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Why inflation is lower than you think
Capital Markets
<p>Financial pundits routinely claim that inflation is much higher than the reported statistics. We hear, for example, that food prices have risen much faster than the roughly 1.5% increase in the consumer price index (CPI) over the past several years. Viewed over the longer term, however, inflation is far lower than reflected in the published data.</p> <p>The reason for this anomaly is that the CPI doesn’t reflect the rapid advances in technology and the new products and services that have benefited everyone.</p> <p>The implications are profound. For example, real GDP growth is greater than has been reported, and some claims of income inequality are misleading.</p> <p>This theme was the focus of two recent presentations I attended. On October 18, the economist Woody Brock hosted a private gathering of investment professionals from Australia and New Zealand, organized by the Portfolio Construction Forum, at his home in Gloucester, Massachusetts. On October 22, Rick Rieder, the CIO of fundamental fixed income at BlackRock, spoke at the CFA Institute Fixed-Income Conference in Boston.</p> <p>Let’s look at the distortions in the reported inflation statistics and the implications they have for policymakers.</p> <p>The problems with the CPI and PCE</p> <p>The CPI, which is administered by the Bureau of Labor and Statistics (BLS), and the personal consumption expenditure (PCE) index, which is the Fed’s preferred metric for measuring inflation, rely on tracking the prices of a basket of consumer goods. Those goods include food, clothing, energy and housing, which is the largest component of both indices.</p> <p>They differ in that the PCE maintains fixed weightings, whereas weightings in the CPI are adjusted over time. The CPI also incorporates “hedonic” adjustments; it assumes, for example, that if the price of beef increases rapidly, then consumers will adjust their tastes and purchase more chicken. As a result of the difference in weightings, over time the CPI reports lower inflation than the PCE.</p> <p>But the problem is that the hedonic adjustments do not fully reflect advances in technology.</p> <p>As Brock said, the published inflation data “seriously overstates inflation.”</p> <p>Technology advances are apparent in the quality of televisions, which has improved vastly over the past 50 years; compare the small black-and-white TV sets of the 1960s to today’s 60-inch high-definition flat-screen pictures. As Brock noted, the typical lifespan of light bulbs has increased from four months to nearly 20 years over the last couple of decades. Our chances of surviving a motor vehicle accident is five-times greater since the introduction of seatbelts and airbags.</p> <p>Read more at Advisor Perspectives.<br /> Photo: Lucas Stanley<br /> &nbsp;</p>
Bernanke identifies greatest threat to global economy
Capital Markets
<p>Ben Bernanke knows a few things about financial crises. As US Fed chairman he had to cope with the 2008 credit crunch and subsequent economic meltdown. </p> <p>In a fireside chat with veteran journalist Andrew Neil hosted by The Spectator on October 27 he warned that although most indicators don’t suggest the world is approaching another recession, “emerging markets are the most meaningful financial risk at the moment.”</p> <p>A consensus is rapidly building that the dollar debt amassed by some emerging countries during six years of low interest rates is a disaster waiting to spread contagion throughout the financial system. A few weeks ago the IMF waved the same red flag and the credit rating agencies have expressed the same fear.</p> <p>So the chances are that if there is a crisis, then it is going to be caused by something else entirely.<br /> Photo: Insider Monkey<br /> &nbsp;</p>
China’s property bubble still buoyant
Capital Markets
<p>Predictions of an imminent crash in real estate prices is a favorite among China-doomsayers. But it’s not going to happen yet, according to a report by Moody’s Investor Services  published on Thursday (subscription).</p> <p>Positive sales momentum for the country’s property sector will continue this quarter, fired by supportive monetary and regulatory polices implemented since the second half of last year.</p> <p>"These favorable policies -- including the increased availability of mortgages, as well as lower down payments and funding costs to buyers financing their second homes with bank mortgages -- will support overall sales over the next 12 months and help maintain healthy year-on-year growth into 4Q 2015," says Stephanie Lau, a Moody's assistant vice president.<br /> Photo: drnan tu<br /> &nbsp;</p>
The Fed's dilemma
Capital Markets
