by dionysus on 2010/08/06
I’m pleased to bring you another edition of Cumberland Advisors Market Commentary by David R. Kotok. For newcomers and regular readers alike, please head over to Cumberland’s Introduction and Biographies page which can be found here. To sign up for their free newsletter yourself, please point your browser at: http://www.cumber.com/signup.aspx. Now, let’s get right in to this edition:
The forthcoming Fed meeting (August 10) is likely to feature an internal debate. We MAY see some evidence of it in the statement released after the meeting’s conclusion. We will not know the intricate details for years.
The debate is on four levels. The first is, do we do something because deflation risk is rising and the economy is weakening, or do we wait for more “incoming data” before taking any action?
The second issue is, if we do something what should we do? Buy replacement mortgages for those maturing? This could be over $300 billion between now and the end of 2011. Buy more short-term treasury bills? Buy more long-term treasury bonds? Use some other type of special easing program? How large can our balance sheet be?
The third issue is, what do we say to the world about our policy and how do we say it? This language issue has become critical. Financial agents now dissect every word of the Fed’s statements. The term “extended period” seems to mean a length of time of at least four FOMC meetings, or about a half year or longer.
The fourth issue is somewhat technical, but very important. The classic structure for the Fed’s monetary policy construction is to have a corridor of interest rates. The policy rate is in the middle, the penalty rate is the highest, and the interbank trading rate is the lowest. That is the structure applied in most places in the world, as well. In the US, the policy rate is currently defined as zero to 0.25%. The interbank rate is trading below the 0.25%. The penalty rate is well above 0.25% and is little used by the banking system today. One of the reasons that the Fed Funds (interbank) rate is so low is that the GSEs are sellers of Fed Funds and that selling drives the Fed Funds rate lower than it otherwise might be. Banks elect to deposit their excess reserves with the Fed for a 0.25% return rather than sell their excess reserves to each other at a lower rate. This construction influences other market pricing like the swap rates, and that is distorting behavior by financial market agents. The Fed could alter this by lowering the rate they will pay banks for excess reserves, raising the Fed Funds rate to a level above the excess reserve rate, altering the term of the reserve deposit rate, or some combination of actions.
The Fed has not made its policy direction completely clear. Chairman Bernanke has testified about the unusually large “uncertainty” surrounding policy making today. Some FOMC members (Jim Bullard, St. Louis Fed) have enlivened the public debate about Fed policy options. This is a good thing, since it adds to the transparency that market agents see. A secretive Fed is the worst-case scenario, since it heightens risk premia and makes the Fed’s job more difficult.
The coming meeting statement MAY add some clarity. Every word will be scrutinized, as will statements of FOMC members once the blackout period expires. As NY Fed President Bill Dudley noted in a speech at the Philly Fed not that long ago, we are certainly in “interesting times.”
Stay tuned
David Kotok, Chairman and Chief Investment Officer
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by dionysus on 2010/08/03
I’m pleased to bring you another edition of Cumberland Advisors Market Commentary by David R. Kotok. For newcomers and regular readers alike, please head over to Cumberland’s Introduction and Biographies page which can be found here. To sign up for their free newsletter yourself, please point your browser at: http://www.cumber.com/signup.aspx. Now, let’s get right in to this edition:
Three fish tales fit this weekend’s brief writing. The first involves a speech and some magnificent trout.
We are back from the Rocky Mountain Economic Summit held on Friday in Afton, Wyoming. Former St. Louis Fed president Bill Poole, Wells Fargo chief economist John Silvia, and I presented, followed by an interactive discussion with the guests. Investors, CEO’s, and financial-market professionals comprised most of the audience.
A quick summary of the publicly presented views follows: Bill Poole talked about the US fiscal policy and described how the US faces an adjustment that will be difficult. He described our current fiscal path as “unsustainable”. He detailed the size of the imbalance. He argued that tax policy cannot overcome the demands on federal fiscal finances, given the promises that politicians have made. Bill’s remarks were sobering.
Then John Silvia outlined his economic outlook. He sees the economy slowing in the second half of this year. He cautioned about the weight of the “unemployment hole”. John is worried about the politics of the country. He described the difficulties within the various demographic cohorts. He noted how important education is when job seeking. He, too, was sobering.
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by dionysus on 2010/07/23
I’m pleased to bring you another edition of Cumberland Advisors Market Commentary by David R. Kotok. For newcomers and regular readers alike, please head over to Cumberland’s Introduction and Biographies page which can be found here. To sign up for their free newsletter yourself, please point your browser at: http://www.cumber.com/signup.aspx. Now, let’s get right in to this edition:
We have a little technical correction on our recent piece (July 22) about taxes and dividends and capital gains. See: www.cumber.com. This year the long-term cap gains federal tax rate is 15%. The debate over what the cap gains tax will be is unlikely to be resolved until after the November election. Geithner has said the Obama administration will seek a rate of 20%.
Many other influences determine the net cap gain a taxpayer can pay. Here is one example.
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by dionysus on 2010/07/22
I’m pleased to bring you another edition of Cumberland Advisors Market Commentary by David R. Kotok. For newcomers and regular readers alike, please head over to Cumberland’s Introduction and Biographies page which can be found here. To sign up for their free newsletter yourself, please point your browser at: http://www.cumber.com/signup.aspx. Now, let’s get right in to this edition:
If you want less of something, tax it. If you want more of something, do not tax it.
We ask the next question with that principle in mind. Could the two-month stock market malaise be due to the forthcoming hikes in the income tax rates on dividends? Or on capital gains? Or both?
The capital gains debate is simple. The rate on long-term gains will be 15% for 2010. Twenty percent may be the rate if the Geithner comments become a reality. Alternatively, it could become anything else, depending on Congress.
Geithner has said the White House will let the Bush tax cuts expire. He also said the Obama administration wants a 20% tax rate on dividends and on long-term cap gains. Therefore, the tax fight will be conducted in the lame duck session that follows the November election.
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