Take Advantage of Shift From Bonds to Stocks

For several years, investors have anticipated a “great rotation” from bonds into equities, and for several years, they were dead wrong. In fact, even as equities were quietly rising for the past years, both domestic and international money has continued to surge into bonds. At long last, that is beginning to reverse, which demands a reconsideration of strategies that seemingly have worked so well and so easily for so long. As long as bond prices were rising, pouring money into assets that had a certain return looked like a slam dunk. No longer.

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Market Stresses in 2015 Can Have Good Outcome

For the past few months, financial markets have been positioning for a change in Federal Reserve policy to move from “very easy and accommodative” to “easy and accommodative.” The decision of the Fed, finally, to raise short-term lending rates by 25 basis points was met with relief that months of will-they won’t-they were finally over. At the same time, the energy and commodity complex has continued to melt down as prices plummet. The result has been both an unusual amount of turmoil in fixed income markets and a rising chorus of voices anxiously drawing parallels to 2008-2009.

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Hey, Donald: Washington Is Working!

The view of Washington as a dysfunctional system is deeply entrenched—and of course it’s the most popular meme on the GOP campaign trail. “Nothing works in our country,” Donald Trump said again at Tuesday night’s debate, repeating his favorite (and seemingly most effective) appeal to a base that’s disgusted with politics as usual. Yet the past week has been a blow to cynics everywhere, because lo and behold, Congress, the White House, and the Federal Reserve all acted on vital economic policy and did so with minimal drama.

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The Uberization of Money

Imagine that you want to buy a home. You might find a real-estate agent to show you around, which is a very 20th-century way of doing things. Or you might go 21st century and use the Web to research prices and available properties and to take a few virtual tours.

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Janet Yellen's Quiet Revolution

Donald Trump turned his rhetorical bazooka on Janet Yellen this week, accusing the Fed chair of being “highly political” and merely doing President Barack Obama’s bidding by declining to raise interest rates. In this as in so many things he says, Trump was issuing wisdom from his rear end, but the GOP candidate from clowntown did serve one useful purpose. He prompted us to ask yet again: What is Janet Yellen’s game?

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Ben Bernanke, the Grown-Up in the Room

Ben Bernanke’s new memoir, The Courage to Act, is neither easy nor scintillating reading. But clunky and dry as it is, the 600-page tome serves as a provocative reminder that not all high officials in our largely dysfunctional government are motivated by partisanship or the desire to protect bureaucratic turf. It offers proof that Bernanke and the Fed were the grown-ups in the room during a period of crises unprecedented since the Great Depression, regardless of whether you believe they have conducted themselves brilliantly or poorly.

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How Fed Inaction Changes the 2016 Election


It may sound like a Zen koan, but the longer the Federal Reserve declines to take action in coming months, the more its inaction will seem like action. To put the paradox another way, the Fed’s failure to raise rates makes it even more of an election cycle factor in U.S. domestic politics, keeping the central bank in the spotlight to an excessive and unconstructive degree, like a low-level fever that doesn’t keep you in bed but casts a general pall.

It has now been more than seven years since the Fed last raised interest rates, and the rationale for last week’s most recent decision came as something of a surprise to market players: In addition to seeing little evidence of inflation, the Fed in its statement also expressed concern about global volatility and continued instability.

That was not taken well by some. Said Rick Santelli of CNBC, he of Tea Party fame, the Fed has now expanded its mandate to become “the U.N. central bank.” Others wondered whether, in addition to its mandate to assure price stability and full employment, the Fed was now unofficially adding a third goal: maintaining global financial stability. And that, you can be sure, will be sure fodder for Republicans and not a few Democrats who already believe that the Fed is too powerful, too unaccountable and too focused on the needs of the financial system at the expense of average workers.

There are, of course, legitimate questions about whether the Fed and other central banks are erring in their multiyear course of easy money. The European Central Bank is now in the midst of its own policy of “quantitative easing.” While the European Union has ceased its economic free-fall, that is about the most that can be said of its current economic recovery. Japan has been in the midst of more than two decades of easy money and near-zero interest rates since the 1990s. It too has exhibited low growth. The United States has recovered from the worst of the global financial crisis of 2008-09, especially in terms of a low unemployment close to 5 percent and growth above 2 percent, but years of zero interest rates have hardly fueled a boom in anything other than some speculative stocks, urban real estate in select cities, and high-end art.

Because the Fed has given no clear sense of when it might actually start to raise rates, it thus has solidified its profile as an eternal Hamlet for months to come. The question "Will they or won't they?" has become tedious and borderline-obsessive. There was some hope that this conversation would come to an end; now it will simply go on, absent some major event that makes it irrelevant.

