Market Roundup
In the end, the Fed folded.
Rather than raise interest rates for the first time since June 2006, policymakers opted to sit tight. Not only that, but they also sounded a much more cautious tone on the global economy, the outlook for inflation and more.
Specifically, the Fed called out the fact that “net exports have been soft” in its post-meeting statement. It went on to say that “inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports” … that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term” … and that it was “monitoring developments abroad.”
Sure, there was some happy talk about the domestic economy – comments that “economic activity is expanding at a moderate pace” and that “the housing sector has improved further.” The Fed also noted that the “labor market continued to improve, with solid job gains and declining unemployment.”
But those comments almost seemed like afterthoughts, especially when you factor in changes in the Fed’s forecasts. Policymakers lowered their expectations about how high rates would rise in the longer term, lowered their forecasts for future growth, and lowered their views of future inflation.
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| Janet Yellen and the Fed held rates steady. |
In sum: I believe this was a dovish statement combined with a dovish policy move (or no move, as the case may be). Every single Fed voter went along with the decision too, except for Richmond Fed President Jeffrey Lacker, who wanted to raise rates by 25 basis points.
Markets traded all over the map in the immediate aftermath of the news, as they always are on Fed days. But after reading the statement, and listening to Chairman Janet Yellen’s post-meeting press conference, I’m left asking a simple question: What is the Fed so afraid of?
Are things so bad in the world that we can’t get off 0% a whopping seven years after the depths of the credit crisis? Shouldn’t it concern investors that the Fed is still too worried to raise rates by even a measly quarter point? How is that long-term bullish for the economic outlook, corporate earnings or stock prices for that matter?
Look, the Fed has been dragging its feet forever. Policymakers first started talking about dialing down QE back in the spring of 2013. That set off an initial “taper tantrum” in bonds, emerging markets and stocks, and it caused officials to stall for time.
Finally, in December 2013, the Fed began the process of winding QE down. Asset buying slowed from a pace of $85 billion to nothing by last October.
But even as the Fed backed off, the Bank of Japan, European Central Bank and other banks around the world continued to pile on. They cut rates, launched or increased the size of their own QE programs, and tried to devalue their currencies in order to boost inflation and exports.
That helped drive the dollar up, and hammered sectors like energy and manufacturing. Judging by the early earnings warnings we’re hearing from corporate America, those threats are getting worse rather than better.
| “A simple question: What is the Fed so afraid of?” |
Meanwhile, the co-dependency of the Fed and markets has gotten so bad that it borders on the absurd. The wild swings of the past several weeks prove it. We saw many moves up and down – of several hundred Dow points — prompted by on-again, off-again talk about the chances of a hike at today’s meeting.
One policymaker would imply a hike was likely, causing markets to sell off. Then in a quick about-face because of the selloff, another policymaker would say a hike was less likely. That caused markets to surge, which in turn led to the next policymaker saying that a hike was more likely. And that, in turn, caused yet another sell off.
Talk about a circular-logic-driven market mess! Since the Fed didn’t put an end to that guesswork by starting the rate-hiking process today, it’s only going to continue for the foreseeable future.
Finally, we have seen two huge examples of the negative side effect of leaving policy too easy for too long. Easy money helped inflate the dot-com bubble, and the housing bubble … both of which were followed by huge, painful busts. This time around, we’ve seen massive speculative activity in commercial real estate. We’ve seen huge flows of excess capital into early-stage tech companies that don’t make any money. We’ve witnessed a giant surge in junk bond valuations and issuance. And we’ve observed a torrid pace of corporate debt offerings, with companies plowing that money into stock buybacks and M&A, rather than hiring and capital investment.
So to sum up: Anything can happen with markets in the very short term. Stocks fell today after we saw a decent bounce earlier this week. But beyond that time frame, I don’t believe the Fed’s non-action, or the Fed’s statement, are ultimately bullish for the real world we all live, work and invest in.
From a practical, actionable standpoint, I continue to recommend maintaining a healthy reserve of cash. I also suggest you stay on high alert about the very real risks out there, and invest only in a select group of highly rated stocks in conservative sectors. For instance, the remaining positions in my Safe Money Report are concentrated in sectors like consumer staples, pharmaceuticals and high-dividend-payers.
Lastly, this is no time to focus on traditional Wall Street malarkey. This is a time where you want to follow independent researchers and analysts who can tell you what’s really going on – and what it truthfully means for your wealth and well-being, such as those here at Money and Markets.
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Now, that we have seen the Fed punt (again) on interest rates, the most important question is “Where do we go from here?” Several of you had opinions on that even before the news was released.
Reader Fred 151 said: “The problem is, no one but God really knows what to do or what not to do if you want to artificially manipulate the U.S. economy, much less the world economy. And that is the problem with having a czar trying to do just that. If the market is going up, the czar will be praised as a god. Once it starts going down big time, he or she will be pilloried.
