The consequences of policymakers returning to the same tools employed in the financial crisis.
There are three key areas where the allocation requirements of passive fixed-income vehicles have an impact on the market.
We entered into the current crisis with a whole financial system that had been incentivized by policymakers to take on excessive levels of debt and leverage. The turmoil we are seeing right now is the result of the unwinding of this leverage.
Markets often overshoot, and just because things are cheap doesn’t mean they can’t get cheaper.
Without the right programs, this shortfall in credit availability will increase and it will further deepen the crisis.
The Fed still has a number of tools at its disposal that haven’t yet been implemented.
In this remarkable period in our history, we must renew our resolve to the commitment to always do that which is true and noble for all. Together, we can meet this historic challenge.
If I had written a commentary on how 4,000 people dying from the flu would topple global financial markets, I think I would have been deemed insane. Yet today that is exactly the story.
The cognitive dissonance in the credit market is stunning. I recently have had the feeling that I’m living peaceably in Britain during the 1930s while on the continent the Germans were building weapons, expanding their army and navy, and opportunistically grabbing land.
Ultimately, investors will awaken to the rising tide of defaults and downgrades.
The Fed’s cure might make the disease worse without fixing the problem.
During the course of the last two years, we have consistently indicated that the course for the U.S. economy, along with risk assets and rates, was contingent on the impact of any unexpected exogenous events, most likely from overseas.
Some believe we may have seen the Federal Reserve’s (Fed) last rate hike in this cycle, and that the next step from here will be a cut in rates as the economy loses momentum going into the first half of next year. I believe that view is plainly wrong.
Recession fears resurfaced at the end of 2018 as a combination of negative data surprises, communication blunders by the Fed, slowing growth overseas, and rising trade tensions triggered a selloff in risk assets that led many in the market to fear a recession was imminent.
Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.
Ten charts illustrate the macroeconomic trends most likely to shape Fed policy and investment performance in 2019 and beyond.
An uptick in corporate defaults in 2019 will mark the beginning of a prolonged period of stress in the corporate bond market.
What would be a normal seasonal correction is turning into the worst December selloff in equities since the Great Depression.
To achieve long-term prosperity, rational immigration policy must become a priority.
Investors should stay guarded for exogenous shocks that could pull the next recession forward and cause markets to reprice credit risk.
If you want to see who the real victims of tariffs are, go look in the mirror.
After several quarters of low volatility, tight spreads, and abundant liquidity, financial conditions are shifting.
New developments in fiscal policy, the labor market, and the neutral interest rate suggest that the expansion could extend into the latter half of our recession range.
As the Federal Reserve (Fed) tightens monetary policy further, we expect to see default rates higher next year. Loan recovery rates averaged 70 percent between 1990 and 2017 as a result of their secured status and seniority in the capital structure. Senior secured bond recovery rates averaged 58 percent over the same period, while senior unsecured bond recovery rates averaged 43 percent. We are concerned about distressed exchanges as the risk of re-default is high. About 7 percent of high-yield corporate bond issuers have defaulted in the past.
The Western Pennsylvania of my youth was a magical place, with bucolic parklands and architectural gems like Frank Lloyd Wright’s Fallingwater. The decline of the steel industry over subsequent decades has left this beautiful countryside scarred with abandoned mills and rife with the toxins and refuse of a dying industry. This experience informs my perspective when I think about how to tackle the problem of funding the estimated $2.5 trillion gap in annual global infrastructure needs: How can future development avoid the mistakes of the past?
The business cycle is one of the most important drivers of investment performance. As the nearby chart shows, recessions lead to outsized moves across asset markets. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly.
Investors need to be vigilant, as stocks and bonds are expensive, volatility is low, and risks lay ahead.
After years of relying on monetary policy to stabilize the U.S. economy, policymakers have redoubled their commitment to stronger pro-growth fiscal policies. As post-election Washington sets its sights on growth-oriented reforms, policymakers should remember that economic growth in any nation is determined by the four basic factors of production—land, labor, capital, and entrepreneurship.
Longer-term bond yields are near their highs for this cycle, while the environment for riskier assets like high-yield bonds, bank loans and stocks remains positive.