Welcome to The Credit Strategist!

Update: We have published the February 2018 Edition!

Bulls In A China Shop

“I have concerns about more [bond] purchases [by the Federal Reserve]. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction that I anticipated, and I am uncomfortable with it for a couple of reasons. First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster growth, which it is probably not in our power to produce?

“Second, I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that is our strategy.

“My third concern – and others have touched on it as well – is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think…Another way to look at it, though is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.”

Jerome Powell, 2012

The Only Question That Matters

There is only one question on investors’ minds today – how long will the bull market continue? While the answer is unknowable, I suspect that the market is not yet done torturing the bears. Just as bears consistently underestimated the power of central banks to boost stocks since the financial crisis, they now risk giving short shrift to the tax bill and the slow pace of central bank tightening in 2018. The weak dollar may slow the pace of tightening even further; Mario Draghi is already signaling that the European Central Bank will delay any tightening moves due to the strengthening of the Euro. Stocks may not keep rising as forcefully as they did in January, but the forces pushing stocks higher are formidable and undeniable.

…Continue reading

January 2018 Edition, Part I

January 2018 Edition, Part II

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