“Just wait to see what happens to Yellen when this next big collapse comes. Her name will be, well, something worse than mud. The Soviet Union and their communist central planners tried manipulating their economy for years with no success. Why would we think our economists are any better because they went to Haaaahhhvvvvvaaaddd or Yale?”
Reader Frank E. added: “It seems that the Fed has a tiger by the tail, and it’s clearly one of their own making. I have never believed that our economy was really recovering from the ’08 collapse except in the highly inflated world of Wall Street, and this was set up by the zero interest rate deal.
“The entire world is in over its head with debt, and the central banks are now going to do what? More QE? Yeah, that really works! Mike is spot on about taking your profits off the table before they go bye-bye.”
Finally, Reader Donald L. said: “Governments cannot resist the temptation to meddle in the markets. It’s just that the Chinese, with their history as control freaks, do more of it and cause more damage, though we are working hard to catch up. The ideal solution would be to step back (depression of 1919-21), let the market flush out the refuse, and move on from there.”
Meanwhile, on the geopolitical front, Reader William L. offered this take on our fight with ISIS:
“I don’t think we should worry about ISIS or get involved in defeating it. If the countries around them don’t care to fight to stop ISIS, then they don’t deserve to survive. If they do care, then perhaps they will act to defeat the ISIS menace without our involvement.
“The issue of Putin supporting Syria is just a come-on to distract us and draw us in. He’s worried about ISIS taking over the Russian seaport and military base there, so let’s leave him to his own devices. We need to generally follow a non-interventionist foreign policy.”
Reader Chuck B. also weighed in on the regional turmoil, saying: “Turkey is the only boots-on-the-ground force with power to destroy ISIS, and they have done a bit of bombing. But they are more concerned with defeating Kurdish efforts to set up a homeland in the southeastern part of their country (and northern Iraq).
“It is a geopolitical mess over there, and our bombs can do little to prevent the Caliphate from happening. If we would try to send in the forces needed, we might find ourselves involved with the Russians, who support Assad, and have now sent in marines to protect their naval base at Tarsus.”
Thanks for offering your views. And if you haven’t shared any yet, don’t hold them in. Just head over to the Money and Markets website and let ‘er rip.
Just so you know, I agree with the idea that the Fed lives or dies by the market response to its actions. Alan Greenspan was considered a hero for “saving” the market after the Long Term Capital Management meltdown in 1998 … then treated like a goat after the Nasdaq collapse, and the housing implosion a few years later.
Ben Bernanke is considered a hero for “saving” the markets after the credit collapse in 2008. But I believe history will judge him harshly if the current QE-driven rally now falls apart. And considering he didn’t forecast the housing and credit crisis in advance, like I did, I already view him as flawed. The beat goes on.
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Two more benchmark, mega-cap companies released disappointing earnings and revenue in the last day. Telecom giant Verizon (VZ) said sales probably won’t grow between 2015 and 2016 due to challenges in its wireless business. Oracle (ORCL) reported disappointing sales due to declining software license revenues and the strong dollar.
Is this a new trend for investors to worry about heading into the heart of Q3 earnings season? I think so.
The leading Republican candidates went at it again in a debate held at the Ronald Reagan Presidential Foundation and Library in California last night. Several candidates came after frontrunner Donald Trump, while Jeb Bush and Carly Fiorina tried to cut through the clutter and gain some ground. We’ll have to see how the polling shakes out in the next few days to see who “won” in the eyes of American voters.
General Motors (GM) is settling government criminal charges that it misled investigators about the scope and severity of its problem with faulty ignition switches. GM has paid more than $4 billion to replace switches and compensate victims of the problem, which could lead to cars being shut off while being driven.
Merger mania continues in the cable sector, with Altice NV launching a $17.7 billion bid to buy Cablevision Systems (CVC). The offer of $34.90 represents a 22% premium to where Cablevision was trading yesterday. Altice of the Netherlands previously bought a majority stake in Suddenlink Communications for $9.1 billion.
An earthquake struck Chile overnight, rattling the South American nation from an epicenter 177 miles north of the capital city of Santiago. The 8.3-magnitude quake killed at least eight people, and triggered widespread tsunami warnings in the Pacific Basin.
What thoughts do you have about yesterday’s Republican debate? The GM settlement with the Justice Department? The spate of earnings warnings we’re seeing? Share them at the website.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Look out below
“You gotta know when to hold them … know when to fold them … know when to walk away … know when to run.” The Fed is clueless and the elephant in the room,the Wall Street banker’s are laughing all the way home. Very soon, the derivatives bubble created by the Fed’s monopoly money will burst wiping out our money supply. What follows next is “chaos.”
