James Saft

Bonds living on one lung: James Saft

Apr 26, 2012 10:47 UTC

By James Saft

(Reuters) – Guess what, bond investors: just like the Federal Reserve, you are trapped.

The Fed on Wednesday said it was keeping rates on hold until at least late 2014 but failed to tip its intentions clearly about any possible additional round of quantitative easing. The Fed once again stressed the “significant downside risks” from “strains in global financial markets,” a nod to the backwash from euro zone issues, having eliminated this language from its last statement.

Going strongly into equities seems brave given the bumpy recovery and with continued risks of fallout from Europe, even with an implied promise of a safety net from the Federal Reserve. That leaves the rather unlovely option of government bonds, now 30 years into a bull market and offering low yields and the, distant, possibility of big losses when the Fed eventually hikes rates or gets behind the inflation curve.

“The Fed can no longer do what it once could, which is to take preemptive strikes against inflation,” Jeffrey Gundlach of DoubleLine Capital told a convention of investment advisers, speaking before the Fed announced its decision.

“They will stay low for as long as we are in this debt morass. Jobs have snapped back less and less since the late 1980s. Do you think it might have something to do with this debt experiment we’re in?”

Euro zone’s backlash whiplash: James Saft

Apr 24, 2012 11:24 UTC

By James Saft

(Reuters) – It’s not simply an austerity backlash in the euro zone; it is a policy backlash, as everyone appears to blame everyone else for a host of overlapping and conflicting policies which clearly aren’t working.

A series of political and monetary ructions are showing that it is very difficult to predict with any confidence what path Europe will choose, much less who will lead it there or even how the euro zone will be constituted and organized.

All of this argues for increased risk premia on euro zone assets, a conclusion duly enacted on Monday by financial markets. Little surprise, given developments:

Get ready for election fun

Apr 19, 2012 20:02 UTC

By James Saft

(Reuters) – If worrying about the impact of politics on your portfolio makes you want to scream, you probably ought to just turn off your TV and phone for the next seven months.

The 2012 U.S. presidential and congressional elections could set the tone for years to come on the single issue that may have the most power to move markets: deficits.

The United States has dug itself a deep fiscal hole, and that means some combination of spending cuts and tax increases to get out of it. More worryingly, perhaps, is a political atmosphere in which cross-party cooperation isn’t likely, increasing the chances of policy gridlock and bigger issues later.

More firepower, less force for IMF: James Saft

Apr 19, 2012 04:03 UTC

By James Saft

(Reuters) – The International Monetary Fund may emerge from its meeting this week with more firepower but less force.

While the fund is looking on track to add at least the $400 billion it has argued it needs to deal with the potential fallout from the euro zone crisis, it will have to cope with a U.S. which is partly sidelined by domestic politics during a period of rising international economic tension and protectionism.

Even the $400 billion is a downgrade from a $600 billion figure bandied about earlier. IMF Managing Director Christine Lagarde has been busily putting a positive gloss on the shortfall, arguing that matters have improved substantially in Europe since the bigger figure was suggested.

A new Great Rotation?

Apr 13, 2012 00:16 UTC

By James Saft

(Reuters) – One of these days, and it might start soon, investors are going to begin to reverse their multi-year rotation out of stocks and into bonds.

We are now fully 30 years into perhaps the greatest bond bull market in history, as interest rates have slid from the high teens to a level that feels like it’s change for a Coke. As well, equities have returned virtually nothing for a decade for most investors. To make matters for equity bulls worse, these lousy returns have come along with huge volatility as the market worked its way through first the dotcom bubble then the housing bubble and now very possibly the social media bubble.

The last 30 years have been marked by two related trends. Inflation has fallen, benignly at first but painfully after the bursting of the housing bubble. At the same time debt levels surged, first in private hands before the crash and now in public ones.

Bernanke’s Instagram bubble

Apr 12, 2012 12:05 UTC

By James Saft

(Reuters) – Instagram founders Kevin Systrom and Mike Krieger ought to get down on their knees every night and thank Ben Bernanke.

That’s because the Federal Reserve chief has been crucial in creating an atmosphere in which two 20-somethings can sell an 18-month-old company with 13 employees and no significant revenue for $1 billion.

Facebook agreed on Monday to pay $1 billion in cash and stock for Instagram, which develops photo-sharing applications, just a week after the infant company closed a funding deal valuing it at a paltry $500 million.

Switzerland’s line in the sand

Apr 10, 2012 10:18 UTC

By James Saft

(Reuters) – Things are getting sticky for the Swiss and their franc.

Twice in the past week the market, that nebulous but inexorable force, took a run at the cap on the value of the franc established by the Swiss National Bank last September.

Last Thursday, amid low pre-holiday volume, the franc actually pierced the 1.20 per euro line the Swiss central bank had drawn in the sand. Suspected intervention soon drove the franc lower but then once again over the weekend the franc came within a hairsbreadth of that line.

“We won’t accept any exchange rate below 1.20. We are committed to buying foreign exchange in unlimited quantities to defend this level,” a spokesman for the SNB said, re-enunciating a policy intended to insulate Swiss exporters and fend off deflation.

No de-coupling for U.S.

Apr 6, 2012 17:19 UTC

April 6 (Reuters) – This time around it looks that when the
rest of the world comes down with a cold, the United States
starts sneezing, too.

Arguments for American exceptionalism, or even that
much-vaunted but seldom seen phenomenon known as “de-coupling,”
were undermined on Friday when U.S. payrolls data disappointed

For investors, this is somewhat dispiriting, as many were
hoping to ride out the effects of a sharp European slowdown and
weakness in emerging markets by investing in U.S. shares, which
had a great first quarter, driven by strong signs out of
manufacturing and a brightening jobs picture.

Market loses Fed crutch: James Saft

Apr 5, 2012 04:13 UTC

By James Saft

(Reuters) – So now we will finally get to see if the stock market can stand on its own two feet.

The Federal Reserve signaled this week that an additional round of extraordinary help such as quantitative easing is probably not in our immediate future, and so far risk assets like stocks are not liking it one little bit.

Minutes from the Fed’s March meeting released on Tuesday showed a more constructive tone about the economy and, crucially, revealed that only two members of the policy-setting open market committee saw the case for more monetary stimulus. That’s a sharp change from the month before when ‘a number’ of members believed current conditions could justify additional easing. That slight chill breeze you felt was from the door slamming on any move in that direction at the Fed’s April meeting, implying that only a relapse in the economy will bring more help.

Will France remain in Europe’s core?: James Saft

Apr 3, 2012 04:06 UTC

By James Saft

(Reuters) – France faces the frightening and humiliating, if narrow, chance that by the end of this year it may no longer qualify as a paid-up member of core Europe.

That’s the risk if, lulled by the apparent calming of the debt market waters and without anything approaching a strong national consensus about reform, France sails later this year into another bout of euro insecurity and finds its own debt out of favor and its ability to borrow compromised.

With an April 22 first-round presidential vote fast approaching neither of the two likely survivors, incumbent Nicholas Sarkozy of the conservative UMP or Socialist front-runner Francois Hollande, have enunciated anything approaching a strong commitment to the sorts of labor market, retirement and fiscal reforms now being espoused, if not yet successfully pursued, by weaker euro partners such as Italy, Greece and Spain.