Productivity & Creative Destruction

Nick Ferres Vantage Point Articles

As we noted on Good Friday, in most historical episodes markets rarely make definitive lows this early in a recession. A multi-month period of contraction in growth and earnings tends to exacerbate known stress points and contributes to new ones that eventually lead to further de-leveraging and declines in risk assets. However, the strongest argument against a re-test of the …

The Entire Kitchen

Nick Ferres Vantage Point Articles

Whether the equity and credit markets have already achieved a trough on March 23 will only be obvious with the benefit of hindsight. In real time, investors will, quite rightly, remain concerned about the depth and duration of the recession, the effectiveness of policy stimulus and the magnitude of the second order imbalances and reflexive linkages. There are a few …

Hopium

Nick Ferres Vantage Point Articles

With the benefit of hindsight it appears as though we are still in the “response phase” sweet spot for equities. With an apparent peak in the US and European COVID-19 infection and mortality rates approaching, markets are choosing to emphasise the positive developments. In particular, the extreme monetary and fiscal policy response with the promise of even more driving the …

Dividends are Conditional

Nick Ferres Vantage Point Articles

Back in February when Treasury yields started to approach zero and equity dividend yields started to rise (from a fall in price), the relative spread between the dividend yield and the Treasury yield or cash rate increased to a spicy or enticing level by historical standards. Of course, in contrast to the coupon on a fixed income security, dividends are …

King Dollar & Equities

Nick Ferres Vantage Point Articles

Over the past 3-6 months, the broad US dollar index has had a 80-90% inverse correlation with equities (chart 1). Therefore, it is probably not a surprise that a (tactical) correction in the dollar over the past week has coincided with a recovery in equities. Of course, policymakers, most notably the Fed, are clearly aware of dollar funding pressures that …

Selling Fatigue

Nick Ferres Vantage Point Articles

Nothing about this crisis is typical. The velocity of the decline in equities and credit, as well as the size and speed of the policy response are all unprecedented. The catalyst for the downturn was a virus. The cause of the contraction is the deliberate decisions of policymakers to stop activity. The episode has also exposed the magnitude of corporate …

The Full Package

Nick Ferres Vantage Point Articles

The Bank of England has just delivered a 50 basis point rate cut today at an emergency meeting. Perhaps more importantly, the Bank has also announced targeted lending plans for small and medium sized enterprises. As one observer said, “a surprise rate cut at 7am is enough to make a gentleman choke on his kipper.” The additional point to note …

The End of Positive Convexity

Nick Ferres Vantage Point Articles

The decade since 2008 has been characterised by a regime that some observers such as Larry Summers have termed “secular stagnation” – the prevailing bias that low trend growth, low inflation and low interest rates are a permanent state. This belief was pervasive and self-reinforcing for policymakers’ and market participants. An additional and related feature of the regime was volatility …

Policy and its Limitations

Nick Ferres Vantage Point Articles

In light of the disappointing way price responded to the extraordinary monetary response from the world’s central banks, it is worth considering the limitations of policy. In a metaphorical sense, the Fed’s actions while necessary and welcome, were like bringing a knife to a gun fight. The Fed’s actions obviously lowered the risk free cost of capital to zero. It …

The Fed: Hero or Zero?

Nick Ferres Vantage Point Articles

The Federal Reserve has cut the Funds rate by 100 basis points to near zero this morning in Asia and has also pledged to buy at least $700 billion. In addition, it announced several other actions, including letting banks borrow from the discount window for as long as 90 days. The Fed also united with five other central banks to …