Looks like a nice little Fed rally to 2020 (S&P) today prior to the afternoon slide. Should be some downside fireworks in the next several days. I agree with you Mike……1/4 point should not have been that big a deal….except that the bankers are greedy for yet more money with the ZERO rates. Savers are still getting thrashed while the bankers get richer and richer.
Well…..we all know where the Fed Board members go after their “service”. And their “reward” for their tough service…..(dare some say “payoff”?-nahhhh)…… are always waiting for them at the end of the journey.
I would say the market is ignoring the Central Bankers and their dance around interest rates and is focusing instead upon earnings. After all, that is why you invest. You exchange cash now for income in the future. The increase in the risk or the decrease in the income will reduce the value of the investment. It is that simple and that is what we have been seeing for the past two months. As the Q3 earning reports come in showing reduced levels of income and failure to meet analysts’ expectations, (as part of the long-term trend we have been watching during Q2) we will see further corrections in the values of corporate equities to levels that should be more supportable in the long run. Exuberance and optimism are fine as long as they are rational and reflect the market’s reality but Yellen at the problem will not make it go away, only reasoned investment with the goal of sustainable growth can accomplish that.
Feds usually create their own problems. QE1 thru QE99 (whenever that will happen are really destructive). If they talk and knew weeks ago they were not going to raise the rates, they should have said so then. Should they raise the rate. YES, of course, 25 points now then in 2 to 3 months another 25 points. Everyone expects it, do it! That is the Fed showing they have faith in the economy.
The US should deny the Iran nuclear treaty as the joke it is. And other than support Israel stay away from Middle East wars. However, if any pilot is ever shot down the US should be prepared 110% to go get immediately that pilot no matter where he/she lands. On another note. if the laws of the US are preventing our crude oil being exported they should be changed. We live and die by free enterprise.
Hi Mike,They are afraid of a strong dollar. Why raise when literally everyone is lowering.
The Fed has .become simply a political arm of Congress and the White House. All of this crap today is just silly meaningless chatter. The Fed keeps rates at zero simply to facilitate the crazed spending of politicians. If they were to let rates “normalize”, the costs of servicing our debt would be so overwhelming as to leave little or no money for defense, entitlements etc. The end of free stuff. The printing presses could not work fast enough. Disaster of unimaginable proportions would soon ensue.
In any event global forces will soon make the Fed actions meaningless IMV
Fed members appointed by the president, approved by the Senate. If they don’t agree to the politicians’ terms, they aren’t appointed or approved. HaHa.
You have a real talent for making excellent points with as few words as possible. Your posts are always worthwhile. Jim
The problem with stating that the market is focusing on earnings, is that history shows that the market as a whole does not consistently do that over time. In fact, if you review the correlation historically, there are periods of time when it does……and periods when it does NOT. The correlation between the two is simply NOT reliable, however, over long periods of time. Good earnings do not necessarily mean a market that will go up. It sounds intuitive but it is NOT always a reality. Why? Because markets, over LONG periods of time……….typically move by the psychological moods of the investors, not by the earnings of companies.
An excellent point, Fred. Psychology always trumps reality. There has been no real economic reason for the past 6 years of a climbing market, but it has certainly shot higher.
The talking heads are now predicting the FED will hold off until 2016. Income securities should rebound. Solar yieldcos are looking interesting now, given their yields outpace those of most utilities.
Looks like closed end funds and ETNs will also benefit.
Central banks raise interest rates to fight inflation and lower interest rates to fight recession. Lower interest rates help the economy to grow. We do have inflation – more than the official figure. I’ve heard 7.8% by one method of figuring. Maybe that is a bit high. We also have an economy that is barely growing. This combination would fit the definition of stagflation, as one respondent mentioned yesterday. The Fed can’t really lower rates to help business and the economy, and raising rates might kill what growth we have. I wonder how much of the hidden inflation is caused by the well meaning actions of politicians in Washington and elsewhere. The coming election year could possibly make things worse as politicians promise even more goodies to the mass of voters.
Examples of what I talk about above include the growing costs of food (agricultural subsidies), healthcare (Obamacare), and higher education.(student loans). All these costs are rising due to apparently well meant actions of politicians. They result in cures that may be worse than the problems they were meant to solve.
Mike,
With all due respect for your intelligence and education in journalism (and not business or economics), I’m afraid you sound like a GOP apologist….Let us remember that it was Paul Volcker (appointed by Carter and criticized by Reagan) who stopped inflation and started the rally of 1982-2000. Let us not forget that it was Greenspan, a Republican, appointed by Reagan who favored the Removal of Glass-Steagall and raised interest rates in 1999, then bailed out as the gathering story of the same kinds of highly dangerous trading which was allowed after the G.S. removal and very similar to the late 1920’s took place…. Bernanke was appointed just before the Crash and did little until Obama to stop the Crash of November 2007 through 2009…..
Imagine where we would be if the Republicans had let a Public Works Program (Similar to the WPA and the CCC’s) go forward….. With ONLY the banks saved from bankruptcy, the recovery has limped forward with most of the gains going to the stock market and the banks and little to the Middle Class and the General Population…..
I listed last night and heard little from the Republican candidates on how to speed up the current, very slow economic recovery….. But, hey the Conservative Ultra Wealthy (CUWs) are doing just fine, so why worry…. Perhaps they can come up with something that sounds good, but is basically horse crap like “Trickle Down Economics” which will further screw the Middle Class and in turn, the economy…..
We did do a “public works” project called the $800 billion stimulus with all its ” shovel ready” jobs that never materialized. It ended up just being payback to his supporters. You chastise Dr. Donnie for blaming Obama but don’t refute any if the facts he presents below. The Republicans have certainly done a terrible job representing us but there is plenty of blame to be laid at the feet of the entire political class. They have complete contempt for all of us in flyover country. Jim
It’s beyond me how anyone can praise a group of people that has borrowed $10 trillion from our children and grandchildren. It’s despicable. Jim
Sorry, I erred. It’s Like Walter Williams says. When you take something without asking its called stealing. Theft under the color of law. And we, their loving parents and grandparents, have let them get away with it. Jim
Jim,
This site will not let me post a study of GOP/Dem stock market gains from 1929 forward, but you can access it. The Article was called “Poor Dumb Rich People” by Alan Grayson and I believe it was posted in the New York Times….. And to my knowledge, never refuted by the GOP….
The fed doesn’t have an EASY money policy, they have a CRISIS money policy. Inflation will not be a problem until they raise rates. The avg person doesn’t spend freely when rates are zero, they hunker down and watch every penny. The job market is in shambles, don’t let postings fool you (most are multiple recruiter posting same job), every job i apply for has at least 70 resume submissions, and noone ends up getting the job!
Try to understand basic economics. When interest rates are low, saving is discouraged because it is not rewarded; consequently, spending is relatively encouraged. When rates go up, saving gets encouraged via earned interest, wherefore spending is reduced. Zero interest rates don’t make you watch every penny; unemployment, however, does. So raising interest rates stops inflation, as inflation requires increased spending, both by employers (wage inflation) and consumers.
Exactly.
After watching the debate last night the front runner Donald Trump showed us how much that he does not know about the rest of the world.He would be a very scareie leader of are country.
john, I have not seen a candidate yet who would NOT be scary as the leader of our nation… Not this time around, nor the last SEVERAL presidential elections, for that matter!!
Good point, Robert!
Hi John
With a history of so many B and C grade presidents, what could be wrong with a 1% A grader who may not mince words, but would sure shake things up.
Mike L. you asked, “What is the Fed so afraid of?†Insolvency might be the correct answer…?
Pssst… Don’t tell anyone okay…?
Don’t be silly. The Fed is afraid of deflation. They fear that raising rates might induce a repeat of the 1937 catastrophe.
But, there’s one thing about all the campaign promises we’re hearing now that I can guarantee: that hype will soon be completely forgotten right after election day…….
The Donald has awakened the party to a view held by many outside the political elite.
Economic Expansion is all about the growth of the Middle Class, the real strength of America….. Beginning with Reagan and through the election of Obama, the Middle Class got crushed….. If the Middle Class begins to grow, the economy will grow….. That said, you can not enrich the Conservative Ultra Wealthy and expect the Middle Class to grow. It just doesn’t work that way…. We would do well to remember that it was Reagan who gave HUGE tax breaks to the Ultra Wealthy, but failed to lower Federal Spending and now we have a HUGE Deficit…. Big surprise, aye?… :(
And of course The Donald is one of the 1%. Who do you think he will favor if he gets into the White House?
In my opinion, exacty the same people that Reagan, Both Bush’s and Cheney favored during their administrations.. That said, I’m not losing any sleep over that prospect…
Donald Trump is the only one with the balls needed to fix the country. All the other politicians will end up doing NOTHING as usual. You want the same thing again…really?
Mike,
Of course companies are borrowing and putting it into M&A or stock buyback programs. If they borrowed money to put into capital or labor expansion the market would punish them harshly. It’s the sad reality of short sighted investors who only care about a couple key metrics.
And all that borrowed money increases a company’s debt, but it often raises profit per share, especially with buybacks, makes the bottom line look better, and justifies nice bonuses for the management. HaHa.
It´s sad to see the lack of quality of the political debates. Worse: this downgrade of politics risks to go global. What a world!
Thanks, as always, for a reasoned and informing analysis.
