Financial Research
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Out-Sized Returns Will the Fed really raise rates slowly? 18 March 2015 The pace of rate hikes will be driven by how fast inflation is rising. If inflation takes off then the Fed will not have the luxury of going slow. History teaches us if the economy hits full capacity then prices start trending higher. Inflation is not a smooth linear process. Inflation is more like a binary event; when inflation starts moving it starts moving and it tends to overshoot its target. Wages are already displaying this property. Core inflation is not about to trend up soon but the uptrend seen below is important because it illustrates the binary nature of the inflation process. Interest rate investors continue to be caught in a difficult game theory problem: (1) I will see inflation at some point. If I short rates today it is expensive and I will therefore underperform my benchmark. (2) I will bet on low inflation and low rates and I will earn the yield (positive carry). Once we see signs of an upward trend in inflation, I will run for the exit. Our view differs from this thinking: Rates are nearing an inflection point and the Federal Reserve is in uncharted territory while financial markets are on a tear up but nervous from anticipation. While inflation and the yield curve are at the low end of expectations, Alexander Alternative Capital has an asymmetrical investment opportunity to express. Our global macroeconomic view, in December of 2014, highlights the importance of wage inflation on Federal Funds. If you would like to lean more, please contact Michael Corcelli at [email protected] or by calling 305-379-4200.
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Transcript of Financial Research
Out-Sized Returns
Will the Fed really raise rates slowly? 18 March 2015
The pace of rate hikes will be driven by how fast inflation is rising. If inflation takes off then the Fed will not have the luxury of going slow.
History teaches us if the economy hits full capacity then prices start trending higher. Inflation is not a smooth linear process. Inflation is more like a binary event; when inflation starts moving it starts moving and it tends to overshoot its target.
Wages are already displaying this property. Core inflation is not about to trend up soon but the uptrend seen below is important because it illustrates the binary nature of the inflation process.
Interest rate investors continue to be caught in a difficult game theory problem:
(1) I will see inflation at some point. If I short rates today it is expensive and I will therefore underperform my benchmark.
(2) I will bet on low inflation and low rates and I will earn the yield (positive carry).
Once we see signs of an upward trend in inflation, I will run for the exit.
Our view differs from this thinking:
Rates are nearing an inflection point and the Federal Reserve is in uncharted territory while financial markets are on a tear up but nervous from anticipation. While inflation and the yield curve are at the low end of expectations, Alexander Alternative Capital has an asymmetrical investment opportunity to express. Our global macroeconomic view, in December of 2014, highlights the importance of wage inflation on Federal Funds. If you would like to lean more, please contact Michael Corcelli at [email protected] or by calling 305-379-4200.
DODD FRANK ACT STRESS TEST RESULTS
Alexander Alternative Capital, LLC invests in the financial sector by focusing on a top down global macro view &
combining our view with bottom up fundamental analysis to generate outsized asymmetrical returns. Our Special
Situations Strategy delivered 54.21% in 2014.
To learn more about how we invest in the financial sector, call 305‐379‐4200 or email
ALEXANDER ALTERNATIVE CAPITAL40SW13thStreet,STE602Miami,Florida33130305‐379‐4200info@alexanderalternativecapital.comwww.Alexander.AlternativeCapital.com
Banks now have 200 Billion in excess
capital above requirement or 15% of
its total market cap.
For the first time, all banks maintained necessary capital levels under the severely adverse scenario.
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