<p>Twice in the past 30 years the U.S. Federal Reserve has faced the prospect of prematurely abandoning tightening during market turmoil. Today, global currency devaluations, market volatility, and plunging commodity prices have trapped the Fed in a similar policy dilemma.</p> <p>In 1987, the central bank aborted rate rises and reversed course after a stock market crash. Again, in 1998, after the failure of Long-Term Capital Management (LTCM), a highly leveraged hedge fund, the Fed abandoned its planned rate increases to stabilize markets and avoid a global crisis. In both cases, the unintended result of delaying was inflated asset prices, which ultimately destabilized the economy, and led to severe financial consequences and recession.</p> <p>In 1986, inflation slowed as oil prices collapsed, raising serious concerns about U.S. economic expansion following the worst postwar recession up to that time. Policymakers were slow to raise rates, allowing for a surge in equity prices in early 1987 as energy prices rebounded.</p> <p>After falling behind the curve, aggressive Fed actions to address inflation inadvertently pricked the stock market’s speculative bubble. In October 1987, U.S. equities plummeted more than 30 percent. The Fed quickly reversed course and reduced rates.</p> <p>By mid-1988, markets stabilized and the Fed again raised rates to head off inflation. By this time, more than four years of accommodative monetary policy had led to a commercial real estate boom with a glut of new properties. As the economy tumbled toward recession in 1990, a sharp decline in property values caused defaults and the failure of financial institutions. The government-sponsored Resolution Trust Corporation was set up in response to resolve troubled banking assets.</p> <p>After the ensuing recession and another period of accommodation, the Fed again raised rates in the mid-1990s. During this time, many Asian nations had pegged their currencies to the U.S. dollar. By 1997, the pressure to maintain these pegs amid rising U.S. rates became too much for some. Thailand was first to break its peg, allowing the baht to collapse and increasing pressure on neighboring economies in a dramatic round of competitive devaluation.</p> <p>Volatility in Asia Has Influenced the Fed Before<br /> Since 2009, the U.S. employment gap has been shrinking continuously, as the U.S. Federal Reserve intended. The employment gap is now approaching zero, a signal that supports a rate hike, but China’s slowdown is causing major market turbulence, especially in Asia. This puts the Fed in a similar position to the Asian financial crisis in the late 1990s. Then, the U.S. employment gap was approaching zero while dramatic currency devaluations among Asian countries threatened to destabilize the global economy. In that instance, the Fed abandoned its plans to tighten, inadvertently setting the stage for the Internet bubble.<br /> Shrinking U.S. Employment Gap amid Selloff in Asian Currencies</p> <p>Source: Haver Analytics, Bloomberg, and Guggenheim Investments. Note: Asian currencies include China, Japan, Korea, Taiwan, Thailand, Philippines, Malaysia, India, and Indonesia. The index is based on monthly currency data. Past performance is not indicative of future results. Data as of 8.31.15.</p> <p>By 1998, contagion from emerging markets reached the United States, pressuring domestic m</p>
Daily Scan: Fed spooks the markets; Deutsche to slash 35,000 jobs
Capital Markets
<p>Updated throughout the day</p> <p>October 29</p> <p>Asian bourses closed mixed on Thursday as hopes of further easing from the Bank of Japan did very little to quell fears over a December Fed rate hike.  Hong Kong’s Hang Seng Index finished the session down 0.60%, while China’s Shanghai Composite and Japan’s Nikkei Average ended the day up 0.36% and 0.17% respectively. As for the rest:</p> <p> Hang Seng China Enterprises Index: -1.13%<br /> Shenzhen Composite: +0.80%<br /> Straits Times Index: -1.24%</p> <p>Over in Europe, things aren’t looking that great either. At pixel time, the FTSE 100 is down 0.85%, the DAX 30 flat, and the CAC 40 down 0.25%. S&amp;P 500 futures meanwhile are signaling a 0.20% drop over in Wall Street.</p> <p>Here’s what else you need to know:</p> <p>Deutsche Bank to lay off 35,000. Speaking on the bank’s highly-anticipated strategy update, Deutsche Bank CEO John Cryan told the press that he plans to reduce his firm’s full-time workforce by 9,000 and shut down the bank’s operations in 10 countries. The massive overhaul, once finished, will result in around 35,000 jobs lost. CNBC</p> <p>China buys 130 jets from Airbus. The deal, which was announced after Chancellor Merkel’s meeting with Premiere Li, is reportedly valued at roughly $17 billion. Reuters</p> <p>Japanese industrial output surprises to the upside. Japan’s industrial output data climbed 1% in September, well above economists’ expectations for a 0.6% fall and a massive turnaround compared to August’s 1.9% drop. The climb was also the first in three months. Ministry of Economy, Trade, &amp; Industry</p> <p>Samsung unveils $9.9 billion stock buyback program. After reporting its first year-on-year profit climb in two years, Samsung Electronics announced that it will be buying back and cancelling nearly $10 billion worth of its own shares. The