I get so sick of the Fed talking about low inflation when the price of a Big Mac has doubled in three years, as has the price of any other grocery, and gains in employment with 94 million looking for work.
The obvious and continuing lack of middle class income/demand will lead quickly to our next recession – one that the Fed has perhaps no real quivers left to keep a follow-up Depression at bay. Gloomy? Yes. Accurate; we’ll soon see. Good luck to us all!
Thanks Pete… Investors, we need to take a sharp turn away from eight years of President Obama’s political correctness.
Obama promised to be a uniter, not a divider. In fact, our country today is terribly divided.
The liberal doctrine of diversity is the exact opposite of “United†which is what was chosen for the name of this once republic of states.
Obama promised to uplift the poor, but his policies have had the opposite effect. There are 30 million more poor in American than there was 7 short years ago.
Obama promised America would be respected… But the entire world laughs at American weakness and blunders under his leadership.
Iran is about ready to gain $100 billion windfall under Obama’s agreement and at the very same time the Iranians proudly broadcast they will wipe Israel off the map and chant “death to America.†And just who is going to loan us that $110B…?
At home, under Obama’s leadership there are roughly 93+ million Americans that are either unemployed or under employed.
When Obama leaves office, America will have a work force far smaller than when he took office and our children and grandchildren who will be entering the workforce in the next years have little hope of finding a job, much less a good paying job.
And, instead of letting the engine of our free enterprise system work, Obama has sought to break it with higher taxes for the employed and their employers, expensive socialized medicine for those employed while illegal and often lawless migrants get free care, and outrageous oppressive regulations on our businesses.
Americans need to heal their country… We need to resuscitate, revitalize, restore the America we had before the liberal progressives began their insane war against freedom and liberty.
The nonsense, the idiocy, the stupidity of political correctness must end. King Obama’s reign must end quickly.
Red above Donnie….. Or keep blindly blaming that “Kenyan”…. Geezzz… :(
Too right, Dr. Don! There hasn’t been a good Democratic president since Roosevelt and Truman (though Clinton was fair, and at least reduced debt slightly). Of course, there hasn’t been a good Republican president since Eisenhower, either.
That is why they are called DEMONCRAPS!
“I get so sick of the Fed talking about low inflation….” Amen to that, Pete!!
But I still say, even if the Fed raised by .25…………that’s supposed to be filling their quiver with arrows to shoot at the next economic downturn??!!
Whoever suggested such a thing HAS to be kidding!!
I am retired and rely on interest income.. Yellen has allowed the big banks to borrowed money from the Fed at almost zero interest rates and they are using these funds to drive the stock market up and down by speculating in the market and making billions each quarter. These financial institutions should be restricted to use Fed funds on loans only to individuals or corporations as a proper bank function. Also, J P Morgan and Morgan Stanley are investment banks and should not have the protections as a bank too big to fail. Finally, derrivatives investing by big banks is greater than in 2008…
Tony, it was the GOP (Gramm/Leach/Blyly that pushed the removal of Glass-Steagall (which separated the banks into savings banks and Investment banks)… In my opinion, Clinton got bad advice from Rubin who, after signing, when to work for Citibank for a reported Million a year…
Mike S., did you really say that Clinton acted on bad advice…?
Of course it wasn’t the fault of a liberal progressive president… I mean what kind of idiot liberal progressive Democrat president would even listen to bad advice much less act on it…?
Oh wait, his personal server went down on him… That was it… That was his problem, he couldn’t keep his mind on things presidential… Oh wait, that was kind of crude wasn’t it?
Donnie,
I believe that Rubin came from Goldman-Sachs, which, along with Ctiybank, profited handsomely from the removal of Glass-Steagall….
Hi Donnie
It is true that Mr. Clinton had his hands full and his eyes off the job. Maybe that was the GOP’s fault as well. Right Mike S.
Sorry, I misunderstood. Thought they were talking about Fed bonds, not
Yeah, blame it on Monica!
Adam Smith continues to be ignored, distorted and/or suppressed. Nations gain wealth when workers are paid liberally. When we pay, as now, by the Unfree Market, we find we “are going fast backwards”. And we have been for decades. In his 1776 work on the Wealth of Nations, here are three more of his observations:
1. When employers get together, they discuss how to reduce wages (and salaries).
2. The interests of the wealthy differ from the public, so they will endeavor to persuade (and even lie) to the public to persuade the public to want what is in the interests of the wealthy.
And so we get laws giving the public the Right to Work for Less.
3. Workers will be tempted to underpay workers, but Patriotism and Ethics will dissuade them. Our Rulers, the Global Oligarchs, with Global investments, are Global Citizens, and have no Patriotism for the USA. And, as shown by the giant convicted criminal banks, they have no ethics.
“Get what you can, while you can. By the time it is discovered, you will be long gone.”
