Posts filed under “Think Tank”

Paul McCulley’s Complete Fed Forecast Track Record

This analysis of the long term track record of PIMCO’s managing director was performed by a long time Fed watcher, Analyst X, who apparently is unimpressed with Mr. McCulley’s forecasting acumen. Below you will find his review of a full decade’s worth of Fed calls by .

Analyst X interprets this as PIMCO talking their book, consistently forecasting rate cuts, or the end of the tightening cycle, being wrong most of the time — they were wrong much more than right.



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A few days ago, Paul McCulley of Pimco said:

June 17, 2009, Target 0.00% to 0.25% range
(Bloomberg) — Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve’s exit strategy from the unprecedented initiatives put in place during the economic crisis won’t include interest-rate increases until 2011 and will likely involve paying interest on reserves.  The Fed will raise its benchmark lending rate “no sooner than 2011,” and any speculation officials will raise interest rates this year is “simply silly,” McCulley wrote in a commentary on Pimco’s Web site.

Let’s review Paul McCulley’s public forecasts since 2001.

Amazingly in 2001 he was begging the Fed to create a housing bubble ….

Pimco’s Fed Focus by Paul McCulley for July 2001
Paul McCulley: Show A Little Passion, Baby

The average American also owns a home. In fact, the home ownership rate in America is at a record high 68%. And while most of those homes are levered, there is room to lever them even more, from both a balance sheet and an income statement perspective, as shown in Figure 4. Most important, perhaps, valuation of homes – the price of a home divided by the shelter services that it provides – is secularly cheap, as shown in Figure 1 on the cover. There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing (just like he denied belatedly attacking the NASDAQ bubble). So, while I may think Washington needs to put more Keynesian proof in the policy beverage it is serving, there is no question that Washington is pouring from the right decanter.

On June 30, 2004 The Fed raised rates from 1.00% to 1.25%.  This was the first of 17 consecutive rate hikes that would eventually end when the Fed hiked to 5.25% on June 29, 2006.  During this period the fed funds futures contract predicted what the Fed would do with nearly 85% accuracy as much as 50 days before the FOMC meeting.  What did McCulley think during this period?

8/14/2004, Target 1.25%: 16 consecutive hikes to come
(Bloomberg) — The Federal Reserve will raise the overnight bank lending rate target another quarter point by year’s end to 1.75 percent, said Paul McCulley, who runs the money market desk at Pacific Investment Management Co., in an interview with Barron’s.

9/21/2004, Target 1.75%: 14 consecutive hikes to come
(Bloomberg) Paul McCulley, a managing director at Pacific Investment Management Co., said Federal Reserve policy makers may raise their benchmark interest rate once more this year, to 2 percent, and then “pause.”

12/14/2004, Target 2.25%: 12 consecutive hikes to come
(Bloomberg) — The U.S. Federal Reserve, which today boosted its target rate for overnight loans between banks to 2.25 percent, has “basically” reached a neutral rate, said Paul McCulley, a managing director at Pacific Investment Management Co.

1/7/2005, Target 2.25%: 12 consecutive hikes to come
(Bloomberg) — The U.S. Federal Reserve is “almost finished” with its campaign to raise the target interest rate, said Paul McCulley, a managing director at Pacific Investment Management Co.

3/18/2005, Target 2.50%: 11 consecutive hikes to come
(Bloomberg) — The Federal Reserve may be nearing the end its interest-rate increases as a result of higher oil prices, Paul McCulley, a managing director at Pacific Investment Management Co., told financial news network CNBC.  “I think the Fed will reflect in their policy the fact that they’re near the neutral zone,” where the federal funds rate is equal to the rate of inflation, McCulley said. Newport Beach, California-based Pimco manages the world’s largest bond fund.

4/1/2005, Target 2.75%: 10 consecutive hikes to come
(Bloomberg) — The Federal Reserve may pause after raising its benchmark interest to 3 percent, said Paul McCulley, a managing director at Pacific Investment Management Co. … “I do think they are about finished,” McCulley, who helps manage a quarter of the Newport Beach, California-based firm’s $400 billion of assets, said in an interview with Bloomberg Television. “Once they get to 3 percent, they are at the low end of the common known range of neutrality and I think they will want to stop punishing us every eight weeks.”

4/19/2005, Target 2.75%: 10 consecutive hikes to come
(Bloomberg) — The Federal Reserve may raise its interest-rate target just two or three more times because of a “soft patch” that is emerging in the global economy, according to Paul McCulley, a managing director at Pacific Investment Management Co.  The forecast by McCulley, whose firm manages the world’s biggest bond fund, means the Fed’s target rate for overnight loans between banks would peak at 3.25 percent to 3.50 percent. The median estimate of 59 economist surveyed by Bloomberg News from April 1 to April 7 was for a year-end target rate of 4 percent.

5/23/2005, Target 3.00%: 9 consecutive hikes to come
(Bloomberg) — Paul McCulley, a managing director and fund manager at Pacific Investment Management Co., said the Institute for Supply Management’s monthly manufacturing index may be the catalyst that leads the Federal Reserve to slow the pace of interest-rate increases.

6/22/2005, Target 3.00%: 9 consecutive hikes to come
(Bloomberg) — The Federal Reserve will add to eight increases in its benchmark interest rate one or two more times before stopping, said Paul McCulley, a managing director at Pacific Investment Management Co.

7/18/2005, Target 3.25%: 8 consecutive hikes to come
(Bloomberg) — The Federal Reserve will probably stop raising interest rates next month after guiding the economy to a “soft landing,” said Paul McCulley, a managing director at Pacific Investment Management Co.

8/11/2005, Target 3.50%: 7 consecutive hikes to come
(Bloomberg) — The Federal Reserve will continue raising interest rates until the “bubble” in the housing market bursts, Paul McCulley, a managing director at Pacific Investment Management Co., told financial news network CNBC.  If Fed Chairman Alan Greenspan “wants to pop a bubble in property, he has got to use a nasty bear market in bonds as his vehicle,” McCulley told CNBC from his office in Newport Beach, California. Pimco manages the world’s biggest bond fund.

9/1/2005, Target 3.50%: 7 consecutive hikes to come
(Bloomberg) — The Federal Reserve is “finished” raising its interest-rate target because Hurricane Katrina will have a “profound effect” on the economy, said Paul McCulley, a managing director at Pacific Investment Management Co.

10/28/2005, Target 3.75%, 6 consecutive hikes to come
(Bloomberg) — The Federal Reserve, to accomplish its goal of raising longer-maturity debt yields, should stop increasing interest rates, according Paul McCulley, a managing director at Pacific Investment Management Co., and Bill Miller, the head of Legg Mason Fund Management.

12/20/05, Target 4.25%, 4 consecutive hikes to come
(Bloomberg) — “The Fed will stop tightening, most likely at the end of January.”

1/3/06, Target 4.25%, 4 consecutive hikes to come
(Bloomberg) —  “They were warm and fuzzy minutes with the FOMC telling us they are about finished,” McCulley said. … “I was certainly premature in anticipating the Fed drawing this tightening to a close,” he said. Now, “our view and the Fed’s view are very close,” he said. That is, “the Fed is not accommodative anymore and it’s an issue of how far they are into the neutral zone. We are on the same page.”

4/7/2006, Target 4.75%, 2 consecutive hikes to come
(Bloomberg) —  “We’re looking for a slowdown in the housing market. If the property market defies what the Fed’s done and defies what the market’s doing right now, we’d have to rethink. We think they’re going to stop at 5 percent, but I can’t put fists on the table and say there’s zero probability of that.”

6/29/2006, Target 5.25%, the last of the 17 consecutive hikes done
(Bloomberg) — Paul McCulley, who oversees $100 billion at Pacific Investment Management Co., said the U.S. Federal Reserve has finished raising interest rates, barring any economic surprises.

From June 29, 2006 to September 17, 2007, The Fed held the target rate steady at 5.25%.

August 2, 2006, Target 5.25%
(Bloomberg) — The Federal Reserve has raised interest rates “too far” and will lower them in the next six to nine months, Paul McCulley, managing director of Pacific Investment Management Co., wrote in a report.

November 2, 2006, Target 5.25%
(Bloomberg) —  Pimco’s McCulley Says Fed to Cut Rates to 4.25% Next Year

January 30, 2007, Target 5.25%
(Bloomberg) —  McCulley of Pimco Sees Economy Slowing, Fed `Easing’ This Year

February 2, 2007, Target 5.25%
(Bloomberg) —  McCulley of Pimco Says U.S. Housing Drop May Lead to Rate Cut

May 29, 2007, Target 5.25%
(Bloomberg) — The case for the Federal Reserve to cut interest rates is growing more “robust” because the U.S. jobless rate is poised to rise, according to Paul McCulley, a bond fund manager at Pacific Investment Management Co.

August 17, 2007, Target 5.25%
(Bloomberg) — The Federal Reserve may cut its target for overnight loans between banks by a half-percentage point to 4.75 percent at the next meeting in September, said Paul McCulley, a fund manager at Pacific Investment Management Co.

September 10, 2007, Target 5.25%
(Bloomberg) — The Federal Reserve will cut its benchmark interest rate “substantially” by year-end to avoid a recession, said Paul McCulley, a fund manager at Pacific Investment Management Co.  “Here’s saying a prayer that 100 basis points of Fed funds cuts, by the end of 2007, will not be too late,” McCulley wrote in a report Sept. 5 after attending the Kansas City Fed Bank’s annual symposium in Jackson Hole, Wyoming. The Fed will pare borrowing costs following a slump in the housing market, he said.

On September 18, 2007 , The Fed cut the target rate 50 basis points to 4.75%.  This was the first of 10 moves that would take the funds rate to a range of 0% to 0.25% by January 2009.

November 20, 2007, Target 4.50%
(Bloomberg) — The Federal Reserve may reduce its target interest rate to below 3 percent to keep the U.S. economy from lapsing into recession, said Paul McCulley, a fund manager at Pacific Investment Management Co.

December 28, 2007, Target 4.25%
(Bloomberg) — Pimco’s McCulley Says Fed Funds at 3% Makes Sense

January 30, 2008, Target 3.50%
(Bloomberg) — Pacific Investment Management Co.’s Paul McCulley said the economic outlook calls for a half- percentage point reduction in borrowing costs today by the Federal Reserve.

On January 23, 2008 the Fed cut the funds rate 0.75% in a inter-meeting move about an hour before the NYSE was set to open.  Stocks were set to open several hundred DJIA points lower as a reaction to the news that Socgen’s Jerome Kerviel lost nearly $7 billion in unauthorized trading.  The Fed cut the funds rate again by 0.50% to 3.00% on January 31, 2008 completing a 8 day 1.25% reduction on the target rate.

So far, McCulley has had the same call the entire decade, cut rates aggressively or stop raising them.   By the spring of 2008 that is exactly what the Fed was doing.  Now that his eight year forecasting campaign to drive rates as low as possible was finally happening ….

March 31, 2008, Target 2.25%
(Bloomberg) — The Federal Reserve will stop cutting its target rate for overnight lending between banks once it reaches 1.5 percent, Paul McCulley, a portfolio manager at Pacific Investment Management Co., told CNBC.

April 18, 2008, Target 2.25%
(Bloomberg) — Paul McCulley, a fund manager at Pacific Investment Management Co., comments today on the Federal Reserve after a panel discussion in Charlotte, North Carolina.  “I think the Fed is nearing the end of the easing process.  I think they have signaled that. Importantly, the Fed has stressed that a lower fed funds rate by itself as a solo tool can’t cure all that ails us, which is an open invitation for fiscal authorities, regulatory authorities and the private sector to pick up some of the load. It doesn’t mean the Fed won’t ease a lot more if it has to, but it would prefer to have some partners, if you will.”

Finally, The U.S. Government has pumped in over $150 billion to rescue the GSEs Fannie Mae and Freddie Mac.  They are seeking an authority to extend up to $400 billion of taxpayer assistance to these two entities.

August 22, 2008
McCulley Says Taxpayers Should Gain From GSEs

The Treasury Department put Fannie and Freddie into a “conservatorship” on September 5, 2008

Category: Federal Reserve, Fixed Income/Interest Rates, Think Tank

Are we there yet?… to economic recovery?

A day after the World Bank raised its ’09 China GDP growth estimate to 7.2% from 6.5%, the Shanghai index broke out for a 2nd day to the highest level since July. The economic green thumb was passed around overnight as IMF official Lipsky said they will revise their global growth estimates “modestly upward.” Also,…Read More

Category: MacroNotes

Politicizing the Fed Would be a Mistake

Good Evening: U.S. stocks managed to finish with modest gains Thursday, though the performance by the major averages could have been better considering today’s positive economic news. Then again, it was this same set of data that helped push Treasury yields quite a bit higher, and therein lies the rub facing investors. With all the…Read More

Category: Markets, Think Tank

Small Enough to Fail: Community Banks in the Bailout On Wednesday, June 10, 2009, EPI hosted the first of a series of forums on the financial crisis. click here to view video (Flash) click here to download high-res Apple QuickTime (426 MB) Featured speakers: William C. Dunkelberg, co-founder and Chairman of the Board of Liberty…Read More

Category: Federal Reserve, Think Tank

Treasury Secretary Tim Geithner is making a credible appearance before the  Senate Banking Committee today.   Somebody has been working with Geithner on his talking points and his presentation, which is good.  And such is the intensity of the crisis that Geithner is actually being forced to address many issues in a forthright way.  Too little…Read More

Category: Markets, Think Tank

Jobless Claims

Initial Claims totaled 608k, 4k more than consensus and up from 605k last week which was revised up by 4k. The 4 week average fell to 616k from 623k, the lowest since Feb. The real surprise though in today’s data was Continuing Claims that were 153k less than expected and down 148k from last week’s…Read More

Category: MacroNotes

Stock markets: retreat in store?

Stock markets: retreat in store?

It seems as if the spring rally has probably exhausted itself. And it is about time given the extent and rapidity of the move. The MSCI World Index increased by 45.2% from its March lows until the early June high and the MSCI Emerging Markets Index by a staggering 68.9%. Both these indices have only had one down-week since the advance commenced in early March.

Leading markets such as Russia (+137.0%), India (+89.5%), China (+54.7%) and Brazil (+50.4%) significantly outperformed laggards such as the Dow Jones Industrial Index (+27.5%) and the S&P 500 Index (+39.9%), although all markets recorded very respectable returns. The major US indices have gained for 12 out of the past 14 weeks.

Click here or on the table for a larger image.

global-stock-markets-index-movements-18-june-2009

Source: Plexus Asset Management (based on data from I-Net Bridge)

Focusing on the US, the S&P 500 Index (911) has backed off resistance at its January high (935) and is less than five points away from breaking down through the key 200-day moving average (906) – broken to the upside only two weeks ago.

Importantly, short-term oscillators such as the rate-of-change (momentum) indicator is on a knife’s edge of giving a selling signal, i.e. crossing through the zero line in the bottom section of the chart below. Also note the negative divergence between the Index and the ROC line – typically be a warning sign that a near-term trend change will take place.

spx-18june-pic11

Source: StockCharts.com

The venerable Richard Russell of Dow Theory Letters fame said: “In order for a counter-trend rally in a bear market to be sustained, it requires steady or rising buying power plus short covering. Lowry’s Buying Power Index has been declining steadily since May 8. At yesterday’s market close, this Index (demand) was only 24 points higher than it was at the March 9 lows. Furthermore, volume is drying up.

Read More

Category: Think Tank

Technical noise/Fighting the last war

With triple witch expiration Friday, where the open interest in the 900 strike in the SPX is huge and within just a few points of the 200 day moving average, the Russell rebalancing next Friday and only a few weeks before quarter end, there will be a lot of crosscurrents that will impact market activity…Read More

Category: MacroNotes

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: Bailouts, Think Tank

Obama’s Regulatory Proposals — Smarter or Just More?

Good Evening: U.S. stocks finished mixed Wednesday after a morning dip and afternoon rally both failed. Some less than cheery news from FedEx and some bank downgrades set the tone for the early weakness, while a successful test of the 200 day moving average by the S&P 500 helped prices rebound in the afternoon. And…Read More

Category: Markets, Think Tank