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There’s no doubt about it anymore — the Federal Reserve has ventured into the Twilight Zone! Chairman Ben Bernanke has loudly declared that he will print, print, and print some more in an effort to bolster employment.
He went even further, in fact, basically admitting in his post-meeting press conference that he WANTS to create new asset bubbles in things like real estate and stocks. He claims that will make everyone feel wealthier, causing them to go out and spend and bring the happy times back.
But even as Bernanke keeps trying to TALK a good game, we keep getting concrete, irrefutable evidence that all the past money printing efforts — from QE1 and QE2 to Operation Twist 1 and 2 — aren’t working. They’re failing to do anything good on the jobs front, while simultaneously driving up the price of “bad” assets like commodities.
Bottom line: The great “Funny Money versus Fundamentals” battle continues to rage, with epic consequences for your wealth! Here’s how I expect it to shake out …
From Growth to Inflation,
the Economy Is in Trouble!
Let’s start with the growth outlook. Just in the past few days, we learned that industrial production plunged 1.2 percent in August. That was far below forecasts and the worst reading since March 2009!
The first of the regional manufacturing indices we’re getting for September look nasty, too. The Empire Manufacturing Index for the New York area plunged to -10.4 from -5.9 a month earlier, while the employment subindex plunged to 4.3 from 16.5!
What about spending? Well, retail sales — excluding autos and gas — rose a paltry 0.1 percent last month. That was far below the 0.4 percent gain economists expected. Another “core” sales number — one that goes into the government’s GDP calculations — FELL 0.1 percent!
That’s not much of a surprise considering job growth stinks and real (inflation adjusted) incomes are suffering. The latest on that front? Average hourly earnings plunged 0.7 percent in August, the biggest decline since the summer of 2009.
So clearly all the Fed’s monetary horses and all the Fed’s men aren’t doing anything for jobs or growth. But what they ARE doing is causing more inflation!
Producer prices? They shot up by the most in three years in August! Consumer prices? They rose 0.6 percent, the biggest monthly jump since June 2009. And a key index that tracks inflation expectations in the bond market just surged to a six-year high!
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| Bernanke’s latest money-printing scheme will push prices higher and hurt the real economy. |
Bottom line: The Fed’s money-printing policies are driving commodities sky high, helping Wall Street speculators. That’s causing the real income of average Americans to plunge, siphoning off growth from the real economy. Yet somehow, in Fed-land, this is considered progress.
Unbelievable!
So What Can You Do
to Protect Yourself?
In an environment like this, it is very easy to lose sight of just how troubled the real economy remains. After all, Bernanke can point (is pointing, actually) to the stock market and say that its recent rally shows his policies are “working.”
But how much longer can that keep up? How much longer can the massive divergences between the real economy and the market persist? And how much longer can the huge divergences between corporate earnings and equity prices last?
FedEx (FDX) is a company I’ve harped on before because I believe it’s an excellent microcosm for the sorry state of corporate America.
The worldwide shipping firm first cut its forward earnings guidance in June due to waning demand for its services worldwide.
Then it cut its guidance for a second time in early September.
And then, just this Tuesday, it cut its future guidance AGAIN. That’s three warnings in four months, a sign that business is deteriorating at a rapid, and unexpected, pace.
Diversified manufacturing firm 3M (MMM) piled on this week, too, saying its goal of 7 percent to 8 percent revenue growth was likely unattainable. The company makes everything from Post-it Notes to electrical connectors to stethoscopes to tape, and it operates in every corner of the world.
Weak results from Bed, Bath & Beyond (BBBY) — which was forced to cut prices to lure tapped-out consumers, hurting profits — spooked investors even more on Wednesday. So did an epic warning from Norfolk Southern (NSC). The leading railroad firm said declines in coal and merchandise shipments will slash revenue by $120 million, causing it to miss quarterly profit targets by as much as 28 percent!
These are just some of the reasons why outside of select, targeted companies and asset classes, I still don’t want to take on too much risk. It’s also why I recommend maintaining downside hedges against the distinct possibility the funny money rally has carried us about as far as it can!
Until next time,
Mike
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.
{ 11 comments }
Mike. I’m still waiting with “baited breath” for the “sell the News” effect you were talking about???..
Of course, you have no idea how to set up a “sell the news” scenario…
.you don’t “sell the news” after it comes out…you have to pre-position yourself for such action based on your CONVICTIONS prior…
and…of course…you miss out on ALL accords…
Hi Mike:
This is basically the same article you wrote last time. Nothing wrong with re-stating a point tho. The Fed has chosen to flood the banks with liquidity (capital injections) and interest rates are basically zero. This, however, does not stimulate the real economy because the banks won’t lend when they are scared. The Fed has also decided to go on a crazy asset buying binge to keep a floor under the bond market. This has worked temporarliy but they buy them with money they create out of thin air based on nothing. They have the jumper cables on the battery but eventually they have to remove the cables and see if the car can run on its own.