Lost in the market noise and the political spin, however, is precisely the point underscored by the Fed itself and Janet Yellen: It is a major actor on a complicated global stage that has a large cast of characters—one of whom, Chinese President Xi Jinping, is visiting Washington this week. Its mandate, based on legislation in 1913 and updated in the 1970s, speaks to a world that no longer exists. A mature governing legislature would, of course, update and refine that mandate to reflect changed global realities. But the American Congress today is incapable of that type of thinking, as least as a body; individual members are certainly able to recognize the ways in which an entire swath of laws and institutions are out of date. But good luck doing something about it.

Instead, the appointed officials of the Fed are left to muddle through and to try to reconcile a series of demands along with a political minefield. Markets want certainty, and politicians want transparency, and everyone wants more growth. The problem is that certainty is a myth; transparency is a code word for forcing a partisan agenda; and growth for mature economies facing technological disruption and labor competition globally is beyond the control of any one institution.

None of those realities plays well in an election cycle. The very messiness of a modern mature economy in flux may be why none of the Republicans during the last debate mentioned it much. There is no good sound bite. Meanwhile, both Bernie Sanders and Hillary Clinton have been advancing detailed economic plans, ranging from an end to short-termism on Wall Street to an attack on economic inequality. Worthy those may be, but they engage on a cerebral level rather than on the visceral, and hence get short shrift in our national discussion.

By not acting, the Fed feeds into an old red-meat political narrative of indifferent or downright malicious financial elites of the East Coast establishment making policies secretly and opaquely to benefit the interests of a privileged few at the expense of real hard-working Americans who suffer the consequences. Such a story was spun more than a century ago by the populist William Jennings Bryan and his doomed presidential campaign thundering that Americans were being crucified on a “cross of gold.” The Fed today isn’t responsible for that history, but surely it could be less tone-deaf to it.

Fed blame, however, is no more a winning proposition now than it was then. We can excoriate (or credit) the Fed all we want. Its inaction makes it easier for various actors casting about for sound bites and solutions to use the Fed as Exhibit A for why things aren’t better. Would that it were so simple.

Don’t Turn America Into Europe

The Europeans—some of them, anyway—are finally beginning to concede that austerity has gone awry. There’s less growth, more structural unemployment, little bank lending and economic contraction. And now, of course, we have a political backlash in the person of Alexis Tsipras, the leader of Greece’s Syriza party, who upon winning the prime ministership last Sunday declared grandly (and probably over-optimistically) that Greece will now “leave behind the austerity that ruined it.”

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What Should Investors Expect in 2015?

‘Tis the season for looks back and looks forward. The financial world will be replete with such missives in the weeks to come, and that is actually all for the best. Given the fluid nature of money and planning and investing, regular assessments of what worked and what didn’t, how the year played out versus expectations, and what might lie just ahead, are vital. While it is true that forecasts about the future usually say more about present sentiment, thinking ahead does provide a framework for assessing likely risks and potential opportunities.

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The Fed Is Not As Powerful As We Think

This past week marked the annual gathering of bankers, financial officials, and other economic experts hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming. On Friday, Fed Chair Janet Yellen and European Central Bank head Mario Draghi both spoke; in a slow week for the markets, these speeches received the bulk of the econ media’s attention, and Yellen’s remarks were heralded for days as the week’s major financial event.

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Don't Fear Risky Assets

We live in a world that emphasizes risk. That is true in general, but is especially so in the financial world. Since the financial crisis of 2008–2009, financial professionals have been acutely attuned to risk—and for good reason. Too many felt they were caught off-guard and unprepared by the near-implosion of five years ago. That in turn followed volatile periods from the Internet bubble of 1999 into early 2000, through the events of 9/11, and then a sharp market contraction until October 2002. After nearly 15 years of drama, it is hardly surprising that the financial world is primed for risk.

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Deflating Expectations

n a Reuters poll out this week, most economists say they are expecting more robust inflation this year, to the tune of 2 percent. The poll accurately reflects the plethora of emails from research firms in my inbox—a slowly building chorus predicting rising prices along with an uptick in overall economic activity.

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Right Said Fed

Last week, Federal Reserve Chair Janet Yellen held her first press conference, where just a few brief words managed to upend the financial markets. When asked about the possible timing of raising short-term interest rates, she explained that there would be a “considerable period” between the end of the bond buying program—currently being wound down at a rate of $10 billion a month—and an increase in rates. What’s “a considerable period”? Nothing too specific, maybe “about six months.”

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