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Yellen prepares for second act at pinnacle of economic policymaking

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Shortly after Joe Biden picked Kamala Harris to be vice-president in August, Janet Yellen, the former Federal Reserve chair, briefed the pair on the slump triggered by the coronavirus pandemic and what they could do about it.

According to one person briefed on the conversation, Ms Yellen told the Democratic ticket that interest rates were low and likely to stay there for a long time, creating considerable fiscal space for new stimulus and investment.

The intervention was well-received by Mr Biden and Ms Harris, whose economic plan calls for billions of dollars of government spending. Now Ms Yellen, 74, is set to be nominated by Mr Biden to be the next US Treasury secretary, handing her a second act at the pinnacle of American economic policymaking.

Ms Yellen is a well-known quantity both nationally and internationally, given her four years at the helm of the US central bank between 2014 and 2018, fitting well with Mr Biden’s drive to fill his cabinet with competent institutionalists after the disruption created by Donald Trump.

“Janet Yellen’s appointment will be universally welcomed, and rightly so, including by economists, foreign officials and markets, all of whom regard her as a highly experienced policymaker who delivered years of stability,” said Mohamed El-Erian, president of Queens’ College at the University of Cambridge and chief economic adviser to Allianz.

Ms Yellen “understands well the importance of close national and international policy co-ordination”, Mr El-Erian added.

If Mr Biden follows through with her nomination and she is confirmed by the Senate, Ms Yellen will take over the management of US economic policy at a pivotal moment.

The recovery from the initial impact of coronavirus is showing significant signs of slowing amid fading fiscal support from Congress as new infections surge in many states. Even though a vaccine is on the horizon, many economists fear lasting damage to businesses and the labour market that could weigh on the performance of the economy for years.

And while financial markets appear to be in healthy shape, Mr Trump’s Treasury department, run by secretary Steven Mnuchin, has just moved to close some of the Fed’s emergency fending facilities, triggering a rift with the central bank that Ms Yellen is uniquely positioned to mend.

“I think she will do her best within the legal framework to reinstate as much of those programmes as she can,” said Eric Stein, chief investment officer for fixed income at Eaton Vance. “Given Yellen’s background at the Fed, her views will be very much in line with the Fed and she will want the Fed to be able to provide as much credit to various sectors of the economy as possible.”

Ms Yellen was born and raised in Brooklyn, New York, did her undergraduate studies at Brown University and earned her doctoral degree in economics at Yale University, where she specialised in the labour market.

Her government career took her to the Fed — where she met her husband George Akerlof, a fellow economist and Nobel laureate — and eventually into the White House as chair of the council of economic advisers under Bill Clinton.

Later, she would return to the US central bank as president of the San Francisco Fed in the years leading up the financial crisis and at the beginning of the great recession, and later as Fed vice-chair.

When Barack Obama chose her to succeed Ben Bernanke as Fed chair in late 2013, he joked that she was “tough, not just because she’s from Brooklyn” and credited her with sounding an early alarm about the housing bubble.

“She doesn’t have a crystal ball, but what she does have is a keen understanding of how markets and the economy work, not just in theory but in the real world,” he said.

During her time leading the Fed, Ms Yellen presided over the start of the post-crisis tightening of monetary policy, ushering in a cycle of interest rate rises that she approached cautiously, pausing along the way.

For some liberal economists, even those moves were excessively hawkish, and in retrospect the Fed disavowed them on the grounds that the economy could have benefited from sustained easy money without triggering a dangerous inflation spike.

Over that period, Ms Yellen’s tenure was marked by other changes at the Fed that have endured under her successor Jay Powell, including a growing focus on disparities in income and the role played by gender and race — issues that the central bank did not traditionally factor into policymaking.

Mr Trump even considered offering Ms Yellen a second term as Fed chair but demurred after his aides thought it best that he select his own nominee. The president also questioned whether Ms Yellen, who is 5 feet 3 inches tall, was too short for the job, according to The Washington Post.

After leaving the Fed, Ms Yellen took a position as a fellow at the Brookings Institution, a Washington think-tank, and occasionally lamented the US president’s attempts to undermine the central bank’s independence as well as the administration’s lack of global economic leadership.

In an interview with the Financial Times in October 2018, Ms Yellen said that Mr Trump’s relentless verbal assaults were “whittling away the legitimacy and stature of institutions the public has traditionally had some confidence in”, adding: “I feel it ultimately undermines social and economic stability.”

As Treasury secretary, Ms Yellen will be forced to enter the political fray more than in her previous roles. Although she faced frequent grillings from Congress as a Fed official, including her own confirmation hearing, she will now have to negotiate measures to boost the economy with recalcitrant Republicans, and defend them to a deeply polarised American electorate.

Crucial to her nomination to the Treasury is the fact that she successfully managed to endear herself to the progressive wing of the Democratic party in recent years — more so than Lael Brainard, a current Fed governor who was also a leading contender for the Treasury job.