The PITCHFORKS are Coming!
Ya, the same Ultra Wealthy people called FDR a Communist, yet if FDR hadn’t done what he did the very first people to have gone before the firing squads would have been those Ultra Wealthy… History is simply repeating it’s self because we forgot the lessons of our Grandparents… :( Ya listening “Dr Donnie”?
Adam Smith continues to be ignored, distorted and/or suppressed. Nations gain wealth when workers are paid liberally. When we pay, as now, by the Unfree Market, we find we “are going fast backwards”. And we have been for decades. In his 1776 work on the Wealth of Nations, here are three more of his observations:
1. When employers get together, they discuss how to reduce wages (and salaries).
2. The interests of the wealthy differ from the public, so they will endeavor to persuade (and even lie) to the public to persuade the public to want what is in the interests of the wealthy.
And so we get laws giving the public the Right to Work for Less.
3. Employers will be tempted to underpay workers, but Patriotism and Ethics will dissuade them. Our Rulers, the Global Oligarchs, with Global investments, are Global Citizens, and have no Patriotism for the USA. And, as shown by the giant convicted criminal banks, they have no ethics.
“Get what you can, while you can. By the time it is discovered, you will be long gone.”
The PITCHFORKS are Coming!
Thursday’s FOMC rate decision and a potential increase in the Fed Funds Rate of 25 basis points is completely irrelevant. The mainstream media should instead be focused on the massive maturities of Federal Reserve held US Treasury securities that begin in early 2016. $232.3 billion in US Treasuries held by the Fed are set to mature in 2016, including $150.64 billion that are set to mature in the first half of 2016.
The Federal Reserve will need to soon make a decision about whether it will roll-over these maturing US Treasuries and maintain the size of its balance sheet – or will it allow its balance sheet to shrink as its US Treasury securities begin to mature.
Since 2009. the S&P 500 has traded in extremely close correlation with changes in the Fed’s balance sheet. If the Fed decides not to roll-over its maturing US Treasury securities, the S&P 500 will surely crash – as interest rates begin to rise dramatically.
If the Fed raises rates, and rolls over expiring debt, won’t they need to pay the higher rate? Maybe they will NEVER raise rates.
No, Chuck. When the Fed rolls over matured bonds, it purchases new bonds with the money from the old bonds. If rates are higher, the Fed gets more interest for their money. And Yellen announced the Fed will continue to roll over funds from matured treasuries.
The recall notice for my car said to bring in all my keys. They didn’t replace the lock they simply put covers on the keys to change the slot into a centered ‘key ring’ hole. I was amazed, this is the fix?
Hey Mike,
How many times have you been wrong about predicting interest rates since 2008 ?
Hi Mike — excellent and compelling article as usual.
I don’t think Yellen et al have any intention of raising rates for a very long time. In fact, I believe today’s very dovish Fed statement was actually a signal that the U.S. is now embarking on an unofficial weaker dollar policy. After all, devaluing the greenback is a great way to pump exports and inflation — just ask America’s trading partners. Of course, the Fed and Obama administration will never admit it. And they’ll continue to publicly defend the dollar. But arguably, in the immediate short term at least, the U.S. economy will be much better off by today’s standing-pat decision of not raising rates. We’ll see what happens.
Looks like even the FED answers to a higher power… The IMF!
Everyone is obsessed by the Fed, but they are doing what they can, or what they are supposed to do to sustain an economy that the Democrats and the Republicans have ruined. The Fed wouldn’t be in the picture if this wasn’t true. I live in South Carolina and the roads and bridges are in poor conditions. Putting Americans back to work and doing something about the Corporate tax code and simplifying it for all Americans would correct the majority of Americas problems. Let’s get on the elected Politicians in Washington and really hold them accountable for getting the right things done. That’s what we as investors need to be focused on. Don’t blame the Fed, Investors should be happy for volatility make the best trades and leave Janet and the fed alone.
I think Democrats and Republicans make up over 95% of the populace and voters,so I guess you’re not too optimistic.
Yesterday I went to see my friendly personal banker. He told me a friend of his will contact me by Monday. All I asked was if he knows about a 407 Plan that pays 5% + interest. You all have some faith. I am not buying a new car to aid Japan and give car dealers some help. Doing really well to keep the 2007 Ford Focus in good repair. It was born in Kansas City. If things are even 20% as bad as it sounds, get your home weatherproofed and settle in for the duration. No, I will not send out my credit card to help out the economy to date. All I have to do is invest twice a year in a state plan I never heard of that is not covered by FDIC.
