Since May 22, markets have been volatile.  This week we explore some of the reasons, review a colorful essay on the effects of Fed policy, and what Fed policy is doing to long-term care insurance rates.

When Bernanke Confounds, Wall Street Reaches for Theories. Since Fed Chairman Ben Bernanke uttered the words “next few meetings” on May 22, global markets have been volatile.  Chairman Bernanke was referring to the time frame when the Federal Reserve might consider tapering the rate in which it purchases bonds.  This policy has substantially undergirded markets in the recent past.  This first article asks the question:  “Just what was Ben S. Bernanke thinking three weeks ago when he said that the Federal Reserve might cut back, sooner rather than later, its stimulus efforts?”  The author believes “his utterance must have been deliberate and must have had a motive.”  Theories include 1) to placate those with deep reservations about the unprecedented stimulus policies, 2) to “scare” the market not to get ahead of itself, 3) to let float a “trial balloon” in order to see how the markets may react when the Fed actually follows through with tapering, and 4) to telegraph that Mr. Bernanke has in fact shifted his stance from an “open-ended” policy stance.

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Schwab Market Perspective:  Changing picture.  I am reminded of an often used Churchill quote:  “Now this is not the end.  It is not even the beginning of the end.  But it is, perhaps, the end of the beginning.”  This might aptly describe the perspective of the market analysts at Charles Schwab.  “Recent action may be a foreshadowing of action to come as we slowly transition to a more normal economic environment…equities are likely to remain more volatile in the near-term…but it is encouraging to note that many of the technical and sentiment conditions that were troubling at the recent market highs have corrected….many of the indicators we watched reversed quite quickly, suggesting that further downside may be limited, albeit with heightened volatility.”  Hopefully, they are right—that further downside may be limited.

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Wounded Heart.  Bill Gross, of the bond giant Pimco—always insightful and provocative—offers a fairly scathing critique of current Federal Reserve Policy.  He uses the colorful metaphor of policy being like a “beating heart pumping anemic, even destructively leukemic blood through the system.”  With yields so low and the prospects of added return from taking risk so low, then “risk-taking investors turn inward and more conservative as opposed to outward and more risk seeking.”  Taking risk to turn a profit—Animal Spirits as Robert Shiller calls it—is at the very heart of our capitalistic system, and Fed policy threatens its essential functioning, according to Gross.

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Why Long-Term-Care Premiums Are Soaring. Several clients have informed us that their long-term care premiums are increasing dramatically.  One reason is that the rate structures were built on return assumptions that have been put under pressure by Federal Reserve interest rate policy. Investment returns are necessary to build reserves for future claims.  Other factors cited are increasing healthcare costs, and the fact that policyholders are actually keeping their policies—unlike other types of insurance contracts that assume a certain lapse rate when rate structures are calculated.

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J. Mark Nickell & Co.


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