I’m writing to give you some summer reading…because you don’t have enough to do. First, three friends of mine run an investment firm (Goshawk Global Investments, L.L.C.). They have written a couple of pieces about investing and I thought that you might find them interesting. I’ve combined both articles into one pdf and here is the link.
Second, I gave a presentation ten days ago in Galveston about the Fed. It was a long presentation (approximately two hours). I know what you’re thinking…wow, Sandy talking about the Fed for two hours. Who wouldn’t want to listen to that? It reminds me of when I recently visited a friend at a law firm that I worked at (25 years ago). He asked if I ever thought of returning to the law firm. I told him that I would definitely be interested if I was diagnosed with a terminal illness…because every day at the firm felt like a month.
Anyway, here’s a link to my slide deck. The purpose of the presentation was to summarize all of the issues that the Fed is thinking about. I hope that you’ll find that it’s a really good summary of what’s going on in the economy. You’ll see that it’s divided into sections:
1. Primer on the Fed
3. Fiscal Policy
6. Monetary Policy
7. How to Follow the Fed
The slide deck includes my slides as well as many slides that were used by Fed Presidents and Governors in their speeches. It summarizes many of their views on issues such as fiscal policy, the job market and inflation.
In order to put this presentation together, I spent a lot of time reading all of the Fed speeches (and other material). I have to tell you that I’m surprised about the fact that we’re talking about tapering QE3. In my opinion, many of the FOMC members are much more scared of deflation rather than inflation. I would imagine that this has to be a very heated debate right now. Some of the reasons that the potential tapering surprises me include:
1. The latest PCE price index (the Fed’s preferred measure of inflation) showed a .74% inflation rate. The core rate (excluding food and energy) was around 1.05%.
2. The Dallas Fed uses a “trimmed mean” (where they exclude outliers on both sides) and it had its first negative reading ever.
3. The Fed has relied on the fact that our inflation expectations are “anchored” at 2% — but we have to wonder how much longer it will take before these expectations become “unanchored”.
4. NY Fed President Dudley recently spoke about lessons from Japan. One of the (many) mistakes Japan made was to have a lot of “starts and stops” to their policies – where they thought that they had fixed things and then found out that they hadn’t. Does the Fed want to stop QE and then re-start it?
Don’t get me wrong when you read this. There are loads of potential problems from extremely accommodative monetary policy. In fact, here’s a link to a blog that I wrote about this issue. With that said, the Fed often fights the fire that is right in front of them – and that fire is deflation.
I’m sure that many of you think it sounds crazy to hear me say that the Fed wants inflation. In my opinion, there is no question that the Fed wants some inflation (2%) and has great fear of deflation. Ask Japan how difficult it is to end deflation. I even wonder if the Fed wants some inflation (that is higher than 2%) in order to make it easier for the government to pay back our massive debt.
With all that said, President Fisher made a very strong argument as to why the Fed should stop buying mortgage-backed securities. You should see this on Slide 129. As usual, he makes perfect sense and I would agree with cutting back on the MBS.
Finally, there’s a slide in the deck that is “black” because it was a link to a youtube video that President Fisher used in one of his presentations. Here’s the link (I found this amusing).
I hope you enjoy this slide deck. Most importantly, I hope that it’s a good summary of the economy and helps to keep you up to date. I’ll be interested to hear the FOMC statement today.
Have a great week.
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