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

27 posts

Credit Contagion

Credit risk premiums recently narrowed to their tightest levels since late 2007. There are a few risks emerging at the horizon that may alter valuation of corporate bonds. These risks can be put into three categories: 1) macro risks, 2) cross border holdings and 3) non-repatriated earnings and corporate tax reform. In the Minutes of the Federal Reserve released this week, there was a discussion how to respond when the economy with an already tight labor market could face additional fiscal stimulus. Many FOMC members saw a quicker tightening as the appropriate response. This tightening would be through 2 to 3 rate hikes in 2017, possibly followed by a reduction of the size of the Fed's balance sheet. These tightening measures may come at a time

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A Message From The Yield Curve

The slope of the yield curve informs about the future state of the economy. Post the great recession, the yield curve hasn’t tracked always the “normal” cycle shown in Figure 1. There are two reasons why this is the case and what it means for core fixed income investing. Figure 1: U.S. Treasury and Japanese Yield Curve Compared Source: Bloomberg, monthly data. T-= years before the cycle peak of economic growth, T+ = years post peak and into recession. The first reason is to compare the slope of the U.S. yield curve to Japan. The Japanese curve followed the normal cycle but deviated when deflation took hold (T+2 to T+4, Figure 1). Notably, the U.S. yield curve (orange line) follows the

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The Great Unwind

One possible effect stemming from the Brexit and U.S. elections outcome could have significant consequences: central banks relinquish their independence. There are academic proposals that call for central banks to maintain “operational independence” but give up political independence. There has been rhetoric during and post campaigns that argue for a change of central bank influence, different board and Chairman appointments and even a call to return to the gold standard. Politically motivated changes of a central bank have been associated with periods of high inflation. However, removal of central bank independence could also play out differently, for example by way of market forces. There are three ways how that may happen: 1.Loss of control over long maturity interest rates 2.Loss of control over

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The Effects of a Dollar Surge

Since the U.S. elections, the dollar has surged by 5 percent while emerging market currencies fell by double. When the value of the dollar spikes, global GDP on average has contracted by 2 percentage points in the past, and eventually dip into recession territory (see Figure 1). Currently, markets are in the “first inning” of a periods of rising rates, surging dollar and contracting global GDP. This combination could have two profound effects: dollar shortage and Fed balance sheet contraction. Figure 1: Dollar and Global GDP Source: Bloomberg, quarterly data, 1980-2016 Since the middle of 1990s, global debt denominated in dollars has expanded by an average of $1.5 trillion a year, to a cumulative of $50 trillion today according the Bank of International Settlements.

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Risk in Europe

Youth unemployment, debt burdens, current account imbalances and deflation remain at the heart of a struggling Eurozone economy. These factors may again play a role as Europe enters 2017 with elections in the Netherlands (March), France (April) and Germany (September) stacked up like a domino. The European political system, where decisions are made by unelected officials, may spark confidence votes in national parliaments or referendums in individual countries. The linkage between sovereign risk and banks has increased through the European Central Bank’s QE program. And a rise in populism may cause snap elections and minority coalitions. These factors in the wake of Trump’s win are widening European sovereign spreads and resemble the early period before the European debt crisis erupted (see Figure 1, red

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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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"StallFlation"

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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