20-Dec-11
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Unconventional Wisdom: Rethinking Tail Risk for the Eurozone
A popular line of thinking is that a default by Greece is inevitable and that others may follow suit. Meanwhile, it is not an unconventional thought that a breakup of the eurozone is inevitable. Anything is possible we suppose, although we currently think the breakup of the eurozone is the least likely development.
With all of the negative commentary on the debt crisis fully digested by the market and urging positions that deal with worst-case scenarios for the eurozone, we discuss in this note the unconventional view that the tail risk for many now is not things going wrong in the eurozone but things going right.
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06-Dec-11
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The U.S. Economy Not in the Eurozone
There are natural concerns, based mostly on anecdotal views, that the eurozone is already in a recession that will end up being more than mild. That thought has been disconcerting for some market observers who recognize the size of the euro area economy is roughly 80% of the U.S. economy. The EU economy, meanwhile, is the largest in the world, according to IMF data.
Naturally, there is a belief that a recession in the eurozone will pull the U.S. economy back into recession. Is that possible? The answer is “no” and “maybe.”
In this note, we address those answers ahead of the latest "make or break" EU Summit.
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25-Oct-11
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Is it Good Policy to Demand a Stronger Yuan?
It seems like it is that time of year again when populism controls Congress and laws subjecting China to tariffs and penalties for manipulating its currency are discussed. China being labeled a currency manipulator, however, does not mean that the U.S. will see greater benefits from a stronger yuan.
Subjecting China to penalties may be counterintuitive for encouraging a stronger economic recovery. This is especially true today when the U.S. is muddling through a low-growth environment.
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23-Sep-11
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Here We Go Again: Another Look at the Payroll Tax Cut
In an effort to boost employment before the 2012 election, President Obama announced a joint infrastructure spending and tax break stimulus plan that he hopes will be passed before the end of the year. While the details on the spending side remain hazy, one of the elements of the tax break plan consists of lowering the Social Security payroll tax rate from 6.1% to 3.1%.
Unfortunately, our estimates show that the payroll tax cut alone may not be enough to drive economic growth above potential (2.7% - 3.0%) in 2012.
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07-Jul-11
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Unconventional Wisdom: Does Europe Need an E-Bond?
Bailout dollars have been lost or have yet to produce any definitive impact other than helping to avoid defaults. Absent a return to the drachma or an outright default by Greece, the creation of a Eurobond (or E-bond) is not just a potential solution, it is the solution. The creation of an E-bond buys time. And time is the only solution to a debt problem of this magnitude for which solutions (economic prosperity) are predicated on the restructuring of entire economies.
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30-Jun-11
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A Gas Price View with More Bark than Bite for Retailers
Gas prices contribute to shifts in spending behavior, but they are not the predominant factor influencing spending decisions. The latter is admittedly a simple conclusion, yet it is important to consider in the current environment when simple conclusions are being drawn that high gas prices alone are certain to lead to sales and/or earnings disappointments for retailers.
In brief, the sum of economic parts is greater than the whole of gas prices when it comes to influencing the sales and earnings prospects for most retailers. In this note, we present a data-driven analysis for a better understanding of that relationship.
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22-Mar-11
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Unconventional Wisdom: Where are the Qualified Workers?
Given the sheer size of the unemployment pool, one would think that businesses would have an easy time finding qualified workers. That is not the case. The reality is that firms have been steadily increasing the number of job openings, but have been unable to find qualified workers to fill them.
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28-Dec-10
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Unconventional Wisdom: Poking a Hole in Rosy 2011 GDP Views
Following the passage of the temporary Social Security payroll tax break, some prominent economists immediately updated their 2011 forecasts and included an additional 0.7 to 1.0 percentage points to GDP growth as a result of the stimulus. Historical precedent suggests, however, that the contribution to GDP growth from the tax cut will most likely be less than half of what those economists are expecting.
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02-Dec-10
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Unconventional Wisdom: A Case for Employment Growth
It may be in a firm's best interest to forgo capital spending and instead increase its labor inputs. Since firms already own the necessary capital that is needed to keep capital intensity levels at the current trend, hiring growth can occur immediately and the jobless recovery could give way to a full-blown labor recovery.
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20-Oct-10
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Unconventional Wisdom: A Look at Inflation Expectations
Since the Federal Reserve's implied inflation target is 2.0% - 2.5% in the CPI, the 5-year, 5-year forward breakeven should hold between those bounds as long the market believes the Fed is able to maintain its inflation target. Over the past several days that rate has spiked to 3.5%, the highest level in the history of the index, which calls into question the market's perception about the Fed's ability to keep inflation stable.
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10-Sep-10
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Unconventional Wisdom: No Double-Dip in the Treasury Market
A lot has been made of the rally in the Treasury market, so much so that the precipitous drop in yields has been said to be a harbinger of a double-dip recession in the U.S. economy. The economic data and other key indicators, however, suggest otherwise.
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28-Jul-10
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Unconventional Wisdom: Short-Term Greek Debt a Safe Haven?
Considering that the market has been punishing Europe's riskier sovereigns for the past few months -- and with good reason -- it might seem a bit ridiculous to suggest Greece's short-term debt is a "safe haven." However, market participants may be discounting debt that is maturing in 18 months or less from now too much and, in doing so, could be creating a nice buying opportunity.
For participants who believe that Greece will do what is necessary to satisfy the "required" austerity measures, short-term Greek debt may indeed offer an enticing opportunity, if not a safe-haven of sorts.
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12-Jul-10
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Unconventional Wisdom: An Unstable Stability Plan
The €440 bln European Financial Stability Facility is expected to begin operating in late July or early August. It acts as a backstop for the eurozone, but in reality it is a tool for building market confidence. While creating the illusion of a safety net, its viability hinges on need... Since the EFSF does not have its own revenue stream to guarantee its debt, the facility is backed by eurozone countries. If more and more countries need aid, the number remaining to provide support could dwindle to an untenable level... The facility's support must come from the larger eurozone nations, in particular Germany and France. Its viability hinges on their willingness, and the willingness of their citizens, to participate.
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29-Jun-10
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Unconventional Wisdom: Time to Be Discreet
The S&P 500 Consumer Discretionary sector was a much-loved sector during the market's recovery rally. Lately, though, the market has been less infatuated with the sector. That is for good reason as headwinds on the horizon are raising the risk of downside earnings surprises in the back half of 2010. Accordingly, we recommend reducing exposure to the sector.
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07-May-10
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Sovereign Debt: 'Cause Breaking Up Is Hard To Do
European officials find themselves confronted with the notion of whether Greece's fiscal crisis leads to a convergence of the eurozone or a divergence of the eurozone. The fate of the euro is at hand and how policy makers handle Greece will set a precedent for the rest of the PIIGS.
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07-May-10
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Sovereign Debt: Is Portugal Next?
Portugal is in a better economic situation than Greece, but the issue is whether it can successfully conduct bond offerings at affordable interest rates to buy time for its austerity measures to take place. For European leaders, the ultimate question will be whether they allow declining confidence to further unravel fiscal conditions or stem the crisis by solidifying the eurozone, eradicating contagion fears that are undermining their efforts.
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25-Mar-10
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Unconventional Wisdom: The Agency MBS Market after the Fed
An inflection point is waiting for the capital markets at the end of the first quarter when the Federal Reserve steps aside from the agency MBS market. Many fear this move will be the catalyst for higher agency MBS yields and higher mortgage rates as private demand is unable to fill the purchase void left by the Fed. We examine why that may not be the case.
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26-Oct-09
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The Preemptive Demise of the Dollar
Professional investors have had to protect themselves against declines in the dollar this year given the unprecedented quantitative easing cycle in the United States. The general contention is that the dollar is being fundamentally debased. But that protection has risen to such magnitudes that there may now also be heightened risk that shorting the currency has become an over-crowded, one-sided trade.
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28-Sep-09
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Bail Bonds
Stocks are up. Treasuries and oil are up (or at least stable). Corporate bonds are up. Gold is up. Historically, all major assets classes do not rally together, but the market seems complacent. Instead, participants should at least pause to consider what the anomaly might mean.
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25-Sep-09
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When Will the Fed Raise Interest Rates?
The market is anticipating a swift jump in rates starting in April 2010. However, using Taylor Rule estimates we believe the first rate hike will probably not take place until at least the end of 2011.
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24-Sep-09
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China Leveraging Up, but Near-Term Bubble Concerns Overblown
The Chinese government already intervened to stop a potential credit bubble, but a subsequent rise in the country's equity and real estate markets has led to fears of an asset bubble. These fears are overblown as banks are still lending and participants have not cashed out of China's equity and real estate markets.
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