The Big Picture |
- A Way With Words: The Economics of the Fed’s Press Conference
- 10 Tuesday PM Reads
- What If All 50 States Had = Populations?
- Nasdaq 4000: Now and Then . . .
- The Art of Intuition and the Science of Discovery
- 10 Tuesday AM Reads
- Bloomberg 11/26/13 Appearance
- Bloomberg Surveillance with Tom Keene (7-8:00 am)
- Tapering is Tightening or Easing?
| A Way With Words: The Economics of the Fed’s Press Conference Posted: 27 Nov 2013 02:00 AM PST A Way With Words: The Economics of the Fed's Press ConferenceFernando Duarte and Carlo Rosa When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke's June press conference confirms the importance of his comments in the marketplace. The chart below shows the dynamics of U.S. asset prices in five-minute intervals (the ten-year Treasury rate, S&P 500, and euro/dollar exchange rate) during the announcement day. The strong market reaction was spurred not only by the release of the Federal Open Market Committee (FOMC) statement at 2 p.m., but also by the question-and-answer part of the press conference at 2:30 p.m., when journalists questioned the Chairman to better understand the Fed's views. In this case, markets thought Chairman Bernanke revealed new, important information, and asset prices moved. But was this an exception? Do all press conferences provide new information, or is the FOMC statement the more market-moving Fed communication tool? To answer this question, we exploit the timing in the release of information. We restrict our attention to 2012, when the FOMC met eight times to discuss monetary policy. At the end of each meeting for which there was a press conference (on January 25, April 25, June 20, September 13, and December 12), the FOMC released a statement at 12:30 p.m. providing an overview of its policy stance. Then, at 2 p.m., the FOMC released the "Summary of Economic Projections" (SEP), which provides individual Committee members' forecasts for output growth, the unemployment rate, inflation, and the federal funds rate. Finally, at 2:15 p.m., the Chairman started the press conference, which usually concluded around 3:15 p.m. Press conferences were only held in conjunction with five of the eight yearly FOMC meetings. In 2013, the timing changed a bit and the SEP started to be released concurrently with the FOMC statement at 2 p.m.; to avoid confounding the effect of the FOMC statement with that of the SEP, our post only looks at 2012. The next chart displays the five-minute volatility of the S&P 500. The blue line shows the average volatility on 2012 FOMC meeting days that featured a press conference, while the black line shows the average volatility on nonannouncement days. We can clearly see that stocks are much more volatile on FOMC meeting days, and that the high volatility is concentrated around 12:30 p.m., 2 p.m., and the 2:15-2:30 p.m. period, when announcements are made. The effect is also quite large: If stocks on a daily basis were as volatile as they were at 12:30 p.m. on an announcement day, then the annualized volatility would be 35 percent instead of the normal 8 percent (note that these are five-minute volatilities that were then annualized, not annual volatilities). A red circle appears on top of the blue line whenever the difference in volatility between announcement and nonannouncement days is unlikely to be due to chance. (For our beloved wonks: The red dot means that the difference is statistically significant at the 10 percent level.) We're now ready to answer the original question. By looking at the chart, it's apparent that the June FOMC meeting wasn't an exception, but rather the rule. The stock market moves the most around the release of the FOMC statement, but also moves more than usual around the time of the press conference. Because we're looking at very narrow windows of time in which no other relevant economic events or announcements took place, we're confident that we can ascribe the extra volatility to FOMC-related activities. The "announcement effect" we uncovered isn't unique to equities. The next two charts show the reaction of government bonds and exchange rates. The average five-minute change in the ten-year Treasury yield is two basis points after announcements – eight times higher than at the same time on nonannouncement days. For the euro/dollar exchange rate, we see a similar pattern. A notable finding is that, unlike equities, bonds tend to react more to the SEP release than to the press conference. One of us has also found that these effects are also present in Europe, supporting the idea that there are several important communication tools at the disposal of central bankers throughout the world. This is particularly relevant in today's environment of unconventional monetary policy, in which there are multiple dimensions of decision making that need to be conveyed to the public. Disclaimer
Posted by Blog Author |
| Posted: 26 Nov 2013 01:30 PM PST My afternoon train reading:
What are you reading?
