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Ben Emons, Chief Economist

Ben Emons is Chief Economist/Head of Credit Portfolio Management for Intellectus. Prior to Intellectus, he was a Senior Vice President and Portfolio Manager at Pacific Investment Company (PIMCO).

Los Angeles

22 posts

Trump the Domino

The stunning victory by President elect Donald Trump may be out of the playbook of the “democratic domino theory.” Empirical research (Leeson/Dean) found across 130 countries between 1850 and 2000 that “democratic dominoes” catch around 11 percent of their average geographic neighbors’ changes in democracy. In the context of the outcome of Brexit and the Trump win, political movements in rural areas most prone to global trade, emulate each other’s victories by a substantial voter turnout. Currency markets respond with significant dislocations (see Figure 1) in response to a political regime shift. This happened to the Pound during EMS crisis in 1992 and the Mexican Peso crisis in 1994. In reaction to those crises, the CNY devalued and U.S. interest rates saw a

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From Data Dependent to High Pressure

When quantitative easing (“QE”) ended 2014, the Fed adopted “data dependent.” When market volatility rose, the Fed used “data dependent” in communications. By lowering the probability of a hike, volatility and fears moderated (see Figure 1). The result of data dependent was the Fed needs a full year worth of data to justify one hike. Now data dependency has been two years in effect, how can investors anticipate a new policy by the Fed? Figure 1: Historical Probability of a Hike by December and VIX Index Source: Bloomberg. December probability implied from Fed Funds Futures. Probability = 100*(Dec Futures-Sep Futures)/0.125). The answer may be found in the return of a portfolio consisting out of S&P, Barclays Aggregate, Commodity and Currency indices. Figure

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A Presidential Pull to Par

Elections and financial markets always had a relationship. Best known is the “Presidential Election Cycle of Investing.” This cycle shows stocks gain the most in the third year of a Presidential term, by an average of 0.75 to 2.5 per cent. For bonds, monthly returns in the third year were mostly negative by an average 2 percent based Barclays Index history. The history of returns is shown in Figure 1. A reason for this pattern in returns is when an incumbent President announces tax cuts and or spending increases, historically those policies get Congressional approval by the second year of the term. By the third to final year of the term, policies kick into effect and impact earnings and profits. In case of a

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GDP Momentum

One of the key data releases next Thursday will be the first reading for Third Quarter U.S. GDP. GDP has been a “hot” topic of debate at the recent Boston Fed Conference as well as during the third Presidential Debate. The slowness of GDP has been worrisome, especially because despite a robust labor market, wages have lagged. If GDP stays slow, a tight labor market with modest wage growth may decelerate consumer spending. With an already fragile investment, trade and fiscal spending, a drop in consumer spending could “tip” U.S. GDP closer to zero growth. The dangerously slow pace of 1.3% in Q2 2016 could reverse however if consensus Q3 forecast of 2.5% annualized change is realized. The year on year slide

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In her recent speech, Federal Reserve Chair Yellen introduced a phrase that may determine how markets, economists and the public will think about the global economy going forward. Yellen suggested the Federal Reserve should allow the U.S. economy to turn into a "high pressure economy." That means an economy where labor markets are very tight, demand is robust and capital spending runs at a high rate. For Yellen to arrive at such a conclusion, there were four critical issues she highlighted for future "research:" Hysteresis. The global economy suffers from "supply damage" caused by a sharp fall in aggregate demand due to hysteresis. Developed economies saw in their real estate and financial sectors massive layoff, and supply of highly specialized workers was absorbed insufficiently. Because

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A Natural Price for Bonds?

For monetary policy to be effective, creativity and innovation seems essential. The latest is “yield targeting” recently announced by the Bank of Japan (“BoJ”). Targeting yields on Treasury bonds require a central to trade securities the private sector wishes to sell or buy. In that case there should be a “natural or fair price” the private sector is willing to pay. To understand this natural price, research by the BoJ may provide insight. BoJ research staffers discuss a yield curve where the economy grows not too fast or too slow. This is the “natural yield curve” that extrapolates the natural rate of interest by individual maturities. BoJ research looks at level, curvature and slope of the curve adjusted by model factors (Nelson-Siegel model). The idea of

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Risk Free Subsidies

Markets faceoff a crucial week of central bank meetings with the Bank of Japan and the Federal Reserve on Wednesday. As recently doubts grew the BoJ could continue the course, Japanese interest rates rose sharply. When ECB President Draghi said a possible extension of quantitative easing not discussed, global rates experienced a “tantrum”. This phenomenon has become recurring since 2013 when the first “tantrum” appeared. Markets grapple how QE policies could formally end which explain why interest rates react with a tantrum. Underlying the tremors lies a structural issue, and that is whether is there is no longer a “risk free rate.” The existence of the global financial system rests on two assumptions: a risk free rate and a reserve currency. Since the European sovereign crisis

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