Ben Emons, Chief Economist & Head of Credit Portfolio Management's Picture

Ben Emons, Chief Economist & Head of Credit Portfolio Management

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

31 posts

The Dollar Paradox

President Trump is set on the economy to grow beyond 5 percent real GDP. But high growth has a natural ‘side effect’ and that is a strong dollar. Reducing the trade deficit to spur growth increases domestic investment and appreciates the dollar. Trade tariffs hurt other economies and weaken their currencies. That too raises the value of the dollar. Resolving lower tariffs and trade barriers by invest and build in the U.S. will drive up demand for the dollar. Thus, a policy of targeting a lower trade balance has a paradoxical effect on the dollar and the economy. One reason is corporate earnings and cash held overseas. The Bureau of Economic Analysis estimates $300 billion in overseas corporate earnings returned to the U.S. in

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The Turkish Sudden Stop

The plunge in the Turkish Lira attributed to a tweet and a defiant speech. But underneath there was a “sudden stop” in the Turkish currency. In 1997 this happened in Indonesia that went from a darling in the eyes of foreign lenders to a nightmare. The rupiah crashed and Indonesia’s debt to GDP soared to 170 percent. Capital flows to Indonesia ‘stopped’ leaving financial markets in disarray. What followed next was contagion spreading across the South East Asia region. A key reason for contagion is debt denominated in foreign currency. When confidence of foreign lenders shaken, capital flight leads to a currency plunge. Loans in local currency fall in value and impact balance sheets of foreign lenders. As a result, foreign direct investment collapses. In

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When Markets Face Cross Currents

If there is a word to recap past months in markets, then it is “chaos.” Recent tensions in Italy were a reminder Europe could break up at some point in the future. Investors responded by seeking “safe havens” like U.S. Treasuries and the Japanese Yen. When uncertainty reached a climax in June, Italian interest rates spiked above those of the U.S. (see Figure 1). A situation like this can lead to a political resolve. Markets were for example discounting the Federal Reserve to hold off on interest rate increases if the crisis in Italy were to get out of control. On the other hand, after much last-minute wrangling, Italy managed to get a government together. That eased concerns only brief when the U.S.

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When the Yield Curve Reaches Limits

There is a lot of attention for the yield curve lately. Several Fed officials like James Bullard and Neel Khaskari have warned the yield curve could “invert.” That would be a bad signal because historically when the yield curve inverts, a recession could follow a few years later. During the testimony to Congress, Fed Chairman Powell said flattening of the yield curve was a sign of long term rates figuring out when the Fed would stop tightening. Now President Trump has weighed in on that point specifically by expressing concerns rising rates push up the value of the dollar too far. That could threaten U.S. export competitiveness and undo the work of the tax cuts. Thus, the yield curve is the center of attention for

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How a Yuan Devaluation May Play Out

Market focus has been notably on Trump’s tweets on the subject of geopolitical tensions. Investors do have some experience how Trump’s handles such a situation. Think of North Korea that looked quite threatening but has resulted in a future Summit with Kim Jong-Un. The same may happen with Russia where Trump plans to meet with Putin but uses his “punch in the face” strategy to get meaningful dialogue. The "unknown-unknown" of missile attacks causes the oil price to go up but other traditional safe havens like the Japanese Yen, Swiss Franc or Gold have seen limited impact. Markets could be more driven by other factors. For example, how China will pursue trade policy through its exchange rate, the Chinese Yuan. A sudden devaluation of

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A Different Message From The Fed

New Federal Reserve Chairman Jerome Powell’s first congressional testimony made it clear to markets that it’s no longer business as usual. Under Powell’s predecessor, Janet Yellen, developments in the labor market drove monetary policy. And since employment is a lagging economic indicator and slack in the labor market was large, it was an easy message to convey. Monetary policy would gradually adjust as the labor market showed steady improvement. As a result, market volatility was subdued because a stable and moderately growing labor market became quite predictable. But with Powell saying that he considers the labor market to be “beyond full employment,” fiscal policy must now be considered, driving the Fed toward a message that is focused on the uncertain effects of fiscal

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When the Next Cash Nexus Arrives

Cash can be a valuable commodity when returns on financial assets turn negative. After all, cash is easy to manage, has no volatility and doesn’t result in losses. Yet, cash is not abundantly available judging from global surveys such as by Bank of America. Those surveys are conducted among a diversified base of global investors. Respondents see excessive valuations and yet, portfolio cash levels have fallen to pre-crisis (see Fig. 1). A growing wedge between the perception of valuations and cash available to invest could pose a dangerous combination. Figure 1: Stretched Valuations and Falling Cash levels Source: Bank of America/Merril Lynch. “EU” = European Union. “Global” = global investors. “FMS” = Fund Manager Survey During the most recent bout of volatility, investors with significant cash positions

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The Relative Value Between Stocks and Bonds

