Scott Minerd discusses the importance of transitioning sustainable development into an institutional asset class.
Tensions in Asia are rising, as China attempts to move toward a more market driven economy. This, combined with the ongoing ultra loose monetary conditions in Japan, has elevated the threat of a financial crisis in the region between now and the end of 2013.
There are striking parallels between the dramatic recent sell-off in U.S. Treasuries and the Great Bond Crash of 1994. But the summer of volatility now facing financial markets is no doomsday scenario. Instead, it puts the U.S. Federal Reserve in a bind. Higher interest rates will reduce housing affordability, which is especially troublesome since housing is the primary locomotive of U.S. economic growth. That means the Fed, despite Ben Bernanke’s recently announced timetable, may be forced to expand or extend quantitative easing if the housing market’s response to recent events becomes more acute and starts to negatively affect the job market recovery.
Uncertainty over the Federal Reserve’s timeline for tapering quantitative easing has resulted in increased volatility in fixed income markets. While the coming months could see the 10-year Treasury yield climb as high as 3.5 percent, the resulting economic slowdown will keep rates subdued in the medium-term.
The recent bond market collapse is reminiscent of the Great Crash of 1994. Further pressure on the economy due to rising interest rates could cause the Fed to revisit its timetable for QE.
Rising interest rates are beginning to put pressure on the recovery in the housing market, which will affect economic output. This reduces the likelihood that the Fed will taper QE in 2013, and could even lead it to signal a possible expansion or extension of the current policies.
Hyman Minsky’s scholarship holds valuable lessons for the current dynamic in the economy. The Fed, via QE, continues to induce speculative buying in the Treasury market, which is having the effect of destabilizing a number of asset classes.
Market volatility is rising as the Fed continues with its asset purchase program. The economy also appears increasingly vulnerable to a rise in interest rates, which would have an adverse effect on housing in particular.
Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors.
The pace of policy reforms is accelerating and economic recovery appears to be on the horizon for the European Union.
Quantitative easing has benefited from global macro events and appears likely to continue for the rest of the year. Markets, though, will continue to anticipate how the current policies will eventually be unwound.
In addition to serving as Global Chief Investment Officer of Guggenheim Partners and Chairman of Guggenheim Investments, Scott Minerd is also a member of the Federal Reserve Bank of New York’s Investor Advisory Committee on Financial Markets, an advisor to the Organization for Economic Cooperation and Development, and a contributing member to the World Economic Forum. Minerd is regularly featured in leading financial media outlets, including Financial Times, Barron’s, Bloomberg, CNBC, Fox Business News, Forbes, and Reuters.
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Global CIO Scott Minerd joins Bloomberg TV on Fed Day to discuss what current Federal Reserve policy says about the state of the U.S. economy.
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