Recap 11-20-13: FOMC, Buffet on Equity Valuations


So it looks like Tapering is likely to commence in the next couple months or so. There wasn’t a lot of appetite for reducing the UER threshold, which only a ‘couple’ of members favored. (The publication of those two Fed papers on Optimal Control AFTER the meeting, however, may have changed some minds) The IOER cut discussion seems driven by the Fed’s concern that the market will continue to interpret tapering as tightening. (“A number of participants noted that recent movements in interest rates and other indicators suggested that financial markets viewed the Committee’s tools–asset purchases and forward guidance regarding the federal funds rate–as closely linked.”) But the discussion also suggested that the Fed may cut the rate (possibly after the QE purchases stop) if short term yields increase too quickly.

The end result, unsurprisingly, was a steepening of the yield curve, as it appears that the Fed was intent on pinning the short end of the yield curve while proceeding with tapering plans. Long term forwards moved a fair bit – 5y5y swap yields were up ~17bps on the day, and at almost 4.5%, is just ~10bps from the highs from early September. Mortgage spreads over swaps also widened to close to early September levels.

Separately, Buffet said this: "I would say that they’re in a zone of reasonableness…..Five years ago, I wrote an article for The New York Times that said they were very cheap. And every now and then, you can see that that they’re very overpriced or very underpriced. Most of the time, they’re in an area where maybe they’re a little high, a little low, and nobody really knows exactly. They’re definitely not way overpriced. They’re definitely not underpriced…we’ve come back a long way from where we were five years ago, and you’ll see, if you live long enough, you’ll see a lot higher prices."

Now, obviously this is just one (well regarded) investor’s opinion there, but I think it does imply 2 things. First, Buffet does NOT buy into the CAPE10 metric, because at almost 25, it is almost 50% above the long term average. Second, Buffet has changed his mind about using the Market Cap / GDP metric that he touted about 15 years ago, at the height of the internet bubble, when he noted that the Market Cap to GDP ratio is above a 100% and hence suggested an overpriced market.

Also, this was a very very interesting read about heroin market considerations by a junkie. Comparisons to financial markets are easy to make.


  • FOMC minutes
  1. A number of participants noted that recent movements in interest rates and other indicators suggested that financial markets viewed the Committee’s tools–asset purchases and forward guidance regarding the federal funds rate–as closely linked.
  2. participants reviewed issues specific to the Committee’s asset purchase program. They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.
  3. some participants noted that, if the Committee were going to contemplate cutting purchases in the future based on criteria other than improvement in the labor market outlook, such as concerns about the efficacy or costs of further asset purchases, it would need to communicate effectively about those other criteria. In those circumstances, it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time.
  4. As part of the planning discussion, participants also examined several possibilities for clarifying or strengthening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its current, exceptionally low level. A couple of participants favored simply reducing the 6-1/2 percent unemployment rate threshold, but others noted that such a change might raise concerns about the durability of the Committee’s commitment to the thresholds.
  5. Several participants concluded that providing additional qualitative information on the Committee’s intentions regarding the federal funds rate after the unemployment threshold was reached could be more helpful.
  6. Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions. By contrast, participants expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-term Treasury securities or the provision of term funding through repurchase agreements.
  7. Many members stressed the data-dependent nature of the current asset purchase program, and some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings.

There were reports citing ‘two people familiar with discussions’ that the ECB is weighing a -0.1% deposit rate if more easing is needed.

BoE Minutes did not surprise

US Retail Sales rose 0.4% MoM vs 0.1% exp and -0.1% prev. The control group rose 0.4% vs 0.3% exp and 0.4% prev

US Existing Home Sales declined -3.2% in Oct vs -2.9% exp and -1.9% prev

Japan Trade Balance declined to -1.1 trn vs -854bn exp and -932bn prev, driven by a jump in imports of 26% YoY vs 16.5% prev

Harry Reid going “nuclear” – “a senior Senate Democratic leadership aide tells me Reid is now all but certain to move to change the Senate rules by simple majority — doing away with the filibuster on executive and judicial nominations, with the exception of the Supreme Court – as early as this week” – Washington Post

Italy – the head of the country’s debt mgmt. division said he expects domestic banks to cut BTP holdings due to the upcoming stress tests – Bloomberg

Upcoming Data:

  • Wed: China Flash Mfg PMI, BoJ
  • Thu: EU PMI, RBA Governor Stevens speaks, US Jobless Claims, US Markit Preliminary PMI, US Philly Fed, EU Consumer Confidence
  • Fri: German IFO, Canada CPI,
  • Mon: US Pending Home Sales,
  • Tue: US Housing Starts, Consumer Confidence, South Korea Mfg Survey