Past week’s sell off in equity markets was one of the largest in recent years. When something like that happens, market analysts like to look at indicators such as the “Relative Strength Index.” This index is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The relative strength or weakness is known as “overbought” or “oversold” conditions. The RSI index for the S&P 500 and global equity markets reached historic overbought conditions in December before sharply reversing to oversold in a matter of days last week (see Fig.1). The change in the RSI index

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What Shutdowns and Debt Ceilings Say About Returns

For the all the tensions in Washington D.C. over who’s the blame for the shutdown of the government, investors are going to be quite happy. A shutdown of government sounds negative but is viewed by investors as a wrinkle rather than a big fork in the road. This is seen from bond and stock returns that have been uniformly positive during and after shut downs and debt ceilings negotiations end. U.S. political risk is seen an investment opportunity and there are several reasons why. According to a Congressional Research Service report, when a “funding gap” occurs, government agencies start the process of “shutting down” activities and furlough personnel. The debt ceiling is a limit that Congress imposes on how much debt the federal

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Bitcoin Futures : What this Market Means

Bitcoin futures were launched on the Chicago Mercantile Exchange in follow on to last week’s introduction on the Cboe. The result of these formal introductions is liquidity in the market for Bitcoin may pick up quickly. Naturally that would compress the price between futures and the underlying Bitcoin which is called the “the basis.” Currently the Bitcoin basis is around $450 to $800 which suggests there remains a significant liquidity difference between Bitcoin and futures markets. But now that futures on Bitcoin are introduced, institutional investors can develop a better fundamental view on what the “price of digital money” means for the global economy. In that regard, what’s important to watch is the “convenience yield.” This yield is the premium or benefit of holding

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Deficits, Taxes and the Trump Agenda

Financial markets once again embraced President Trump’s tax reform with euphoria. Although details lack and uncertainties remain, the impact of reform was priced in as a positive outlook for the U.S. economy. This was seen from a strong rally in small cap stocks and companies with a current high effective marginal corporate tax rate. The dollar received a boost and Treasury yields rose on the prospect of higher GDP in the coming quarters. Now the question rises whether tax reform is an “inflection point” for the economy? That greatly depends on the effect of fiscal policy. The “fiscal multiplier”, which is the ratio of change in a nation's income level affected by a change in government spending, stands at the highest level since the

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Somewhat Rich Valuations

In her sit down discussion in London, Federal Reserve Chair Yellen presented a milder version of what Alan Greenspan once dubbed 20-years earlier as “irrational exuberance” to describe the state of the stock market. Fed Chair Yellen said valuations appear to be “somewhat rich” when measured on traditional models. The model she referred to is the “Fed model” of stock valuations, introduced by Alan Greenspan at the Humprey Hawkins testimony in 1997. The model uses the 1-year forward earnings yield of the S&P 500 and compares that to the 10-year Treasury yield. When these two are equal, the stock and bond market are in “equilibrium.” In Figure 1, the historical series is shown and it shows there is a wide gap between the S&

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Is the U.S. experiencing shadow deflation?

The latest Consumer Price Index release was the third consecutive inflation report that came out on the soft side. The economy has been moderately growing at 2 percent average with wages around 2.5 percent and unemployment around 4.3 percent. An economist who advocates the “Phillips Curve” (the relationship between unemployment rate and inflation) would argue the U.S. economy is on the brink of a burst in inflation. And yet, the actual inflation is benign and even shows ingrained deflationary trends across a variety of core goods categories. Such are new and used cars, cellular plans and retail goods. Figure 1 shows the long term trend in some of these categories. They have been in decline for some time. What is going here exactly?

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Where are 10-year yields going?

Yields are falling despite the Fed, the Bank of Canada and the Bank of England, want to hike interest rates. The long end of the yield curve responds with natural defense because soft inflation and hikes means the Fed will not meet the inflation target. Indeed, the Treasury Inflation Protected Securities (TIPS) curve discounts a below target inflation for the next 30-years. This expectation has been in place since late 2014 since QE3 ended. Since that time, the 10-year has been in a downtrend with occasional sell offs (like during Trump election). The chart below shows the 10-year since the end of QE3 (October '14) until today, compared to the 10-year during 2001-2006 period. Figure 1 Source: Bloomberg It is interesting to note the 10-year is

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The Benefit of Post U.K. Election Uncertainty

Once again, British polls turned out to be unreliable, and the political fallout may linger for some time. While Brexit negotiations are about to get under way, the Conservatives position in the House of Commons has weakened on May’s mandate backed by a slim majority. This is the uncertainty the Pound Sterling reflected on Friday by falling 1.5 percent against major currencies. A currency that expresses political risk may serve as a reflation backdrop because it can loosen global financial conditions. For example as Figure 1 shows, U.K. financial conditions are the easiest globally despite political uncertainty is perhaps the highest in Britain. Figure 1 Source: Bloomberg For financial markets this is good news because uncertainty begets low volatility when capital remains opportunistically

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