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Tags: Federal Reserve | Greece | gold | economy

When It Comes to Fed Policy, This Time Could Be Different

By    |   Wednesday, 22 July 2015 01:35 PM EDT

Standard & Poor’s on Tuesday raised the long-term ratings for Greece by 2 notches from CCC- to CCC+ with outlook stable as it considers no more as “inevitable” Greece defaulting on its commercial debt during the next 6 to 12 months.

S&P also thinks the possibility of Greece leaving the eurozone within the next three years has declined to a level between one-in-three and 50 percent, which remains high.

S&P states political backing in Greece for the planned reforms is only partial within the governing Syriza party, which raises the possibility the implementation of the new program could be interrupted by another round of general elections (which would be the second this year, and the fourth since May 2012), or by further weakening in growth, financial stability, or both.

Interestingly, S&P also notes that some comments made by Prime Minister Alexis Tsipras and his finance minister could suggest an absence of commitment to implement last week’s in Brussels announced program.

Finally yet importantly, S&P expects the Greek economy to shrink by 3 percent this year.
All that said, long-term investors should probably do well not believing in wonders for Greece over the short to median term and certainly should better keep in mind if Greece should leave the eurozone, which I think it will, there will be economic as well as political “contagion.” How the EU would handle that remains the trillion-dollar question.

All that said, many investors have, as of lately, difficulties understanding e.g. what drives the euro, but also the Japanese yen to go up or down against the dollar.

What we know is since about a year the euro as well as the Japanese yen have become the currencies of choice for carry trade activities all over the globe.

When we had “risk-off” in the markets, we’ve seen the euro and the Japanese yen stabilizing and even strengthening against the dollar while when we saw risk-off easing, the dollar strengthened as e.g. we’ve seen in early March this year as well as last week.

This is important as this seems to confirm, so far at least, a “new” behavioral pattern is taking hold that explains and because markets have taken a risk averse stance as a result of Wall Street’s “weak” earnings, why the euro/dollar currency pair has been rising during the last 24 hours (which means euro up and dollar down) while the dollar/yen currency pair has moved lower (which means yen up and dollar down.)

Besides that and of which very few have taken notice of is the fact during the last 24 hours, gold has declined most against the euro, somewhat less against the yen and less of all three against the dollar. More in detail: against the euro gold was down by 1.96 percent, by 1.63 percent against the yen and by 1.08 percent against the dollar, which are substantial differences over such a short time span.

All this is important because these facts confirm that at present currency markets are experiencing a “major reset” that many investors haven't taken notice of yet.

Fed Policy

That major behavioral shift in currency markets could finally take hold the day the Fed starts raising its rates; higher rates that unavoidably should conduct long term Treasury yields on their way up, albeit by small increments, but which will signal the beginning of the end of the 3-decade long U.S. bond rally (in price) we have had.

Maybe this time is a good time to remember what then Dallas Fed President Richard Fisher said in an interview to Financial Times on June 24, 2013: “We’ve had a 30-year bond market rally. These things do not go on forever.”

Mr. Fisher’s interview came after May 13, 2013, former Fed Chair Bernanke had stated in a speech in Chicago: “… in light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk taking … adding … such relationship may affect asset prices and their relationships with fundamentals…”

Mr. Bernanke’s speech ignited a sharp rise in the 10-year yield (albeit briefly) to more 3 percent from well below 2 percent.

For long-term investors this time may become right to think about, and follow all this a little more profoundly as the first Fed rate rise is coming closer by the day.

Yes, this time could be different from what we have been accustomed to during the last three decades.

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Standard & Poor's on Tuesday raised the long-term ratings for Greece by 2 notches from CCC- to CCC+ with outlook stable as it considers no more as "inevitable" Greece defaulting on its commercial debt during the next 6 to 12 months.
Federal Reserve, Greece, gold, economy
Wednesday, 22 July 2015 01:35 PM
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