10 Jun 10 Fighting the Fannie & Freddie Fires
After first quarter losses of more than $13 billion, Fannie Mae is asking for $8.4 billion from U.S. taxpayers to help cut their losses. To date, the government has given roughly $145 billion to Fannie Mae and Freddie Mac, and that number will most likely keep climbing. That’s because the President has allowed for the government to cover unlimited losses of the two companies until 2012.
Fannie and Freddie were created by Congress to buy mortgages from lenders, combine them into investment pools and sell them to investors. Together they cover about half of all home mortgages in the United States. This is problematic because foreclosures are expected to increase, defaults are expected to remain high and the actual volume of sales has decreased since the fall. And to make matters worse, experts do not see a significant housing correction for some time.
So what does this mean for MERS? The Aggregate Bond Index (fixed income) is normally split into four groups to diversify risk. However, since the Fannie/Freddie upset in 2008, three of the four (agency mortgages, government agencies and U.S. Treasuries) sectors have been unintentionally forced into one government controlled category representing 73% of the aggregate bond index. The problem with this transition is that the Aggregate Bond Index is highly sensitive to what the Federal Reserve does with the money supply and the benefit of diversification in the index has been eroded.
While this is problematic, MERS Investment Department is well appraised of the situation and is monitoring it closely.
— Posted by Bob Griffin and Kathryn Gardner
Tags: Bond Index, Congress, Fannie, Fed, Federal Reserve, Freddie, MERS, MERS of Michigan, mortgage, President
18 Mar 10 15 Months & Counting …
In the second Federal Open Market Committee (FOMC) meeting of the year all eyes and ears were focused on one sentence — interest rates will remain historically low “for an extended period of time.” It was a much-anticipated meeting, as investors waited in the off-chance that Fed chairman Ben Bernanke altered the wording of his long-standing mantra. Instead, a status quo, “no change statement,” is a clear sign that the Fed is still cautious about the U.S. economy, suggesting zero interest rates are still very much needed.
In order for the Fed to move from changing specific words within its statement to an actual tightening strategy, a couple of key economic factors must improve. Speculation is that the Fed will be watching for consistent job creation/increases, improvement in the housing market, and robust GDP growth. Until these three factors dramatically improve, I don’t see the Fed raising rates anytime soon. Until that time, investors will hang on every word the Fed utters.
— Posted by Bob Griffin, MERS Investment Product Specialist
Tags: Ben Bernanke, economy, Fed, Federal Reserve, FMOC, GDP, growth, housing, interest rates, job creation, market, MERS, MERS of Michigan, Municipal Employees' Retirement System
25 Feb 10 Not a Big Deal, Really!
The Federal Reserve raised its discount rate or “penalty rate” that it charges banks for emergency loans after the market closed on Feb. 18. The move created quite a stir, a reaction Fed Chairman Ben Bernanke was trying to avoid.
Remember, the discount rate is much different than the fed funds rate. The fed funds rate is the rate at which banks loan each other money overnight. The rate is controlled by the Federal Open Market Committee (FOMC), which manipulates the rate and therefore the supply of money in the U.S. economy.
The move doesn’t “signal any change in the outlook for the economy or monetary policy,” and is “not expected to lead to tighter financial conditions for households or businesses,” the Fed said. It emphasized that a broader tightening of credit for consumers and businesses is still at least several months away. Fed officials view the economy as recovering, but still weak and thus not strong enough to justify tighter credit conditions more broadly.
This move, in my opinion, shouldn’t have surprised anyone, because Bernanke has been extremely transparent about future monetary moves. In fact, Bernanke has been signaling for some time that they intended to raise the discount rate as part of an effort to pull the punch bowl from banks in an effort to gently wean them off “the sauce.”
Bernanke has been very diligent in repeating his mantra and did so again yesterday: “the fed funds rate will remain near zero for an extended period of time.” If he continues this pattern of transparency — and I believe he will — it will be towards the end of 2010 before we have to worry about “real” fed tightening.
