Protect Your Portfolio, Cash Is An Asset Class

Protect Your Portfolio, Cash Is An Asset Class

$DIA, $SPY, $QQQ, $VXX

The US Fed is not giving the consistent of signals in here, what is it really, Hawkish, Dovish, or what?

On the surface US Fed Chairwoman Janet Yellen, San Francisco Fed President John Williams and Dallas Fed President Robert Kaplan, all urged “gradual increases in the federal funds rate.”

Ah, but there was a difference in “tone” meaning a difference in attitude of the situation

Ms. Yellen’s “delay”, with conditions for a rate hike set out and some skepticism about the rise in core consumer price inflation saying: “… core PCE inflation, which strips out volatile food and energy components, was up 1.7% in February on a 12 month basis, somewhat more than my expectation in December. But it is too early to tell if this recent faster pace will prove durable…”

Mr. Williams’ “sooner rather than later” saying: “… the economy’s “neutral” real rate — that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential — is likely now close to Zero … the current real federal funds rate is even lower, at roughly minus 1-1.25 percent, when measured using the 12-month change in the core price index for personal consumption expenditures (PCE), which excludes food and energy.”

And Mr. Kaplan said he expected the U.S. economy to prove resilient this year but that the nation’s central bank should proceed gradually and cautiously in raising rates, which differentiated him from the Ms. Yellen. Interestingly in comments to reporters Mr. Kaplan declined to rule out a rate increase at the Fed’s next meeting on 26-27 April.

These divergences of opinion/tone has been something we have seen more and more when looking at central bank policy globally as we have moved away from the simple “rates up, rates down” business.

So, participants are left with multi-facetted policy possibilities, with that multiple options, nothing concrete.

In the past the Fed Chair’s views dominated, but recently the Fed has become more democratic. Some backing the Chair others on the FOMC not.

Participants should keep in mind markets are not very good at dealing with the nuances of central bank policies and that is why headlines with the words “Yellen” and “Dovish” were all the markets needed to act aka, rally.

The balance of portfolio risks comes down to the conditions Ms. Yellen will offer.

If you believes that consumer price inflation (CPI) risks are to the Northside, or the USD is unlikely to appreciate, or that the Euroarea economy will outperform expectations, then the Fed’s current policy position seems out of wack median term.

From its side, the EC just provided the March Economic Sentiment Indicators (ESI) that registered a 3rd straight fall for the Euroarea by 0.9 pts to 103.0. (that data came in before the 22 March Islamic terrorist attack in Brussels).

Sentiment data always need to be treated with caution, as there is a tendency to over-stress the underlying economy.

The chief European economist Jean-Michel Six at Standard and Poor’s has trimmed the growth and inflation forecasts for the Eurozone and compared the Euroarea to a plane “flying on one engine” and “fighting for altitude.”

S&P now expects Euroarea to grow at 1.5% this year versus 1.8% back in November while it made substantial revisions to its inflation projections, which it brought down to just 0.4% for this year Vs 1.1% it previously estimated

Long-term investors should not overlook the economic and financial divergences between the US and the Euroarea, as they will not abate soon.

Remember, Cash and Cash-equivalents are asset classes that can protect your portfolio when irrational markets are the only game to be played, plus the name of the Wall Street game is to make money. Keeping dry powder is prudent, there will always be a trade.

Wednesday, the US major stock market indexes finished at: DJIA +83.55 at 17716.66, NAS Comp +22.67 at 4869.28, S&P 500 +8.94 at 2063.93

Volume: Trade was light at about 700-M/shares on the NYSE.

• NAS Comp -2.8% YTD
• Russell 2000 -2.0% YTD
• S&P 500 +1.0% YTD
• DJIA +1.7% YTD

Stay tuned…

Paul Ebeling

HeffX-LTN

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