Partnering with the Federal Reserve

Feb 14, 2014 @ 12:00 am

Runtime: 8:23

Taking cues from the Fed resulted in investment success for Ed Hyman of ISI Group and Bill Miller of Legg Mason Opportunity Trust in 2013. Find out what signs they're looking for from the central bank this year.

Video Transcript

This week on WealthTrack, two financial champions were firing on all cylinders in 2013. What's their plan of finishing the winner circle again this year? -Wall Street is raining king of economist. Ed Hyman joins investment legend Bill Miller next on Consuelo Mack, WealthTrack. -In part one of our two-part discussion, I asked and to describe the forces that shaped last year's economic and market performance that set the foundation for this year. And I began at asking at Hyman why from a forecasting point of view, he says 2013 was his best year ever. -All of us has Elmer block in it but as it went into the year, I saw that people were pretty defensively positioned. People were cautious or, you know, not dancing on the tables or anything like that. And then I got the simple idea that he wanna partner with the Fed that is as long as fed was expanding their balance sheet the market was likely to go up and the Fed will come out and said that we're gonna expand the balance sheet all year, if not for infinity but they said at least all year. And so I thought that was like a free pass for the market to go up and people weren't necessarily positioned for the market to go up and the economy was okay, it wasn't great for sure but it was okay. And-- there you have it, the market went up to 30 percent. -So that was a market call but as far as-- -It was economic market call. -and-- you know, so talk about the economic 'cause why number one, that partnering with the Fed and what the Fed was saying about continuing its very common sense. Why that is so important to the economy? Because a lot of critics of the Fed say, "Hey, this would have-- the economy would have come back anyhow." So why did that have such an important impact in the economy? -Whether it would come back or not, we'll never know. But the Fed has been operating on the premise that when they do queue pushes the stock market up and then that helps consumer confidence and consumer spending. And that's pretty much what happened. I kinda did go up. They also had a nice recovery in housing, house prices were up say, roughly ten percent addition to market being up 30 percent. And there were some luck involved as well but that was the knob of it that the Fed was easy, pushed the market up, that worked. And the economy did improve so. -So Bill, you had two phenomenal back to back years with the Legg Mason Opportunity Trust. So what was it that you saw, especially given what Ed just said, what was that you saw that convinced you that-- you know, that the market number one would be strong and number two that you know where to invest in it? -Well, I'll take off from what Ed said you talked to. He's giving you the macro view-- -Yeah. -And at the micro level, people were positioned cautiously and you can see that in evaluations. So both markets rest on three basic-- three basic legs. One of them is growth, the economy is growing. The second one is adequate liquidity and talked about the Fed a lot of liquidity in the market and third is the track evaluation. And so evaluation of the market going into last year was around 13, 14 times, which compared to bonds, which extremely attractive and compared to-- and that's since the long term history is also pretty attractive. So the back drop was for good equity market and we'll get that right. And maybe more importantly, the market last year had offer things that you don't see a year later. So we bought last year, we bought NetFlix $60. That's $350 today. We bought Best Buy at under $13. It's $40 today. We bought Pandora at $7. That's $33 today-- bought E-Trade at $7. It's $20 today. So those kinds of things stocks and went up two, three to four times. You could get those a year ago. You can't get those today. The market has calmed over those pretty well. So, well-- I think the market is kind of a very good this year. It's unlikely to throw up enough names like that to give you those kinds of returns. -So, Bill, you know, I'm hearing Fed, Fed, Fed, and I think you told me earlier that this is the greatest monetary experiment that we've ever had and, you know, monetary history and I don't know how this is gonna play out so, you know, what's your take on what the Fed's been doing and how it's gonna play out? -I divided the two phases. I think that the Feds extraordinary monetary policy that we've had has been exactly right policy since the crisis and I think that the European, as if [unk] were still running the ECB, I think they would had it even more catastrophic situation than they currently have. But even so, I think Draghi has done a great job over there but even so that the Southern Periphery is likely-- this is all said and done that results worst in the great depression 'cause this sort of a quasi-goal standard with the Euros. So-- -So these are Portugal and-- -Portugal and Greece and place like that, you know, Italy-- Spain. And so we have two experiments running. One of them over here clearly the US has done much, much better than Europe. And I think if you look at Japan what they've done is an even more aggressive thing and it's working so far. In the US, in terms of me thinking about the Fed I'm thinking about policy, and Ed had talked about the tapering and what's gonna happen. There's a Chinese-- as a Chinese proverb or statement that forget about the ways of trying to find the current. And so most people were thinking the ways, you know, as we go up a little bit or down a bit, we're gonna have correction here or there, when the underlying current it's simple market. So I think that whether the Fed is-- the thing I'm concerned about is if the economy grows too strongly. What's supposed we start printing four plus percent quarters this year. -In GDP. -In GDP. -Uh-hmm. -Yeah. And then unemployment drops rapidly and then capitalization rises pretty quickly. And then that you pull forward the Fed's first interest rate increase and I think that's where you're likely to run in the-- run into some heavy going because if, of course, the Fed doesn't do anything, inflation will start to pick up and that's gonna be bad for the market. So I think-- as long as the Fed pins the short rate around zero and that's gonna continue into 2015, the market capitalist resistance is clearly higher. But if things are going too strong this year, which I think is the greater risk and it's too weak. And I think that if you get a little bit [unk] of the year, people will start to worry about what's gonna happen. -So Ed, number one, zero percent interest rate, Fed funds rate until through 2015 you think can we bank on that? -Well, I agree with Bill completely that if it kinda were to pick up. -Right. -The Fed will react for a variety of reasons. I have become enamored with the idea that we're in business cycle like the 1990's. It started slow, job's recovery, the Fed was pretty accommodative, inflation was slow, you had a tech boom not as similar to what we're having now, and the economy got better over three to four years. If it was to play out again, unemployment would go to five, Fed funds will go to five, inflation would probably go to five, but between here and there, the market will grow up a lot and the analogy is we're in if that was a right analogy is that we're in 1996 in market in '95 went up 30 like last year. And then the market went up 20 this year, 30 next year, 27 next year after that and then another 20. I'm saying that's-- -Right. -But that's, you know, you have kind of a lot of things fall in place. -Right. -On a positive note, but they are there if we don't have, you know, some unseen phenomenon. The biggest uncertainly is this unprecedented monetary. -Experiment. -Experiment. And we'll have, you know, take a step carefully each day to see if it looks like it's working. -But it doesn't seem to be the fact that if the experiment doesn't seem to be worrying other view too much, right? -I'm nervous wreck.


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