David R. Kotok
Cumberland, January 28, 2015
1. the quality of being patient, as the bearing of provocation, annoyance, misfortune, or pain, without complaint, loss of temper, irritation, or the like. 2. an ability or willingness to suppress restlessness or annoyance when confronted with delay: “to have patience with a slow learner.” 3. quiet, steady perseverance; even-tempered care; diligence: “to work with patience.” Source: Dictionary.com.
The word “patient” in Fedspeak is now interpreted by the markets to mean at least two meetings from today before there is a first lift of a Federal Reserve policy interest rate. We do not know what rate or what mechanism but most think about this in terms of restoration of the Fed Funds Rate (FFR). There are indicators it could be some other rate like interest on excess reserves (IOER) or the reverse repo rate (RRP) or something else.
So markets have dismissed any optimism in the Fed’s statement and focused on the delay as a sign that the Fed is worried about rising deflation risk. We see the risk but are not about to position portfolios in expectation of deflation in the United States. Lowflation is NOT deflation.
And the markets perceive that the Fed is worried about foreign events like the ECB action. Yes the Fed watches the entire world. And they actually support their fellow central bankers across the pond and elsewhere. And they will use their swap lines with other central banks if that becomes necessary.
We note that there is a wholesale movement of rates downward throughout the world. So, with competitive rate dropping by other central banks, and with the worldwide rate at zero or lower, and with little inflation, and with signs of positive improvement in the growth rate of the United States, the Fed has elected to not change a thing. Why should they? They have no reason to change anything. They really didn’t even need to have a meeting.
Our best guess remains that there will be a first and gentle upward move in rates by the end of the year. Maybe it will come in September or maybe December. It may even be deferred until 2016. We do not know and we presume that the Fed does not know either. It sure seems that way. They cannot know now. Things are too fuzzy.
The Fed has trouble saying “we don’t know” in plain English. It is an institution that is busy in the word-smithing trade. That is the nature of the beast. So we must be patient as investors and analysts while we wait for the Fed who is patient and practices the use of patience in crafting the text of its pronouncements.
This new language use is from new leaders at the Fed. To paraphrase a former Fed chair. Is this irrational linguistic patience? Or is it patient linguistic exuberance?
Cumberland believes the worldwide interest rate at zero is a force that raises asset prices. With the recent ECB action, it is likely to be zero for a long time. When rates rise the increase will be in tepid and tentative steps. And the inflation threat some were fretting about is not really observable anywhere in the mature economies of the world. It may arrive later but not today.
We remain fully invested in our US ETF accounts. We remain focused on the business sectors that have high domestic content and some insular qualities while the dollar strengthens. We are taking advantage of market weakness to rebalance positions.
There are many ways to construct a portfolio that has a domestic bias. We are using them. The utility sector meets that test and is one of our largest sector overweight.
We will be patient.
David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors