Daily Bullets…………..For May 21, 2014

·         Low inflation for 4 more years??......Minneapolis Fed President Narayana Kocherlakota in a speech this morning suggested implementation of price level targeting by the Fed because he believes inflation could remain below 2% until 2018. It is suggested that under price level targeting, the Fed would allow inflation to run in excess of the 2% target level for several years in order to offset the effects of low inflation experienced over the past several  years.

What’s the point? We think this is part of the reason why the stock market is up today. Kocherlakota comments have several important implications: 1) provides some insight into Federal Reserve thinking that they may believe inflation will remain low for an extended period; and 2) it suggests Federal Reserve policy could remain very accommodative for much longer than many now believe. This would have positive implications for financial assets, such as stocks and bond. One other factor we believe may be at work: the Federal Reserve may be learning they do not understand inflation (and its causes) as well as they or many others believe. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140521&ID=17640000&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Fed minutes reflect low inflation....In April FOMC meeting minutes released today, the Fed stated continued monetary stimulus did not risk causing higher inflation. Their reasoning: continued  high structural unemployment and low capacity utilization.

What’s the point? This is another in a continuing stream of data that 1) points to continued low inflation; 2) highly accommodative Fed policy does not appear to be changing; 3) any rate increases by the Fed are still expected to be gradual. This is positive for financial assets but does raise some concern about the underlying strength of the U.S. economy. Because global economies are much more inter-dependent, we think the weakness in Europe and slowing in China is probably having and will continue to have more impact on the U.S. economy than many now expect. The implications for investment policy are: continued balance between equity and fixed income and equity preference toward larger quality companies that have healthy free cash flow and can raise dividends. Link: http://www.bloomberg.com/news/2014-05-21/fed-sees-no-inflation-risk-in-stimulus-to-push-down-unemployment.html