Is it time to stop worrying and learn to trust the Fed?

There is a realization that Ben Bernanke and the Fed face a near-impossible task in getting their timing right. The clamour for an end to QE is growing in the US as the job market improves. But can we just learn to trust the Fed and relax?..


Powered by article titled “Is it time to stop worrying and learn to trust the Federal Reserve?” was written by Nils Pratley, for The Guardian on Friday 7th June 2013 22.31 UTC

• Can we relax? Was Friday's US employment report sufficiently gentle to calm investors and stop them fretting about a potential calamity when the US Federal Reserve starts to withdraw its monetary medicine?

It's certainly true that Friday's non-farm payrolls report contained no frightening number. About 175,000 jobs were created in May, consistent with a slow but steady recovery in the US economy.

It means the consensus guess doesn't require adjustment: pencil in September or October for the moment the Fed starts to reduce the pace of quantitative easing from bn (£55bn) a month. Investors like reassurance and share prices naturally bounced.

But relax? No. The story of the past three weeks – rising bond yields and falling share prices – is sending several important messages.

First, there is a realisation that Ben Bernanke and the Fed face a near-impossible task in getting their timing right. The clamour for an end to QE is growing in the US. House prices are rising again and the argument is made that money needs to be priced "normally" to avoid creating the next bubble. Indeed, if you make a couple of optimistic assumptions (like job creation at an average of 250,000 a month from here) the Fed could meet its target of a 6.5% unemployment rate as early as next summer. So hurry up with the QE reduction, goes that line of reasoning, we're no longer in crisis.

Yet the US recovery also looks extremely fragile. This week's data showed a sharp fall in manufacturing activity. There is clearly a serious risk QE could start to be withdrawn at precisely the wrong moment.

Second, the east is now a worry. This week's talking point has been China, where Société Générale's analyst pointed out that credit is growing twice as fast as the economy. That debt binge looks unsustainable for long. In the meantime, Japan has launched a huge stimulus package. But the first effect has been a rollercoaster ride in the yen that may be sowing more confusion than confidence in Japanese boardrooms.

Third, the eurozone crisis festers. Not that you'd notice from the comments of Mario Draghi, president of the European Central Bank, who would rather his (untested) promise to buy the bonds of peripheral nations was hailed as "probably the most successful monetary policy of recent times". The ranks of the eurozone unemployed (the rate stands at a colossal 12.2%) may not agree. Recession continues while banking union and the other grand ideas proceed at a crawl.

Add it all up and a tepid US jobs report really counts for little. The big picture remains unaltered: ultra-loose monetary policy has produced only an ultra-slow economic recovery. The risk of a relapse as the US withdraws QE is real. The Fed is probably obliged to act but it cannot really know what will follow.

• Steve Groves is an "actuarial genius," they say. He's certainly doing something right. The chief executive of Partnership Assurance, which on Friday made a storming £1.5bn stock market debut, saw his stake valued at £55m. He's banked a quarter and kept the rest. Not bad at the age of 38, and not bad for pursuing an idea that should been adopted by the mainstream insurance brigade a couple of decades ago.

Partnership's model is quite simple: instead of collecting only rudimentary data on new pensioners, such as how many major illnesses they've had and how many cigarettes they smoke, it does a proper job of estimating life expectancy. It asks 250 questions. If your health profile is poor enough, Partnership might be able to offer you a better income in the form of a "non-standard" annuity.

Gruesome? More like hard-headed. The logic is sound: the pension pots of those with "medical and lifestyle conditions," in Partnership's polite phrasing, should be able to buy a superior annuity. That's life, and death.

Why didn't the big insurers take up the model years ago? The answer, one suspects, is that the annuity game in the UK has been too cosy and too profitable for the big boys for too long. The game is changing, of course, as regulators and consumer groups yell at annuity buyers to shop around. But is this development good or bad for Partnership?

The pool of potential customers ought to be larger. On the other hand, having the likes of Legal & General and Aviva throw their bigger balance sheets into the ring would change the competitive picture. Partnership's view is that the 18 years of accumulated data in its mortality database represents the real competitive advantage. Wishful thinking? Quite possibly, but there's always a chance that a big insurer decides the easiest way to deal with a new competitor is to buy it. It wouldn't be the first time.

• "I think I've turned AHL around," Manny Roman, Man Group's new shareholder-friendly chief executive, told the FT in March. He spoke too soon.

AHL, a computer-driven momentum fund, was indeed spitting out better performance numbers in the first quarter of this year, and continued to do so in April. But May proved horrible. Man revealed this week that all AHL's gain of 12% this year evaporated in a fortnight. That's the problem with trend-following investment strategies: profits tend to accumulate gradually but losses can arrive suddenly.

In this case, the sudden sell-off in bond markets did the damage. The disappointment whacked Man's share price for good reason. AHL was within a whisker of passing its 2010 high-water mark, which is when the big performance-related fees would have kicked in, but now finds itself back down the slippery slope.

AHL's system is not broken, sings Man's fan club, it just needs less volatile and choppy markets. The analysis is probably correct, and it's also true that there will always be an audience for this type of alternative investment product. In the jargon, it offers "uncorrelated" returns that can serve as a useful protection. For example, the AHL computer simply loved the banking blow-up and bursting of the commodity bubble – it was up 19% in 2007 and 33% in 2008.

The trouble is, memories are short, many of AHL's rivals have done better in the past three years and money can move home easily. In AHL's glory days, the fund was easily the biggest beast in the trend-following game with bn under management in 2009. Now it has about bn v arch-rival Winton's bn. Now there's a proper trend. © Guardian News & Media Limited 2010

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