David Merkel

About the Author David Merkel

David J. Merkel, CFA — 2010-present, I run my own equity asset management shop, called Aleph Investments. I manage separately managed stock and bond accounts for upper middle class individuals and small institutions. My minimum is $100,000. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. From 2003-2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm, to the delight of employees there. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Don’t Sweat the Fed

Photo Credit: Michael Daddino

This should be short. There are a lot of good reasons not to worry about the FOMC raising Fed funds or not.  If they raise Fed funds:

  • First, savers deserve a return.  Economies work better when savers get rewarded.
  • Second, investors do better on the whole when there is a risk free asset earning something to allocate money to, because otherwise investors take too much risk in an effort to generate income.
  • Third, the FOMC should never have let Fed funds rates go below 1% anyway — the marginal stimulus is limited once the yield curve gets slope enough for the banks to lend.  They don’t really need more than that.
  • Fourth, it’s not as if monetary policy has been doing that much.   Outside of the government and corporations, most entities have not shown a lot of desire to lever up after the financial crisis.
  • Fifth, long Treasury yields will do what they want to do — they won’t necessarily go up… it all depends on how strong the economy is.

But if the they don’t raise Fed funds, no big deal.  We wait a little longer.  What’s the difference between having zero interest rates for 6.5 years and 7.5 years?  Either one would build up enough leverage if the economy had the oomph to absorb it.

As it is, corporate borrowing has been the major place of debt expansion through both loans and bonds.  Watch the debt of energy firms that are allergic to low crude oil prices.  Honorable mention goes to auto, student, and agricultural lending.  May as well mention that underwriting standards are slipping in some areas for consumers, but things aren’t nuts yet.

I’ve often said that the FOMC stops tightening rates when something big blows up.  Can’t see what it will be this time — the energy sector will be hurt, but it isn’t big enough to impair financials as a group.  Subprime lending is light at present outside of autos.

Watch and see, but in my opinion, it is a sideshow.  Watch how the long end behaves, and see if the market reflates.  We need more confusion and less concern over what the next crisis is, before any significant crisis comes.