This week the IMF updated its forecast, which shows a 50% chance of global recession in 2016, defined as global GDP growth below 3%. Even if you’re optimistic about the US economy it’s worth debating how the Fed will respond to the next slowdown. Former Fed Chairman Ben Bernanke is making the rounds promoting his new book, and had some thoughts on the subject. He says officials don’t have “terrific” options, and believes the Fed would likely not respond by launching more bond purchases as a “first resort,” but rather only after trying other tools. More likely the central bank would push nominal rates into negative territory.
Finally, towards the end of the interview, Bernanke acknowledges the elephant in the room, saying the best option would be approaching Congress and asking for some help. Monetary stimulus has been maxed out for several years and we’re not even close to escape velocity. Think about the economy like a car. Fiscal policy determines the car’s structure, horsepower, safety, tires, etc. and the Fed is supposed to operate the vehicle. Bernanke and Yellen have been stomping on the gas pedal for six years, and it won’t pick up speed. The US needs a major tune-up in the form of infrastructure, education and updated tax policies, yet Congress acts more like the DMV than a mechanic.
Nowhere is this clearer than a chart of the S&P 500 divided by the Fed’s balance sheet. Essentially, stocks haven’t rebounded at all since 2009 if monetary stimulus is stripped out. Now, the Fed’s balance sheet looks to have peaked for the time being and, not surprisingly, stocks look vulnerable. Negative deposit rates have been effective at weakening currencies in Switzerland and Sweden, but they’ve done very little for the local stock markets – although there are other variables at play. You would think the president and congressional leaders would be terrified of these developments, pounding the table for some form of fiscal stimulus. Instead, they’re debating about Planned Parenthood, the debt ceiling (again) and getting outmaneuvered by Russia in the Middle East.
Let’s say, hypothetically, the Fed is forced to turn to Congress for assistance. Is Janet Yellen the charismatic leader that can get the job done? That’s not a criticism of her, the best central bankers are even-keel economists who don’t surprise markets, but this highlights how Congress has painted the Fed into a corner. It doesn’t look like help is around the corner, either.
If you think the answer to this problem is new leadership in 2016, you must not be watching the primary campaigns. If anything, these never-ending circuses make it less likely we’ll get any substantive action before the global slowdown reaches its apex. Bernanke says he didn’t vote in the last two presidential elections to maintain impartiality, and sounded stung by the blowback he faced for engineering bank rescues and low rates to stabilize the financial system. He said, “Slogans and bumper stickers are generally not enough to solve complex problems,” and this is shaping up to be one of the most complex problems of the 21st century.
The Cup & Handle Fund is up around 6.5% YTD, and +19.5% Y/Y. While I’m not overly excited about the results, macro hedge funds are going under left and right. As we highlighted last week there’s not much going on in the form of catalysts. Having said that China is back from a weeklong break, and there’s a little more action in the market today. We added a substantial new position this week and feel pretty good about the portfolio currently. The October investor letter went out last week, and so far it’s not doing much of anything. If you’d like to start receiving these letters click here.
With that I give you this week's letter:
As always, if you have any questions or comments or just want to vent, please send me an email at firstname.lastname@example.org.
Until next time, tread lightly out there,
Managing Editor – Cup & Handle Macro