I don’t understand why Americans keep looking at govt as some kind of Santa Claus.Santa Claus is a fictional character that creates wealth from nothing.Govt can’t do that.When you figure out how inefficient govt is,how much waste and fraud is involved,you can expect, that if they do anything that benefits a part of the economy,it will be offset with more negative outcomes,elsewhere in the economy.So,you get a net negative.That is what’s happened,since the Fed has gone on it’s mad fiat printing orgy.It might have kept unemployment a little better than otherwise but the negatives of low interest earned by savers and higher inflation,for most goods and services,more than offset the positives.I see no signs that Obama or Bernanke will give up their belief in a Santa Claus govt.Expect more govt actions,creating more wealth destruction and poverty, causing more govt actions,and on and on.
Mr. Larson,
I spend 6 months in the US and 6 months in Brasil. I’m invested in both the DOW and the Bovespa. You and Mr. Weiss have missed an incredible bull market in the US. I feel sorry for those that followed your joint advice particularly with the inverse ETFs.
Remember the mark to market mortgage backed security assets that are not on the large banks books. The ones that have not been purchased by Fannie and Freddie? Do you not think this latest QE3 purchase mortgage back securities is to clear the mess that still exists on the big 5 banks books. Where is the xxxx billion of write offs on the credit default swaps from Greece showing up? Or is there more to come
Curious?
Tom
Mike…Have you done a good job over the last 5 years positioning your clienets for the massive divy income that’s been shelled out?/..and the more massive ones coming??..
Of course not!!!….because you don’t have a clue!!!
I’m kicking back collecting buckets loads of divies with more coming for doing nothing……..
If you had a clue you would have pre-positioned your clients for such windfalls….but…that takes to much hard work and research..
You just try for quick kills with options…
Hm … and how and where do YOU fin them
Mike, I have to disagree on this inflation fear that you keep mentioning. I see demand falling, not rising. This is deflationary. I see QE3, but no lending money into existence. Without lending the money supply cannot expand. If I look at demographic data, the baby boomers are not spending…they are saving. I see rising unemployment and the transport index falling. I see ZERO evidence of real inflation. Price puffing of commodities is not inflation. It’s profit taking by market makers. I see nothing but a deflationary spiral that is picking up speed with every passing day. How in the world can we have inflation with this much contraction in the economy. It;s not even debatable at this point. Deflation is unavoidable!
CMON lets face it everyone the bounty that OBUMMER promised everyone never happened all we have is higher unemployment higher underemployment higher prices in everything from food to gasoline falling wages trillions wasted on programs that didnt produce anything and this liberal socialist ( PROGRESSIVE ) still is talking we need to spend more taxpayer money on inefficient solar and wind programs . Solar costs are 12x higher and wind 8x higher than coal to produce a kilowatt so for all you left leaning progressive throwback hippies who want wind and solar to produce your energy dont whine when yomamma obama makes your electric bill go up 10 fold . FLUSH THE BROWN TURD OUT OF THE WHITE HOUSE IN 2012
I think Weiss has been right on the economy. It has struggled for years as they predicted. Good fundamental research. Sincerely. The problem is, and this happened to most everyone who was awake and investing, is the economy and stocks were decoupled by the Fed. It has never happened before, at least not to this extent. Let’s face it, if the Fed didn’t intervene and push rates down to zero (totally unnatural) and rates were where they should be 3% on the short end and 5% on the long end, the Dow would be at 9,000 and struggling like the US economy. This rally was engineered by the Fed. The thought is, if we get a wealth effect in stocks and housing, confidence will rise and spending and investment will increase. It wasn’t going to happen on its own, so the Fed created it. Unfortunately, the long-term effects of this (massive money printing) will hurt more than any short-term gains. Honestly, I never thought our government would go so far with the intervention. In the long run everything will collapse under slow growth and then inflation as the Fed over reacts. Helicopter Ben is like a mad scientist who needs to be stopped by the Congress or Treasury. He is destroying the US economy. He’s weak. Instead of enabling the Congress to continue to borrow and spend us to oblivion, he should say, Congress you all got us into this mess with all your overspending, you need to get us out of it.
Mike produces some good info. But, his articles remind me of the religious broadcasting station. Every time I pause to watch one of the prophecy shows, it’s the same old thing: rainbow money, government tracking, mark of the beast, four horsemen of the apocalypse. I could have been in a coma for 30 years and, tuning to the “current events in prophecy” would make me feel like I hadn’t missed a day.
Mikes articles are like that. He seems gloom and doom in everything.