The Federal Reserve Board has Never Engineered a Soft Landing Beyond Full Employment
Our office dart board – having some fun – taking out our frustrations
12/24/2018 11:55 AM
It’s all about the Fed
· The Federal Reserve Board has Never Engineered a Soft Landing
Beyond Full employment. Few other developed nations’ central banks
· Recession risks look low at this time
· We are currently in one of the strongest labor markets since post war
1945, supported by
· Number of job openings per unemployed worker,
· Quit rate
· Household reports of the ease of finding a job, and
· Employer reports of the difficulty of finding workers
· Inflation readings are soft, with core PCE inflation (the Fed’s favorite
measure of inflation) is sub the Fed’s 2% target
However, Chairman Jerome Powell, who increased interest rates 4 times in
2018, has said he will raise rates twice in 2019.
Bring back Janet Yellen, she is a cautious smart woman, and a good Fed Chairman. We prefer her Dovish approach compared to her hawkish successor Chairman Jerome Powell.
We are concerned that the current Fed action could possibly cause a
recession, even though currently the economy seems fine.
No doubt the interest hikes so far will probably lower GDP from the current
approx. 3.5% to perhaps below 2% in 2019.
Meanwhile stocks are in a mini-crash. We believe this is due to algorithmic
type trading, such as:
· Commodity Trading Advisors (CTAs)
· Volatility targeting – equity reduction as volatility increases and vice
· Risk parity strategies – managing a portfolio for a constant volatility by
adjusting the stock/bond mix
· Leveraged ETFs
· Liquidity-constrained ETFs
· High frequency trading (HFTs)
· Extreme option positioning
Below is the YTD daily chart of the S&P 500 index – note the relentless daily
declines in the US large cap index.
In the lower window we can see the VIX volatility index (orange line) rise to its
current level of 34.53
We have taken action to reduce equity exposure in our model portfolios.
What should you do?
· Nothing, we are managing your portfolios for you, or
· Call your advisor with any concerns that you may have: 1-800-578-