NEAM Insights

At the beginning of this year, we wrote a piece called “The Song Remains the Same.” The basic message of the article was that we should expect the current environment of slow economic growth and low interest rates to persist. Given that developed world economies continue to struggle with structural issues such as large debt burdens and aging populations, we believed, at the time, that global monetary authorities would continue with their extraordinarily accommodative programs and that interest rates would likely stay at (or near) their historically low levels. In short, we did not see a lot to get excited about. Our return expectations for the year were modest and our general view of the risk/reward tradeoff in capital markets was uninspiring. Read More

The S&P 500 was pacing for a relatively uneventful second quarter until the final weeks of Q2 when history was made. Unexpectedly, the people of the United Kingdom voted to leave the European Union and uncertainty rippled through the market. Initially, the British pound collapsed and European equities dropped sharply, led by Italy and Spain. Read More

UK Prime Minister David Cameron announced that the UK will hold a referendum on continued EU membership on June 23, 2016. Voters will be asked a straightforward question – Should the UK remain a member of the European Union or leave the European Union? It may be a straightforward question but the implications of the vote for the UK, Europe and the rest of the world are enormous – economically and politically. The prospect for Brexit – British exit from the EU – is an issue all investors and corporations need to be aware of this year. The UK currency, the British Pound, has recently weakened against the US Dollar and the Euro. UK credit has underperformed and foreign demand for UK Government bonds has been weaker. This weaker pricing of UK assets is likely to continue until the referendum takes place. Read More

In recent years, the euro area has displayed tremendous resiliency. It has withstood lacklustre growth, 2 major recessions, major banking crises, near sovereign collapses and a crisis of confidence in the currency itself. As the world’s largest economic bloc, the euro area’s monetary policy has meaningful influence beyond the euro area and beyond Europe. The policy actions of the European Central Bank (ECB) are therefore of great importance to all that are involved in financial markets and financial services. Read More

The start of 2016 has witnessed extreme volatility in capital markets. While the finger has been pointed at many culprits, from oil prices to China and European banks, one plausible driver has surely been the divergence of monetary policy between the Fed and ECB. In this Quick Takes we examine why the U.S. and Eurozone central banks are embarking on different paths, how sustainable this is in a world of growing headwinds to global and U.S. growth and what the implications for capital markets might be for the remainder of 2016. Read More

As the calendar turns to a new year, the Fed has begun its long awaited program of monetary tightening. The question remains—like the water drought in California—will 2016 bring an end to the “yield drought”? Hope springs eternal and the c-suite is certainly hoping this is the start of a trend toward higher book yields and the inflection point for declining portfolio book yields. This Quick Takes will look at both the prospect for higher levels of investment income and a return to firmer pricing in (re)insurance markets. Read More

Background GR–NEAM utilizes a proprietary methodology to establish fixed income return estimates and corresponding probability distributions for our clients. These return projections and distributions are useful in assessing investment outcomes, as they allow us to quantify risk using analytics such as VaR, T-VaR, probability of negative return, etc. Using this methodology, we’ve prepared an estimate of 2016 fixed income returns for the P&C industry along with an estimate of dispersion around the mean. Using this approach last year, we estimated that the industry would register a total return of roughly 1.5% in 2015. As we prepare to close out the year, that estimate has proven reasonably accurate.[1] Read More

There’s a popular adage on Wall Street: “Don’t Fight the Fed.” Investors have followed that advice religiously since 2009, when the Fed initiated the first round of quantitative easing (QE). This injection of liquidity along with a zero interest rate policy has served to support risk assets, driving both bond and equity prices higher for the last several years. By suppressing volatility and fostering an upward bias in financial assets, the Fed, playing the part of the shepherd, has encouraged investors to herd like sheep. Read More

The Fed Then… As 2015 marches on, we draw closer to the first rate hike by the U.S. Central bank in nearly a decade. This time, however, the rate hikes that will eventually occur have a decidedly different flavor than those from previous cycles. From the 1970s through the mid 2000s, the Federal Reserve was fighting a different war. As price levels moved higher during the 1970s and early 80s, the Fed’s role was largely that of inflation fighter. Even throughout the late 1980s and 90s, long after inflationary pressures had leveled off, the Fed sought to err on the side of caution in an effort to maintain price stability by staying “ahead of the curve.” It was not always successful in this regard, but one thing remained clear – the Fed was keenly aware of building price pressures. It fought many battles and ultimately won the war (see Chart 1). Read More

A Bit of Theory Most commentators previously believed that interest rates were subject to a zero lower bound (ZLB) and thus it was inconceivable that nominal interest rates could be negative. The idea of a negative interest rate, however, is not new. Keynes cited the idea proposed by the German economist Silvio Gesell in the late 19th century to impose a tax on holding money and many economists have written about it since then, from Irving Fisher in the thirties to, more recently Willem Buiter – a former member of the Bank of England’s Monetary Policy Committee. In 2009, Greg Mankiw referred to negative policy rates as a policy option in the New York Times. Read More