buyback program, which will be implemented in several stages, will begin on Friday and end “within one year.” Financial Times (paywall)</p> <p>U.S., China to hold talks over warship patrol. Admiral John Richardson and Admiral Wu Shengli are set to hold an hour-long video teleconference on Thursday over the USS Lassen’s recent patrol near the Spratlys. This will be the third video teleconference between the two. South China Morning Post (paywall)</p> <p>Fed stands pat on rates. The Federal Reserve, in a near-unanimous decision, voted on Wednesday to keep rates unchanged near zero. They did however open the door for a December rate hike. Federal Reserve</p> <p>Ping An to snap up U.S. properties. Teaming up with Blumberg Investment Partners, China’s second largest insurer has formed a $600 million fund meant to snap up logistics properties across the United States. South China Morning Post (paywall)</p> <p>The Starwood Hotel plot thickens. Chinese companies have been vying for the hotel chain, which includes The Westin, W Hotels, and St. Regis. Now H</p>
French billionaire acquires 5 percent of Warburg Pincus
Capital Markets
<p>Groupe Marc de Lacharriere (GML), the family holding company of French billionaire, Marc Ladreit de Lacharrière acquired a 5% stake in Warburg Pincus, a private equity firm with $35 billion of assets under management.</p> <p>In a statement, Mr. Ladreit de Lacharrière said, “We are very pleased to have the opportunity to invest in Warburg Pincus. GML is delighted to become a long-term partner with a global private equity firm and Warburg Pincus perfectly matches our objectives with respect to investing model, culture, and persistence of performance.”</p> <p>GML owns several investments, including 86% in Fimalac, a publicly traded company in France.</p> <p>Mr. Ladreit de Lacharrière is now a Senior Strategic Partner of Warburg Pincus following the investment of GML. The French billionaire plans to invest in the private equity firm’s future funds as a limited partner, according to the private equity firm.</p> <p>A person with knowledge of the matter told the New York Times that Mr. Ladreit de Lacharrière had been looking for private equity firm to invest over the long-term. The person said the French billionaire approached Warburg Pincus regarding the transaction.</p> <p>Charles R. Kaye and Joseph P. Landy serve as co-chief executives of Warburg Pincus. Former U.S. Treasury Secretary Timothy Geithner joined Warburg Pincus as president in 2013.</p> <p>The private equity firm did not disclose the amount of GML’s investment, and other financial terms in the transaction.<br /> Comments from Warburg Pincus executives<br /> Warburg Pincus said it would use all the proceeds from the transaction to invest in its funds. The private equity firm said the investment would enhance the alignment between its professionals and limited partners. It would also create additional flexibility for the firm.</p> <p>“Warburg Pincus has always valued clearly aligned interests – within our general partnership, with our limited partners who invest in our funds and with the management teams of the companies in which we invest. We know GML shares that commitment and this transaction is consistent with those interests,” said Mr. Kaye.</p> <p>Mr. Landy is looking forward to partnering with GML as they work on improving Warburg Pincus’ network of potential investment opportunities.</p> <p>Mr. Geithner said, “We are honored to introduce a figure of Marc’s standing to our firm.”</p> <p>This story first appeared in ValueWalk.<br /> Photo: Joel</p>
Daily Scan: Stocks rebound after Fed meeting; Hyatt talking about Starwood bid
Capital Markets
<p>Updated throughout the day</p> <p>October 28</p> <p>Stocks rebounded after the Federal Reserve announced that interest rates are... wait for it... still near zero. But hey, there's always December. The Federal Reserve is hinting more strongly that December could be it for a rate rise. The Dow rose 1.1% at that news. The S&amp;P 500 gained 1.2% and the Nasdaq added 1.3%. Don't forget: The Republican debate is on Wednesday night. The focus for the third gathering, this time in Boulder, Col., will be the economy. A new twist for the GOP candidates: Donald Trump is not the undisputed leader in the race. Neurosurgeon Ben Carson can now say that he is No. 1. Will anyone on Trump's campaign hear the immortal words of displeasure from the Donald if he continues to fade? "You're fired!" World Series Game 2 is also happening Wednesday as the Mets take on the Royals. The Royals won Game 1 Tuesday night after 14 innings, the longest opener ever in a World Series. It's shaping up to be quite the contest.