The Republican debate(s) need better moderators. It appears there is a bias toward Trump and a disallowance of participation for certain people, Why should a candidate have to react in a directed question about something Trump said? Where are the in depth policy questions. There are too many topics that are squeezed in without an opportunity for each candidate to express their views. They almost have to be rude or just ignore the moderators quest to switch to another topic. The moderator should keep them on the question not allow them to wander wherever the wish. Overall I am not getting much from these programs, they are certainly not debates. Hopefully the number of participants will narrow, moderation will improve and then maybe some substance will evidence itself.
One observer points out that if the Fed had raised rates even a 1/4 point yesterday, it would have told the markets that things were getting better. No change indicates at least, that things are NOT improving in the economy. What that means to you is your business.
I think,until the Dollar crashes,it’s business as usual,for govt and the Fed.Really amazing,how long the Dollar bubble has lasted.Won’t last forever.You can’t lay all an economy’s problems onto its currency,without negative consequences,but most countries continue trying.
I wish somebody would make a comment about the US budget deficit. Is it too big or too small? I think it is of utmost importance for the inflation rate, and therefore for the interest rates. It was low inflation that stopped Mrs. Yellen’s hand, and it’s keeping the dollar high and gold low. Somebody can say something?
Alejo,
This site will not allow attachments or I would send you a chart of the U.S. Budget Deficit…. That said, if you Google that subject, you will find plenty of charts. One thing I would point out is that from 1981 (Reagan and the Republican Revolution) you will notice that from 1981 forward the Deficit, whether Budget or Total, goes Parabolic. That is because Reagan and the Republican Presidents that followed him and mostly Republican Congresses allowed HUGE tax cuts to the Ultra Wealthy without having the guts to cut Federal Spending….. In addition those Republicans sent our troops to Iraq twice and Afghanistan without increasing taxes to fund those misadventures…. Then there was the Medicare Drug Plan that was also NOT funded…. Add on the Stock Market Crash and Depression of November 2007 (under Republicans Cheney/bush and a Majority Republican Congress and it should not be any surprise that the deficits are so high….. Ya, and that is supposed to be the “Business Party”….. Personally, I think not!….. :(
Thank you, Mike S, for your answer. Only I would like to go a little deeper. Of course I know that US budget deficits SEEM huge to us, but the question is if they are big enough to win the fight against deflation and depression. Because it looks like we’re losing it. Most people seem to have the dogmatic belief that deficits are a bad thing, and that government spending should be funded with taxes as much as possible. It’s the illusion of the “balanced budget”, something that looks desirable but I think would be a total disaster. With a balanced budget in the US there would be no inflation, interest rates would go below zero and the world economy would sink into a permanent depression. We’re seeing something like that in Europe – with its appalling unemployment and constant debt crises -, while Japan is struggling fiercely with deflation. The dollar is still by far the main world currency, and where are people all over the world going to get dollars for their reserves and operations if there is no budget deficit in the US?
If you study U.S. history for the past 100 years, you will see that Democrats basically believe in paying for the cost of government as they go along and the Republicans believe in screwing the Middle Class, enriching the already rich while deferring the cost of government for future generations as though it will simply go away… Those of us that live successfully, pay our bills as we incur them…
Maybe so, but the biggest deficits in US history happened during Obama’s government (2009 – 2012), over 1 trillion dollars per year. He’s been criticized for bailing out the banks, but I think he saved the economy from a terrible crisis. Looks like we need something like that again, but the truth is that nobody really seems to know what’s happening to the world economy or what should be done. We need a serious analysis of the present situation.
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Mike S…
Agree the “Republican Method” has been to use a credit card rather than TAX and pay for the government’s expenditures. Now what? In DEBT up to our asses, crumbling infrastructure, and we are still broke. Did you want to raise TAXES? On who? Should that 15% go to 18%, the 25% to 28%, etc etc right up to the line? Gee, Bro that only get’s us back to 2000 before Bush the “Decider” gave away more tax cuts.
Maybe we could be a bit more Canadian with their higher taxes, they have a “Conservative” government presently…
JP, the tax rates in 1981 before Reagan and the other Republicans changed them, pretty much paid our bills and our infrastructure…. Simply go back there would be a start…. And before the GOP believers start screaming about “Taxing the Rich”, I would point out that those tax rates go back over 50 years and that period from 1932-1981 was the GREATEST period of Increases in living standards for the average American and the Greatest Increase in Economic and Manufacturing Expansion in our history….
I’m very familiar with the Canadian system and in my opinion, they do it better. One only needs to compare the cost of Medicine in Canada and our costs… In Canada the doctors are trained by the state and the state runs Medical care…… In America, we have lots of Millionaire Doctors, Presidents of Hospital Systems and Healthcare Insurance companies…
governments and politicians are thieves and in the long run the general public doesn’t stand even a chance.