— Posted by Bob Griffin, MERS Investment Product Specialist
Tags: Ben Bernanke, discount rate, Federal Funds Rate, Federal Reserve, FOMC, market, MERS, MERS of Michigan, transparency
17 Feb 10 Enjoying A Free Lunch
In today’s fast-paced, technology-driven investment world, where news stories and economic releases rule each trading day, MERS remains steadfast on the long-term viability of the portfolio. In fact, we are currently in the middle of a full-blown asset allocation study, which is done formally every five years. This process will assist us with developing a new — or confirm our current — asset mix, which should allow us to meet our actuarial rate of assumption of 8 percent.
Asset allocation is the notion that different asset classes offer returns that are not perfectly correlated (that is, producing varied results at varied times), and therefore reduces the overall risk of the portfolio. Said differently, having a mix of asset classes — better known as diversification — is more likely to meet our goals (actuarial rate of return of 8 percent) in terms of the amount of risk and possible return.
Diversification has been researched extensively by the academic world, and its importance in a portfolio cannot be overstated. That’s why diversification has been described as the only “free lunch” in the investment world.
This discipline of asset allocation keeps us focused on our long-term investment goals and away from the trendy temptations of short term, often complicated, investment ideas and strategies.
More to come as we conclude our study …
— Posted by Bob Griffin, MERS Investment Product Specialist
Tags: asset allocation, discipline, diversification, economic, long-term, market, MERS, MERS of Michigan, portfolio, short-term
10 Feb 10 The Zero Hour
In a recent interview by Margaret Brennan of Bloomberg, Marc Faber suggested that the U.S. government has hit the “zero hour,” or the point at which additional debt/stimulus will no longer impact positive growth in U.S. GDP.
If Faber is correct, Ben Bernanke and Tim Geithner — the ones center stage in our economic recovery — have an interesting dilemma. In fact, notable bear Bob Janjuah from RBS highlights this problem in his recent warning that the next bubble (some argue it’s happening now) will be brought on through government intervention, sovereign risk, and excess liquidity. He goes on to suggest that the U.K. and the U.S. have again failed to do its job of seeing a delusional debt-fuelled Ponzi Bubble for what it is.
I tend not to be as bearish as Faber and Janjuah, and tend to agree with Carnegie Mellon’s Allan Meltzer, who says the mounting deficit is indicative of a new era in Washington. “We used to have a rule people believed in,” Meltzer wrote, “balanced budgets. And now that’s gone.”
Has hope gone with it? I don’t think so. With specific stimulus designed to increase private investment, we might finally see some durable job creation. From there, it’s up to us. I actually find some optimism in the fact that as Janjuah puts it, “the real vigilante this time seems to be The People.”
Don’t look now. We might actually have a voice in this drama after all.
— Posted by Bob Griffin, MERS Investment Product Specialist
Tags: Allan Meltzer, Ben Bernanke, Bloomberg, Bob Janjuah, budget, Carnegie Mellon, debt, GDP, growth, Investments, jobs, Marc Faber, MERS, MERS of Michigan, RBS, stimulus, Tim Geithner
19 Jan 10 Do We Need a Little More Gas on the Fire?
One of the biggest questions being asked today is, “What happens when the punchbowl (i.e. stimulus money) is pulled away?” And honestly, it’s a good question because history would suggest that government gets it wrong most of the time. It either happens too soon and we have a double-dip recession, or it happens too late and we end up with runaway inflation — in either case, it’s bad news for you and me.
I’m sure most of us have tried to build a bonfire at one time or another. And with wet wood, it’s nearly impossible unless you have gas and a lot of matches. The process goes something like this — gas, match, big flame, little flame — then no flame at all. More gas, match, big flame, little flame, no flame but dryer wood. So you repeat this process a couple of more times, and when the wood’s dry enough, you end up with a roaring bonfire on the verge of being out of control.
That’s not too different from what government is attempting to do with the economy. Good economic numbers just mean that a lot of gas was just added to a small spark. Likewise, systemic issues still persist (housing, unemployment), in the form of wet wood, dampening the flame.
I guess the point is, if you play with fire, you may get burnt. But it sure is a cold, dark place without it.