Not only did Ms Yellen stress America’s capacity to engage in deficit spending during her call with Mr Biden and Ms Harris in August, she also penned an op-ed in The New York Times that month with Jared Bernstein, a member of Mr Biden’s transition advisory board, appealing for large-scale stimulus.

“If senators still fail to resolve stalled negotiations . . . millions of needy Americans will suffer — and the overall economy could degrade from its current slow rebound in growth to no growth at all,” they wrote.

On Monday, Ms Yellen received a ringing endorsement from Elizabeth Warren, the Massachusetts senator known for her very liberal views on economic policy and hardline positions on banking regulation.

Ms Warren’s support suggests there could be little backlash from the left to her nomination, at least initially, of the kind that dogged former Treasury secretary Tim Geithner under Mr Obama.

“She is smart, tough, and principled. As one of the most successful Fed chairs ever, she has stood up to Wall Street banks, including holding Wells Fargo accountable for cheating working families,” Ms Warren wrote in a tweet that described Ms Yellen as an “outstanding choice”.

Swamp Notes

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Earnings beats: lukewarm reaction shows prices are stretched

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Investors are picking over first-quarter results for signs of economic recovery and proof that record market highs can continue. Stock markets have only been this richly valued twice before — in 1929 and 2000. Bulls hope strong corporate earnings and rising inflation can pull prices higher still. But pricing for perfection means even good results can be met with indifference.

L’Oreal illustrated this trend on Friday. The French cosmetics group stated that sales in the first quarter of the year rose 10.2 per cent. This was a better performance than expected. Yet the announcement sent shares down by around 2 per cent. Weak cosmetics sales were seen as a veiled warning that consumers emerging from lockdowns might not spend as freely as hoped.

Online white goods retailer AO World, a big winner from pandemic home upgrades, also offered a positive update this week. In the quarter that marked the end of its financial year, sales were £30m ahead of forecasts. But even upbeat commentary from boss John Roberts could not stop shares slipping 3 per cent.

Banks are not immune. Their stocks have outperformed the market by 7 per cent in Europe and 12 per cent in the US this year. But stellar Wall Street results were not enough to satisfy investors this week.

JPMorgan Chase, the biggest US bank, smashed expectations for the first quarter. Even adjusting for the release of large loan loss reserves, earnings per share beat expectations by 12 per cent because of higher investment banking revenues. Bank of America earnings also rose thanks to the release of loan loss reserves. Yet shares in both banks ended the week down. Goldman Sachs had to pull out its best quarterly performance since 2006 to hold investor interest.

On multiple metrics, stock valuations look steep. On price to book, banks are now back to the pre-crisis levels recorded at the start of 2020. Living up to the expectation implicit in such valuations is becoming increasingly hard.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.



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Barclays criticised for underwriting US private prison deal

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Barclays has attracted criticism for underwriting a bond offering by the US company CoreCivic to fund the building of two new private prisons, in a new dispute over Wall Street’s relationship with the controversial sector.

The UK-based bank said two years ago that it would stop financing private prison companies, but the commitment did not extend to helping them obtain financing from public and private markets.

About 30 activists and investors, among them managers at AllianceBernstein and Pax World Funds, have signed a letter opposing the $840m fundraising for two new prisons in Alabama, which was due to be priced on Thursday.

The signatories said the bond sale brings financial and reputational risk to those involved and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”.

Activists and investors who pay attention to environmental, social and governance issues have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour. As well as raising ethical issues, many also say such financing may be a bad investment because legislators are increasingly calling for an end to the use of private players in the prison system.

While Barclays is not lending to CoreCivic, activists and investors attacked its decision to underwrite the deal, which is split between private placements and public issuance of taxable municipal bonds. The arrangement is “in direct conflict with statements made two years ago” when the bank announced it would no longer finance private prison operators, according to the letter.

Barclays said its commitment to not finance private prisons “remains in place”, adding it had worked alongside representatives from the state of Alabama to finance prisons “that will be leased and operated by the Alabama Department of Corrections for the entire term of the financing”.

CoreCivic said the Alabama facilities will be “managed and operated by the state — not CoreCivic. These are not private prisons. Frankly, we believe it is reckless and irresponsible that activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space, and potentially dangerous conditions for correctional staff and inmates alike.”

Barclays’ 2019 commitment to limit its work with private prison companies came as other banks, including Wells Fargo, JPMorgan Chase and Bank of America, also said they would stop financing the sector.

Critics said they were not sure why Barclays is differentiating between lending and underwriting.

“You’ve already taken the stance, the right stance, that private prisons and profiting from a legacy of slavery is bad,” said Renee Morgan, a social justice strategist with asset manager Adasina Social Capital, one of the signatories of the letter. “But then you’re finding this odd loophole in which to give a platform to a company to continue to do business.”



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Hedge funds post best start to year since before financial crisis

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Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It’s a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

Additional reporting by Katie Martin

laurence.fletcher@ft.com



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