, financial crises do test the mettle of the investor and judged this way, the past three years have been among the most challenging period in decades. Perhaps because crises mean different things to different groups of investors, we have lived with the ultimate traders market, one alternately characterized by the risk on or the risk off. Interestingly, the level of the Dow Jones is within just a few points of where that index started the year. Had you just returned from the Antarctic, you might have concluded that 2011 was a snoozer.
The Keynesian Bridge to Nowhere
by Tad Rivelle of TCW Asset Management,
All of us want growth and to see unemployment back down to where it belongs. In pursuit of these objectives, our national govern- ment has ?manufactured? liabilities ? Treasury bills, notes, and bonds ? and sold them to investors, many of which are based overseas. In so doing, the U.S. Treasury laid claim to resources ?released? by these lenders and put those re- sources to work in the U.S. today with a promise to return those resources, with interest, tomorrow. Economic pain inside the U.S. has been reduced in the here and now as a result of obtaining access to these borrowed resources.
Trading Secrets
by Tad Rivelle of TCW Asset Management,
Treasury yields are lower today than they were in the early 1930s. This is despite a paucity of evidence that prices are deflating, or that the U.S. is the beneficiary of a flight-to-quality. Furthermore, the low rates have continued notwithstanding QE2, a program of thinly disguised ?money printing.? Our belief is that low rates are the product of a zero rate policy that is distorting Treasury pricing. This ?artificial? propping up of Treasury pricing will last until such time that bank balance sheets are substantially repaired. As such, our outlook for Treasuries is decidedly negative.
QE2: Demise of the Dollar?
by Tad Rivelle of TCW Asset Management,
Today's QE program is conceptually similar to the Kennedy administration program known as Operation Twist. The Fed's form of payment, an accretion to the banking system's reserve accounts, is equivalent to the Fed issuing an IOU to the private sector. In effect, the Fed may have concluded that the pre-recession economy was unduly dependent on a consumption binge enabled by a housing bubble. With housing wealth lost 'forever,' the U.S. must adjust to being a more export-focused economy. Thus, by weakening the dollar, the Fed may be accelerating an adjustment that must, in any case, happen.
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