Stock Seasonality |
| What If All 50 States Had = Populations? Posted: 26 Nov 2013 11:30 AM PST |
| Nasdaq 4000: Now and Then . . . Posted: 26 Nov 2013 09:30 AM PST
Yesterday, the Nasdaq topped 4,000 for the first time in 13 years (but slipped back and closed at 3,995). The composite still remains more than 20 percent below the highs that its dot-com high-flyers pushed it to in March 2000. What is different between now and the last time the Nazz was here? Valuations, for starters. The big tech leaders in 2000 had nosebleed valuations, assuming they had any earnings at all. Today, the leaders have mostly mid-teen valuations. Looking at the forward earnings, we see Apple with a price-to-earnings ratio of 12.2, Microsoft at 14.1, Cisco at 10.6, Intel at 12.8 and Qualcomm at 14.4. There are still some stocks with absurd valuations. The poster child is Amazon, which arguably has no earnings, or if we accept the company's tortured accounting, is at a p/e of 467.4. Google seems almost reasonable at 23.9 p/e, but at least it has growth prospects that somewhat justify that ratio.
Continued here |
| The Art of Intuition and the Science of Discovery Posted: 26 Nov 2013 08:30 AM PST “The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honors the servant and has forgotten the gift.” ~ Albert Einstein What is intuition and how might it help or hinder an investor's decision making process? A good philosopher begins with definitions, otherwise they risk building their argument upon a false premise. Therefore we begin with a broad, conventional definition of intuition from Miriam-Webster:
My intuition tells me that there are several things wrong with this definition. The primary problem is that it is a conventional definition and conventions only cover the surface. So let's delve deeper by doubting or elaborating upon the last two words, “understanding why.” And where does this “feeling” come from? More importantly, how does one recognize intuition and differentiate it from potentially defeating signals coming from media noise, biases, and ego? Personally, I do not believe that ideas just magically appear or that they arise from nothing. Roughly one year ago, I interviewed Barry Ritholtz for a writing project and I asked him about intuition in trading: He said, “I suspect the best traders learn to internalize lots of what they have learned over time, and what appears to be intuition is really the result of thousands of hours of hard work, research, practice, and experience.” This is a good foundation for a practical meaning of intuition. It may appear as a gut feeling. However it is really just a culmination of learned knowledge that we call experience. But how and when can intuition be called upon and applied in the decision making process?
Seeking is the opposite of finding; thinking gets in the way of feeling. The more you focus on seeking, the more you diminish the capacity for finding. In different words, intuition cannot be “called upon.” Searching for a specific piece of information can ironically make you miss the idea that may actually help you make the best decision. For example, have you ever tried to recall something and it just would not come to your mind? This typically occurs when in conversation and you say the thought is “on the tip of your tongue” but you just can't recall it at the moment. Hours or even days later, the information you were seeking seems to suddenly pop into your mind. This is because the part of your brain used for recall is not the same part that produces the answers. Speaking of recall, some of you may recall the blog, TraderFeed, which combined trading and psychology, authored Dr. Brett Steenbarger, PhD, from 2005 to 2010. In one of his posts, The Role of Intuition in Trading Decisions, Dr. Brett teaches readers that there are two parts of the brain at work with learning:
I am no PhD but my simple mind can translate this into the notion that trading is both science and art, either as separate but necessary entities or possibly a synthesis of both. The explicit mind is the reasoning scientist and the implicit mind is the artist on drugs (so to speak). But the artist is the intuitive thinker that is rarely heard because the scientist commands the attention with attractive solutions and demands decisions be made with quantitative data. For the investor, the scientist often speaks louder than the artist. An Intuitive Summary of Intuition? And now we arrive at a difficult juncture—how to end this blog post. If I provide more supportive data and a definitive solution, the scientist will ironically crowd out the artist. So after my own scientific research for this particular blog post ended, I did my best to stop thinking about finding a solution. This way perhaps my intuitive mind could fittingly end a blog post about intuition! So I looked outside of a window near my desk and began watching the colored leaves of a white oak tree slowly fall to the ground. After following one particular leaf complete its descent from beginning to end, my eyes met a pair of squirrels engaging in their hurried late-Autumn activity and, as I began to find myself amused by their…. Aha! My mind was empty and quiet. Or as a scientist might note: the explicit learning system was dampened; access to the gut feeling was enabled; and this nugget of wisdom popped into my mind:
I am guessing I recalled this piece of useful wisdom because I had stopped the hyper-intentional activity of searching, which presumably awakened the artist needed to finish this post. If there is a way to use this intuitive thinking for investing, or for any other endeavor for that matter, it will not likely come to you by calling upon it. Instead, try doing your research and analysis first to satisfy your inner scientist. When the analytical work is done, leave it alone for a while and try doing something completely different than investment research before making a decision. Perhaps you could take a walk, read a book, listen to music, meditate or even take a nap. You may be surprised at how productive ideas can come to you because you were not looking for them. This is the art of intuition that can follow the science of discovery…. What are your thoughts on intuition? How often do your intuitive ideas come to you and how accurate are they? Have you ever ignored a “gut feeling” and regretted it later? How do you balance or combine the science and art of investing? —————————————————————————————————- Kent Thune is blog author of The Financial Philosopher. You can follow him on Twitter @TheThinkersQuill. |
| Posted: 26 Nov 2013 07:00 AM PST Before you get too involved in whatever, some morning reads:
Continued here |
| Posted: 26 Nov 2013 06:00 AM PST In today's "This Matters Now," Bloomberg Contributing Editor Barry Ritholtz, talks with Tom Keene about investment strategies to survive market downturns. He speaks on Bloomberg Television's "Bloomberg Surveillance." Weathering the Storm of Market Downturns ~~~ On today’s “The Agenda,” Tom Keene, Scarlet Fu and Cristina Alesci look at trending news stories on Bloomberg Television’s “Bloomberg Surveillance.” Housing & the Economy ~~~ Does Volatility Create a New Bond Market Order? |
| Bloomberg Surveillance with Tom Keene (7-8:00 am) Posted: 26 Nov 2013 03:30 AM PST Bloomberg Surveillance
I am going to be appearing on Bloomberg TV this morning with Tom Keene & Company from 7:00 am – 8:00 am. Subjects we are discussing:
The live TV streams here. |
| Tapering is Tightening or Easing? Posted: 26 Nov 2013 03:00 AM PST Tapering is Tightening or Easing?
The Federal Reserve meeting minutes stimulated lots of discussion in the media and blogosphere. Cumberland's Chief Monetary Economist, Robert Eisenbeis, discussed this in his recent note. Here are some quick points from our desk. Markets are/were reacting to the Fed's confusing communication. Members of the FOMC (Federal Open Market Committee) are sending a mixed message. They divide along the lines of those, on the one hand, who advocate persisting in a stimulative course until the unemployment rate gets to something between 5% and 6% (and staying on this course for years), and those, on the other hand, who want to stop quantitative easing as rapidly as possible and get to some other, more neutral regime. Both sides, and those in the middle gradations, argue persuasively. Each policymaker's view is based on decades of experience with research about the implementation of monetary policy. The players on this monetary stage are serious observers of the roles of central banks. Both sides of the policymaker cohort add to the public debate, which in itself is massively divided. Among financial-market agents, media personalities, investment advisors, economists, and other skilled market observers, there is also an intense divide. Their views range similarly widely. The result is increased volatility in markets. We are witnessing a rapid response to every nuance and every change in point of view in every speech, conversation, or published argument. The added volatility rapidly moves market prices, as it did in the Treasury market selloff last week and in the stock market bounce a day later. A fundamental issue, as yet unresolved, is whether tapering is tightening or easing. In our view, it can be either. Fed purchases of federally backed securities could be reduced to an amount somewhat smaller than $85 billion per month. At the same time, the creation of net new federally backed securities might occur at a rate that falls faster than the reduction in the Fed’s purchases. Therefore, the central bank purchases as a percentage of the newly created paper would increase proportionally. Under such circumstances tapering would be easing. Yet the reverse might also hold. Suppose the federal government were to create new federally backed securities at a rate that was slowing rapidly. That is the case today because the deficit is shrinking. Suppose the Fed’s tapering was also decelerating and then quickly fell to zero. The Fed would no longer be a purchaser influencing the pricing of federally backed securities, and in this case rapid tapering would amount to tightening. Some in the Fed have pointed out that the size of the balance sheet is only part of the issue. The focus should also be on the composition of the Fed's balance sheet and, additionally, on how that composition integrates with the US banking system. The Fed is the storage warehouse of the entire banking system's excess reserves. The Fed created those reserves through quantitative easing. Now it is in the throes of a debate as to how much interest it should pay on those excess reserves. Here again we have division. In the Fed there are those who argue that the rate should be lowered or maybe go to zero. It is currently 0.25%. Others argue that the rate should be raised or that the amount of required reserves should be changed, thereby changing the excess reserves composition. All sides of this debate are passionately argued by skilled agents in monetary economics. In addition, other questions remain. What should the composition of the balance sheet be on the asset side? Should the Fed own long-term, intermediate-term, or short-term securities? What mix, what composition? How should the Fed change that composition over time? Again, the issue is being thoughtfully and forcefully debated in the public domain. Janet Yellen's task, among others as new Fed chair, is to unify the Fed’s communication strategy and outline a policy that will be representative and depended upon by agents in the marketplace. She has been working at this for some time. She has a lot of experience with this issue of central bank