On the Fed versus the Market ; Antioxidants and Healthy Arteries!

From: aditya rana
Date: Sat, Apr 25, 2015 at 2:05 PM
Subject: On the Fed versus the Market ; Antioxidants and Healthy Arteries!

Hi!,

As we head towards the month of June, and a possible interest rate hike by the Fed, one can expect some turbulence in global financial markets. The big question investors face is whether the Fed’s actions are likely to create a significant correction in markets or a relatively shallow correction and therefore a buying opportunity (as has been the case in recent years). As Warren Buffet warned a few years ago – “when the Fed does raise rates, it will be a shot will be heard around the world”. Gavyn Davies, Chairman of Fulcrum Asset Management and ex-chief economist at Goldman Sachs, had an interesting piece in his FT blog which helps one form a view on the likelihood of either event. To summarise:

-Janet Yellen, in an important recent speech on monetary policy, outlined the underlying rationale for the Fed’s expectations on future interest rates based on a rise in the equilibrium real interest rate, as well as projections on inflation and the unemployment rate. This implies a rise of the Fed funds rate to a level of 2.8% by end 2017 (and 3.5% over the longer-term).

-However, the market expects a much smaller rise in the rates as shown in the graph below. The performance of global equity and bonds markets this year will depend on who is right about the path of future interest rates.

-This difference in expectations between the Fed and the market rests mainly on the Fed’s expectation of a rise in the equilibrium real interest rate, which is well captured by the recent debate on secular stagnation between Bernanke and Summers (which was summarised in a previous letter).

-Ben Bernanke makes the case that the equilibrium real rate is currently abnormally low and should rise as the economy recovers with the “headwinds” abating. Larry Summers makes the point that , because of subdued investment and high global savings, the equilibrium real rate is actually below -2% (the lower limit achievable by the Fed with a zero bound nominal rate and a 2% inflation target). He also thinks that the real rate will stay at these levels for many years.

-It seems that the markets are more in agreement with the Summers view, given the abnormally low level of yields prevailing in the developed world, supporting global asset prices. In addition, the latest IMF World Economic Outlook supports this view by highlighting the weakening in potential output growth and the fall in private investment.

-The Fed is wary about forcing the market to accept its view on the future path of the equilibrium rate, following the “taper tantrum” of 2013. While they willing to inform the market about their (changing) rate forecast, they fear a major disruption in markets caused by an explicit warning of the likelihood of a more rapid rise in the future Fed funds rate than implied by the market.

-The key factor to watch going forward then is the inflation rate – clear evidence of rising inflation would imply that the equilibrium real rate is too low.

-This gap between the Fed’s rate forecasts and market expectations will be a key determinant of global asset prices in the months ahead. The rising dollar (see graph below) is also a headwind for the U.S. economy, and a form of tightening in monetary conditions, which makes the likelihood of a Fed increase in rates in June unlikely. A delay in the hike, together with dovish language emanating from the meeting, would provide further impetus to global financial markets until year-end. The other point to note is that the Fed will continue to have its finger close to the panic button, in the event of a significant (>10%?) correction in the U.S. stock market – see the remarkable quote below made on April 6 by the New York Fed Chairman (and Fed insider) William Dudley:

-Federal Reserve Bank of New York President William C. Dudley said the path of interest-rate increases is likely to be “shallow” once the Fed starts to tighten, and recent economic weakness probably won’t persist. How financial markets respond to the Fed’s actions will help determine the pace of rate increases, said Dudley, 62, a former Goldman Sachs Group Inc. economist who is the central bank’s chief liaison with Wall Street.

-The Greek saga is also likely to come to a head in June, as they negotiate the third bailout agreement when the second bailout term (which was extended in February) ends on June 30. The key deadline for them is July 20, when a Euro 3.5 BN bond repayment is due to the ECB (there are other IMF payments due until then but they can be delayed without causing the ECB to withdraw liquidity support) . The probability of a Grexit are extremely slim as polls show more than 80% of Greeks want to stay in the Eurozone! However, their negotiating tactics leave much to be desired – as the cartoon below from the Economist illustrates:

Antioxidants and Healthy Arteries:

The antioxidant content of whole plants and fruits, thereby benefiting from the synergistic actions of the thousands of compounds prevalent in whole foods, are associated with healthier arteries and a lower risk of heart disease and strokes.

Dr. Michael Greger, April 9th:

-Studies have shown that antioxidants from whole plants are associated with lower cancer risk. It turns out that total antioxidant capacity of diet may also be protective against stroke, the world’s leading cause of death after heart disease. This is in contradiction to all the antioxidant supplement studies that failed to show benefit. This may be because the food antioxidant studies took into account thousands of different compounds, in doses obtained from a usual diet, rather than individual nutrients at unnaturally high levels.

-The buildup of oxidized fat is considered the hallmark of fatty streak formation, the earliest manifestation of atherosclerotic plaques. The oxidation of fat can happen outside the body, every time we cook it, but oxidized fats are not only formed in foods, but may also be generated during digestion, especially in stomach acid. Our stomach may be like a “bioreactor for the oxidation of high-fat, cholesterol-rich foods. Muscle foods contain large amounts of endogenous catalysts which accelerate fat oxidation.” As poultry sits in our stomach, the oxidation may build up minute by minute.

-Turn out chickens are bled of only about half their blood, and the remaining residual can be a powerful promoter of fat oxidation, so there are those in the industry advocating an additional decapitation step, but if oxidation is the problem, antioxidants can be part of the solution.

-We know antioxidant pills don’t work. While extensive experimental data “have revealed a central role for oxidative stress in the stiffening of our arteries and suggested a potential role for ‘antioxidant’ treatment in cardiovascular disease, experimental data has not translated into clinical benefit. Most antioxidant vitamin trials have failed to reduce heart disease and death and may in fact even be detrimental. As a result, some have even questioned the supposedly central role of oxidative stress in the disease process.” The fact that pills didn’t work was described as a critical blow to the whole free radical theory of aging.

-But high-dose single-antioxidant supplements are not a good substitute for the very complex antioxidant network of thousands of compounds in foods, present at concentrations far below those used in those pill trials. No one had ever looked at the overall effect of the complex antioxidant network in our diet in relation to our leading killer, coronary heart disease… until now.

-A large prospective population-based cohort study, measured total antioxidant capacity of people’s diets: “The total antioxidant capacity measures, in one single value, the free-radical-reducing capacity of all antioxidants present in foods and all the synergistic effects.” They observed that “higher total antioxidant capacity of diet was statistically significantly associated with lower risk of incident heart attack in a dose-response manner,” meaning, potentially, the more high antioxidant plant foods in one’s diet, the better.

Here’s to adding adequate amounts of whole plants, fruits and grains to your diet and keeping the antioxidant intake high!

Rgds,

Aditya

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