</p> <p>Here is what else you need to know:</p> <p>The Starwood Hotel plot thickens. Chinese companies have been vying for the hotel chain, which includes The Westin, W Hotels, and St. Regis. Now Hyatt is said to be looking at a Starwood purchase. The cash-and-stock bid should be announced in the coming weeks, but discussions remain under wraps for now. New York Times (paywall)</p> <p>Hillary wants the Export-Import Bank reauthorized. Democratic candidate Clinton says she doesn't understand the arguments against reauthorizing the recently closed bank. Clinton's rival Bernie Sanders has opposed the bank for providing "corporate welfare to multi-national corporations." Reuters</p> <p>GoPro misses earnings, driving down its stock. GoPro shares dropped 16% in after hours trading after the company's earnings of 25 cents on revenue of $400 million fell short of the expected 29 cents on $434 million in revenue. CNBC</p> <p>Paul Ryan nominated by GOP as Speaker of the House. The Wisconsin Republican would replace John Boehner as he retires from his post at the end of the month, pending a full House vote Thursday. At 45, Ryan would be the youngest speaker since Reconstruction. Ryan will face a rough battle to lead a party that has been dumping leaders and creating further fractions. The Atlantic</p> <p>Carl Icahn takes stake in AIG and encourages split. The activist investor says he has a "large stake" in the insurer, and he wants it to split its life and mortgage businesses into three public companies. AIG, the poster child of the financial crisis bailouts, should also pursue a "much needed cost control program," says Icahn. Wall Street Journal</p> <p>Walgreens revenue growth lets down investors. The pharmacy, which announced that it is buying Rite Aid, posted earnings of $26 million for the last quarter, compared with a loss of $221 million a year ago. Revenue was up to $28.52 billion from $19.06 billion, but fell short of the expected $28.86 billion. </p>
Interest rates stay at zero, for now
Capital Markets
<p>The Federal Reserve is keeping short-term interest rates near zero for now, but the central bank more strongly hinted that a rate rise could happen this year, reports The Wall Street Journal. Officials are less concerned about the global financial markets now than they were in September, and they specifically mentioned the next Fed meeting December 15-16 as a time to assess interest rates.</p> <p>“In determining whether it will be appropriate to raise [interest rates] at its next meeting, the [Fed] will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation,” the Fed said in its statement.</p> <p>But hey, don't hold your breath waiting for rates to rise.<br /> Photo: Ekke</p>
3 reasons Microsoft has finally turned it around
Capital Markets
<p> The share price of Microsoft Corporation (NASDAQ: MSFT) has appreciated 23.46 percent over the past month, reaching a high of $54.25 on Monday.<br /> FBR &amp; Co.’s Daniel H. Ives has maintained an Outperform rating and price target of $60 on the company.<br /> Ives believes that CEO Satya Nadella has made three major strategic changes over the last 18 months that have helped the company turn around.</p> <p>Analyst Daniel Ives mentioned that the “three major fundamental and strategic changes” made by Nadella include realizing that the Nokia Corporation (ADR) (NYSE: NOK) acquisition would not be a ...</p> <p>Full story available on Benzinga.com</p> <p> Photo: Mike Mozart </p> <p>&nbsp;</p>
Innovative trade financing
Capital Markets
<p>Companies still find it tough to access trade finance. Bank-led funding has plummeted by a half from a peak of $14 trillion before the global financial crisis in 2008 to about $7 trillion, according to a report in September by law firm Clyde &amp; Co.</p> <p>More intense regulatory scrutiny and tougher lending rules have curbed both the capacity and appetite of banks to open up the credit valve. </p> <p>That’s forcing producers, suppliers and purchasers to rely on a patchwork of financing to meet their needs, turning to private equity, trade-finance funds or credit provided by major commodity-trading houses.</p> <p>But some banks have found ways to overcome the hurdles by forging agreements with third parties.</p> <p>Today, Citi and the IFC, a member of the World Bank Group, announced the signing of a $1.2 billion risk-sharing facility to help stimulate the growth of trade in emerging markets.</p> <p>It marks the extension of two existing facilities that have financed a total volume of $20 billion for 3,368 trade transaction through 163 Emerging Market issuing banks in 40 countries, of which 23 are low and lower middle-income countries, according to a Citi statement on October 28.</p> <p>“As the availability of global trade finance continues to decline, IFC is committed to working with Citi to find innovative ways to help expand trade finance flows in the developing world,” said Marcos Brujis, IFC director of financial institutions group.</p> <p>Citi says it will use the funding “to originate and fund trade finance transactions in Africa, Asia, Central and Eastern Europe, Latin America, and the Middle East, enabling its bank clients to extend financing to local importers and exporters. The funding is expected to support emerging market trade flows of more than $6 billion through 2019”.<br /> Photo: Andrew Priest<br /> &nbsp;</p>