— Posted by Bob Griffin
Tags: economy, government, housing, MERS of Michigan, stimulus, Unemployment
28 Dec 09 Low Rates, Lower Expectations
In case you missed it, here are some oddments from the Dec. 16 FOMC Statement …
“Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.
“Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
“In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009.
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The Committee was unanimous in its decision.
— Posted by Bob Griffin
Tags: Board of Governors, Federal Reserve, FOMC, housing, labor, market, MERS of Michigan, spending
28 Dec 09 BTW …
A recent comment from Andy Busch, BMO Capital’s Global Currency and Public Policy Strategist: “Twelve major banks, including Citigroup Inc, Goldman Sachs Group Inc, and JPMorgan Chase & Co will participate in a White House meeting with U.S. President Barack Obama on Monday. Obama has summoned the bankers to press them to increase lending to small businesses and discuss his administration’s financial regulatory reform efforts.”
What happened? In short, the President told big banks to lend more. In fact, the rumor is that he told them that America bailed them out and now it’s time to repay the favor by loaning more money to small businesses, which in turn will create job growth.
Will it happen? We’ll have to wait and see.
— Posted by Bob Griffin
Tags: Andy Busch, Barack Obama, BMO Capital, Citigroup, Goldman Sachs, JPMorgan Chase, MERS of Michigan
04 Dec 09 The World is Flat — and Short Sighted
For most of us, Thanksgiving is a time of relaxation, reflection, and giving thanks, all while stuffing our bellies full of wonderfully prepared food. But thanks to the financial markets, we experienced a little stress around the dinner table this year.
What threw the markets into turmoil was a request by Dubai World, the investment arm of the Dubai government, to delay repayment on $59 billion of its liabilities. Normally this Las Vegas wannabe’s financial woes wouldn’t rattle the world financial markets but, as Thomas L. Friedman points out in his bestselling book title, The World is Flat.
And in a flat world, everything seems to be tied together. So Dubai is just another example of investors taking on too much debt and another reminder that the Band-Aid doesn’t cure the disease, it just temporarily covers it up.
A glance at the financial headlines these days just confirms that the Band-Aid is slowly being peeled off the problem, which is a general lack of fiscal discipline. John Hussman summed it up perfectly in his recent article, Reckless Myopia:
“In part, the market’s increasing propensity toward speculation reflects the increasing lack of fiscal and monetary discipline from our leaders. Policy makers who seek quick fixes and could care less about long-term consequences undoubtedly encourage investors to embrace the same value system. Paul Volcker was the last Fed Chairman to have any sense that discipline and the acceptance of temporary discomfort was good for the nation.”
Honestly, we don’t have all the answers. What we can tell you is that we are not chasing risk just because it’s what seems to be in vogue.
— Posted by Bob Griffin
Tags: Dubai World, Federal Reserve, financial markets, fiscal, Investments, John Hussman, Las Vegas, liabilities, MERS of Michigan, pension, risk, Thanksgiving, The World Is Flat, Thomas Friedman, world market
23 Nov 09 U.S. Jobless Claims: Not as Awful as Expected!
U.S. initial claims were unchanged in the week of November 14th at 505k, but continuing claims rose to 5,611,000. Here in Michigan, one report by the University of Michigan predicts job losses will continue through 2010.
But no worries, because Fed Chairman Ben Bernanke said in a speech last week, “The best thing we can say about the labor market right now is that it may be getting worse more slowly.” I don’t know about you, but I can hardly stand all that optimism!
A less slumping job market (and sarcasm) aside, the overall economy appears to be getting better more quickly. According to a recent article in Bloomberg, the rally in stock prices, low short-term interest rates and slowing job losses are signs consumer confidence and spending will stabilize soon, limiting the risk the economy will retrench.
And with the Dow keeping its head above 10,000 for the first time in more than a year, things seem to be looking up — at least for now.
Now that’s optimism. It remains to be seen if it’s realism.
Tags: Ben Bernanke, Bloombery, Dow, Federal Reserve, job losses, jobless claims, MERS, MERS of Michigan, Michigan, stabilize, stocks, University of Michigan