communications. It is about to become her show. We ask, seek, hope, and anticipate that the members of the FOMC and the soon-to-be-appointed additional personalities on the Board of Governors will coalesce to achieve a communications strategy that is clearer. Markets need to know the direction the Fed will pursue and be able to depend on it. Once they do, decisions can be made about investments and the structuring and deployment of capital in ways that will enable the economy to resume a faster growth rate. We cannot expect agents in the marketplace, established economic enterprises, or those in the entrepreneurial arena to make decisions of a long-term nature when they have to navigate confusing messages from the Fed. At Cumberland we hold the following view. We believe the short-term interest rate will be kept low for a long period of time, which we measure in years, not months. We do not expect the Fed to shock the economy by any action that would cause another recession. Some members of the Fed are already worrying about that possibility. There is evidence of deflationary and/or disinflationary forces at work now. That evidence has raised the eyebrows of some policymakers and commentators. We are among those who worry about this issue. We do not think Japanese-style deflation will happen but we worry that it could happen. The bond market has to confront a very mixed bag of issues. If the short-term interest rate is going to be anchored near zero, it is not likely that the long-term interest rate is going to shoot up to some wild figure. We have seen reports stating that the 10-year or even 30-year Treasury yield will go to 6%. We do not believe it. It is not going to happen soon. It won’t happen when the short-term interest rate is anchored near zero. Our view remains that some bonds are attractive. They need to be hedged so that interest-rate risk and volatility are dampened. Structuring barbells – that is, portfolios in which the maturities of some bond issues are shorter-term for defensive purposes and others are longer-term – is needed. We select only bonds in the categories where credit is good and where the worry about payment risk is minimal. We do not buy Detroit, Puerto Rico, or Jefferson County. We stay away from certain cities in California and elsewhere. Credit characteristics are critically important to examine. At the same time, there are great bargains in the tax-free municipal bond space because the tax-free interest rate on the highest-quality bonds is above the taxable interest rate in the long end of the Treasury curve. That absurdity persists for a variety of structural reasons. It cannot last forever, but while it does, it presents great bargains to a skilled bond buyer. Let's get back to the tapering, tightening, or easing discussion. Philadelphia Federal Reserve Bank president Charles Plosser has outlined the issue of acceleration and what it means with regard to quantitative easing. He used the metaphor of an automobile in a speech he gave last year. He described what it is like to have to change speed in the area of monetary policy. We utilized a similar metaphorical automobile in our discussion of tapering versus tightening. We call readers' attention to the piece we released on November 17, 2013 (http://www.cumber.com/commentary.aspx?file=111713.asp). We also would like to call readers' attention to President Plosser’s very thoughtful discussion. Here is the link: http://www.philadelphiafed.org/publications/speeches/plosser/2012/02-14-12_university-of-delaware.pdf. The key element to think about is not the size or make of the automobile but how we drive it. The key element is the speed at which monetary policy is altered and reapplied and what that policy is relative to other economic factors. The issue is complex and multidimensional. That is one of the reasons there are such diverse views among policymakers and commentators. What Plosser did in his Feb. 2012 speech was to characterize what might happen if the Fed were to continue in the policy mode it had adopted at the time. Plosser dissented during several FOMC meetings because he disagreed with the policies in place. We suggest readers take a look at Plosser's outline, because they can look back now on the views of someone who has been consistent in his arguments about monetary policy. Take a look at the last half of his speech. Review what has happened since he dissented and ask whether or not his warnings were prescient. In our view, he called attention to serious questions and has subsequently been validated by events. That does not mean the next three years will be as easy to accurately forecast as the last three years have been. What it does mean is that respect has to be given to the hawkish position at the Fed and to the warnings that are issued by hawks. On the other side, one could also examine speeches from dovish colleagues of President Plosser. They would argue that the labor-market recovery is weaker than desired or expected. One could look at the forecasts being issued by FOMC members. One could also notice how they have repeatedly forecast economic outcomes only to later revise their forecasts downward. The labor market is not robust. Coincidentally, we might be flirting with disinflation or deflation. Falling prices and weak labor markets are the stuff that turns the Phillips curve upside down. When confronted with both trends, does tapering mean easing, tightening, or something else? In our view, we are in uncharted waters with the extraordinary monetary policy evolving at the Fed. No one knows how this will play itself out. Meanwhile, there is work to do and life continues. We remain fully invested. And we wish all a happy Thanksgiving as we celebrate our great American tradition. ~~~ http://www.cumber.com/ |
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