Actually, the average American did pretty well from 1932-1981…. Then we forgot and allowed the Republicans (ya, the same guys in power when 1929 happened) back into power and here we are all over again… :(
Reader Barry
By the Way I have said since January the Federal Reserve WILL move on the rate on the 28th of October 2015.
The world would flip upside down if they do not and the rate would move anyway no matter what they will do. I will real how I know if asked.. It will go up only 25 basis points but it will happen!!! “Triple Eve of what people call Halloween” the 28th of October. When this happens I will reveal how I know if and only if someone ask this of me. then I will mention to TWO MAJOR EVENTS the WILL happen before the end of this “Whirlwind year of 2015. Remember all you have to do it know the answer.. May all Prosper and be in Health…
Barry
I am asking in advance…tell me
It should be disturbing to the Republican Party that a full 1/3 of its HARDCORE primary voters want NONE of the professional politicians as their nomimee. This DOES NOT bode well for the nominee in the general especially becuase the ideas espoused by the non professional politicians are right out of the Hiliary Clinton playbook. The day of reckoning for the republicans who have hoodwinked there supporters since Ronald Reagan may finally be at hand.
I’d also include Trump on the failing GOP side…..Probably Bernie Sanders and a return of Democrats to control Congress despite the Billions coming from the Koch Brothers and the other Billionaires on the GOP side… Yep, the Democrats will be asked to clean up the GOP mess for a Second time in the past 100 years!… :(
RWebb and Mike S, both of you make very good points….
HOWEVER, the fact is that we have now had a Democrat President in office for 8 years….It seems to me that chances are VERY great that a Republican will be elected next, and it really does not matter who that candidate may be.
When it comes down to it, it doesn’t really matter about the “popular vote.” It’s ALL about the votes of the electoral college!!
In the second MAIN Republican debate I was most happy to hear from candidate Governor Chris Christie issue a call for all candidates to behave better and begin to seriously discuss the REAL ISSUES facing our country and world. We don’t need to worry about someone’s face or persona, and certainly NOT about whether or not a certain candidate has real hair or a wig hairpiece. All this childishness might get attention, but all these candidates have got to MAN UP and be all desirous of some real SOLUTIONS, and not continuing leap-frog solutions that constantly repeat the same problems, seemingly perpetually, absent of real study and research of HISTORY – by way of reviewing the past, analyzing the present, and projecting the future – to learn from our mistakes and not repeat losing yet another civilization of human beings to a PIC event, which our military is keeping top secret from us all. What we need to do is become better human beings in each and every person in our country and on the entire planet Earth. Perhaps, we are ready to be led in another CRUSADE … this time, by HIS HOLINESS, Pope Francis, and a THEOCRACY declared upon bringing the human species back down to Earth to take back our precious planet and world and reverse rapidly-developing control of now run-away technology that seeks to enslave us to/by artificial intelligence and robots. It is time to truly TRUST FREEDOM upon our whole world-wide societal infrastructure and all of us work for PEACE AND HARMONY as perfect and total as it can and MUST be in order for USAll to survive and prosper truly and live long and well!! … to transform our current World of Problems into a “shining city on the side of a hill” and an everlasting WORLD OF SOLUTIONS!!:
What makes everything tick well, is when the citizens have good paying jobs, or even have a job, to have money to spend. However, across the board because of:
lack of employment; many people are out of work, and not counted as not employed;;
being under employed (low pay and or not enough work hours);
25% pay cut by reduced hours 30 instead of 40 so company can avoid health insurance;
existing wages actually going down competing with countries paying less than a $1/hour;
and inflation;
are all causing most of the people to be tight with their money, to buy only the basics.
I do not see a change in this trend, only to continually get worst per government policies.
Thus, companies involved in what people need, NEED to live, will be the best bet stocks.
If whatever is something people can do with out, expect those companies to decline.
So identify the companies most likely to decline or to maintain, and proceed accordingly.
Richard,
Our future is in our past….. From our very start we have had cycles where the Liberal Progressives ruled and those have been periods of prosperity where ALL Americans prosper. Then there have been shorter cycles where the Conservatives ruled and those have been periods where ONLY the Ultra Wealthy and their Quislings get richer and the Average Citizen suffers…… The Great American Liberal Progressive Cycles began in 1932 and 2009 after shorter Conservative Cycles which left our Country suffering from Stock Market Crashes (caused by dangerous trading behaviors allowed by the Conservatives), disastrous Depressions and ALL the classes below the Wealthy crushed and and suffering…. The First Progressive Liberal Cycle in the past 100 years lasted about 50 years…. We are now roughly 5.5 years into the Second Liberal Progressive Cycle…. Despite what the Misguided Negatives and the GOP Quislings are saying, Life in the U.S.A. is going to continue to get better…… Until our children and grandchildren forget the lessons and stories we tell them about our experiences during the last Conservative cycle of 1981-2009…