Fed Leadership, Housing Options & Investment Positioning…

August
12

The Markets

Like the kid who sings loudly and enthusiastically at a grade school concert while wary peers dodge his O Sole Mio arm sweeps, the Federal Reserve has been getting a lot of attention lately. That didn’t change last week.

Markets pulled back from record highs after Chicago Fed President, Charles Evans, who has been a supporter of the Fed’s quantitative easing program, indicated the Fed could begin to reduce bond purchases at its policy meeting in mid-September. He reiterated the fact that moderating quantitative easing did not mean the Fed would begin to raise rates.

The Fed also garnered some attention for the contentious tone of discussions about who should replace current Fed Chairman, Ben Bernanke, when his term ends next January. Some of the rancor stems from contender Larry Summers stint as President of Harvard University which ended badly, in part, because of comments he made on “the issue of women’s representation in tenured positions in science and engineering at top universities and research institutions,” and the fact his primary competition for the job is female.

Paddy Power, which bills itself as “Ireland’s biggest, most successful, security conscious and innovative bookmaker,” is taking bets on who will be appointed as the next Fed Chairman. On August 11, 2013, it gave the odds as: Larry Summers, former Treasury Secretary, 1-to-2; Janet Yellen, current Fed Vice-Chairman, 2-to-1; Roger Ferguson, President and CEO of TIAA-CREF and previous Fed Vice-Chairman, 12-to-1; and Don Kohn, current member of the Bank of England (BOE) Financial Policy Committee and previous Fed Vice-Chairman, 18-to-1.

Speaking of the BOE… the United Kingdom’s central bank did a fair imitation of the Federal Reserve last week when it offered forward guidance tying tighter monetary policy to unemployment levels. The U.K. bond market’s response to the BOE’s assurances that rates would remain low for some time was quite similar to the U.S. bond market’s response to similar declarations from the Fed: yields on Gilts – bonds issued by the British government – moved higher. 

Data as of 8/9/13

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-1.1%

18.6%

20.6%

14.5%

5.5%

5.6%

10-year Treasury Note (Yield Only)

2.6

NA

1.7

2.8

4.0

4.4

Gold (per ounce)

0.0

-22.7

-18.9

2.9

9.0

13.8

DJ-UBS Commodity Index

-0.1

-9.7

-13.2

-2.4

-7.8

0.6

DJ Equity All REIT TR Index

0.1

5.6

9.6

13.5

5.6

10.5

A NEW TWIST ON A CONTROVERSIAL ISSUE…

It hasn’t been that long since eminent domain was a topic of conversation in households across the United States. Just after the turn of the century, homeowners in New London, Connecticut tried to stop the city from invoking its powers of eminent domain to acquire their homes and use the land for new development that was intended to boost the local economy. In 2005, in a five to four decision, the Supreme Court determined that the distressed city could acquire the properties.

According to a 2009 Federal Reserve article, the response to the ruling was immediate and intense. The U.S. House of Representatives passed a resolution denouncing the court, as well as a bill requiring federal development funds be withheld from states and political subdivisions that used eminent domain in specific ways. In addition, a majority of states took action to limit the reach of eminent domain.

Today, eminent domain is making headlines again. In a strange twist, some cities are considering invoking eminent domain to acquire and reduce mortgage debt, keeping people in their homes as a means of boosting the local economy. According to economists at the New York Federal Reserve:

“With more than 11 million homes still “underwater,” the mortgage debt overhang caused by the housing bubble remains an impediment to economic growth and a burden on communities across the country. One possible solution to this problem is for state and municipal governments to use their eminent domain authority to purchase and restructure underwater mortgages.”

This time, banks and investors (including Freddie Mac, a government-backed company that is one of the biggest buyers of private home loan bonds) are protesting. They argue invoking eminent domain in this way could create losses for bond holders, as well as make lending institutions more reluctant to lend if the loans could be seized. Will this thorny issue continue to ripen or will it die on the vine? It may depend on how fast home prices increase and how quickly the housing market recovers.

Investment Focus – Buttonwood’s Summer Newsletter

How are we positioning investment assets at Buttonwood?  What trends are we following?  Which asset classes are we overweight / underweight and why?  These questions and much more can be found in our Quarterly Newsletter.  Our Summer Edition has just been published and can be found here –> Buttonwood Summer Newsletter