Explaining Southern California's economy

In SoCal's Bond Triangle, the Carlyle Group hits some trouble

TCW-Getty

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The Carlyle Group, a huge private-equity firm, has hit snag with its purchase of a majority stake in TCW, one of the big bonds finds headquartered in California.

Reuters ran a dense "exclusive" Monday about some financial gyrations that are making potential trouble for private-equity colossus the Carlyle Group's deal to buy a chunk of TCW, one of the biggest bond funds in the world and a part of what I call the Southern California Bond Triangle. It also includes PIMCO and DoubleLine Capital.

PIMCO is the biggest bond fund in the world, with $1.8 trillion under management. TCW has around $135 billion on its books. DoubleLine has been growing at a furious pace since CEO Jeff Gundlach established it after a controversial departure from TCW. It has taken on nearly $50 billion in under three years. 

You could also throw Pasadena-based WAMCO in there, creating a Bond Quadrangle. WAMCO has around $450 billion under management and has tried in recent years to regain its competitive mojo versus PIMCO.

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The investors' view on the Federal Reserve's interest rate decision

Ben Bernanke

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Federal Reserve Chairman Ben Bernanke. Will continued low interest rates lead to inflation? Some money managers don't think so.

The Federal Reserve's Open Market Committee announcement Wednesday wasn't a big surprise on the interest-rate front. The Fed has stated it intends to keep short-term rates low for the foreseeable future, in an effort to stimulate the economy and push investors into riskier assets, like stocks. A continued low-interest rate environment will also continue to bolster the housing market, where mortgage rates are at historic lows.

Fed Chairman Ben Bernanke and the rest of the FOMC annouced that they will keep rates low until unemployment falls to 6.5 percent. It will also continue to buy up mortgage-backed securities, at roughly the same rate it has been (so-called "Quantitive Easing," installment 3, or "QE3").

[UPDATE: I slightly misinterpreted what the Fed is doing on the bond-buying side. It's also worth noting that the Fed is now saying that it will keep interest rates low until unemployment hits a specified level. This is a policy departure from saying that rates will stay low until the economy improves. But anyway, bond-buying: the Fed is going to double what it's doing in the QE front and change "Operation Twist" into an extension of QE3. The older aspect of QE will still involve buying MBS. But the additions to QE3 will entail buying long-term U.S. Treasuries without selling short-term bonds. This is important as it means the Fed will be adding $85 billion per month to its balance sheet — under Operation Twist, it hadn't grown much, which was viewed as an way to "sterilize" against inflation. Former Dallas Fed President Bob McTeer has a good post about the FOMC decision at Forbes.]

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Here comes QE3: The Federal Reserve decides to stimulate U.S. economy (video)

Federal Reserve Chairman Ben Bernake spe

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Federal Reserve Chairman Ben Bernake. The Fed today decided to undertake another round of quantitative easing to stimulate the U.S. economy.

The Federal Reserve's Open Market Committee wrapped up its September meeting and, as expected, it's decided to undertake another round of "quantitative easing" — injecting money into the economy in order to stimulate economic activity and lower the 8.1 percent unemployment rate. The markets took off in response to news, with the Dow up 110 point in early afternoon trading.

This is from the Fed's statement:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 

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Best take on the Fed's meeting is from the Huffington Post

Mercer 11751

AP Photo / J. Scott Applewhite

The Federal Reserve Building in Washington, DC.

The Federal Reserve released the minutes from its most recent Open Market Committee meeting today. Bottom line: There will be no additional round of "quantitative easing," or QE3. This means the Fed won't print more money to buy bonds and drive down long-term interest rates. 

At the Huffington Post, Mark Gongloff had the best take:

This affront to humanity sent the stock market tumbling immediately, making it seem almost as if the market's rally to multi-year highs had less to do with actual economic growth than with an addiction to Fed stimulus.

At the worst moment for the market this afternoon, the Dow Jones Industrial Average was down about 130 points, or about one percent, while the S&P 500 stock index was also down about one percent. Both markets were on track for one of their worst days of the year.

Gold, silver and platinum, which have thrived under a free and easy Fed, fell even harder. Gold at last check was down nearly 2 percent to $1650.40 an ounce.

U.S. Treasury bonds fell, too, as the Fed's minutes disappointed market hopes that Bernanke & Co. would soon launch another program to print money and buy bonds. The 10-year Treasury note recently yielded 2.25 percent, which is still ridiculously low, thanks in part to the Fed still keeping its promise to hold short-term interest rates near zero until sometime around the Second Coming.

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Did Ben Bernanke just guarantee two more years of slow growth?

Well, that was a letdown!

A lot of observers expected Federal Reserve Chairman Ben Bernanke to announce anther round of "quantitative easing" –QE3 – at the Fed's annual Jackson Hole conference. He didn't, and in combination with his previous indication that the Fed would keep interest rates at near-zero levels for the next two years, he passed the ball back to the politicians. 

Economist Jared Bernstein has a very good take:

While I’m not sure more Fed easing would help much right now, I think that if underlying demand were stronger, I could help a lot.  In other words, fiscal and monetary stimuli are partners right, but there’s a sequencing: first, fiscal needs to wake up the demand side of the economy, then easing could help amplify the impact of that demand.

Unfortunately, if the Fed is reluctant to ease now, they’d be even more so if some growth actually showed up on the scene.

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