| MARKET ROUNDUP | |
| Dow | +5.26 to 17,060.68 |
| S&P 500 | -3.82 to 1,973.28 |
| Nasdaq | -24.03 to 4,416.39 |
| 10-YR Yield | Flat at 2.549% |
| Gold | -$12.40 to $1,294.30 |
| Crude Oil | -$1.02 to $99.89 |
Don’t laugh. But I love testimony days — those days when the current Federal Reserve chairman has to go before Congress and explain him or herself.
Some of the representatives and senators don’t know an interest rate from a hole in the ground, so you get to laugh at their questions. Others are so far to the extreme on the “tight money vs. loose money” scale that you know what they’re going to say before they open their mouths.
Heck, I can’t shake the feeling that at least one or two of them secretly get their questions handed to them by New York Times and uber-Keynesian Paul Krugman. Maybe in a darkened parking garage like that scene in All The President’s Men.
Anyway, it was Chairman Janet Yellen’s turn to appear today before the Senate Committee on Banking, Housing and Urban Affairs. She submitted these comments at the outset, and a more detailed full report on policy, inflation, growth, and financial stability. Then the “fun” got started with a couple hours of comments and questioning.
So what are the major takeaways I got from testimony day?
First, Yellen is trying to put the markets on notice that the Fed is increasingly flying blind with regards to policy! She’s trying to straddle the fence between increasingly divergent camps at the Fed, and her comments reflect that. Some policymakers are very eager to keep policy easy to fight unemployment, while others are getting more strident about the need to tighten policy to ward off inflation.
That’s why she said the following:
“If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”
This is a big difference from the autopilot-like policy path we’ve been on for the last few years. Instead of promising to keep rates low forever, regardless of the data, she is moving the Fed to a much more data-dependent world. That means we could see much bigger market moves — in stocks, interest rates, currencies, and so on — when we get key reports, such as the monthly jobs report or the monthly CPI release.
Second, Yellen actually sounded a bit less dovish to me about the policy outlook. She repeatedly talked about signs of economic strength, outside of housing. She also noted that the unemployment rate has fallen sharply, job creation has picked up notably, and that “broader measures of labor utilization have also registered notable improvements.”
Third, Yellen continued to devote more time to topics I’ve harped on for a long time but that she basically ignored many months ago. That includes financial stability and “chasing yield” — taking cheap Fed-provided money and buying every lousy bond issued by every lousy company and high-risk country on the planet just to pick up a few extra basis points in rate.
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“This is a big difference from the autopilot-like policy path we’ve been on for the last few years.” |
Specifically, she said the Fed “recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions could increase vulnerabilities in the financial system to adverse events.”
Heck, the report that accompanied her comments went so far as to single out smaller capitalization stocks in sectors like biotechnology and social media. It also highlighted the risks posed by overheated leveraged corporate lending and junk bond markets, and noted that the collapse in implied volatility for the S&P 500 was yet another warning sign of dangerous yield chasing.
Yellen implied she won’t raise rates — yet — to prick those bubbles. She claimed that macroprudential measures — like specific, behind-the-scenes warnings from regulators or targeted cease-and-desist type actions — are a better fix.
But the fact she has already shifted from saying nothing to saying a whole lot about these threats … and the fact she hasn’t ruled out using rate hikes if other measures fails … speaks volumes. This is not the Fed of 2010-13.
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| The Fed’s Janet Yellen said the Fed “recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions could increase vulnerabilities in the financial system to adverse events.” |
The economy is improving, inflation pressures are building, asset markets are getting out of control, and the market (and increased media attention) is starting to force Yellen and her cohorts to pay attention. That’s why QE is about to die an ignominious death, and why the next surprise after that (for Wall Street, but hopefully not you!) will be much earlier-than-currently-expected short-term rate hikes!
So what does this mean to you as an investor? Let me break it down as simply as I possibly can:
- Dump your long-term bonds, from Treasuries to municipals to high-risk corporate! Bond ETFs and mutual funds with average maturities or effective durations over two to three years look particularly dangerous to me.
- Buy some gold or gold miners on pullbacks for protection from inflation and volatility.
- Sell the euro and buy the dollar as our Fed is well ahead of the European Central Bank in terms of how close it is to hiking rates.
What do you think? Are these the takeaways you got from Janet Yellen’s latest remarks? Or do you have a differing opinion? Are stocks the riskiest asset here? Bonds? Something else? Let me know at the Money and Markets comment section.
| OUR READERS SPEAK |
There were a heck of a lot of solid comments and recommendations in the comment section of the website in the last 24 hours. So I want to share as many as I can, since they contain valuable information about gold, stocks, interest rates, and more.
Reader Ken said: “This is a tough time for decision making in the stock market. We’ve had a very good few years, but every time I begin to think about cashing in, and I have sold some stocks, the market takes another step up, like today going back over 17K.
“IMHO, I believe the stock market is fairly safe for the next 18 months at best, but I’m keeping my options open and I’m ready to cash in at the first sign of real weakness.”
On the other hand, Reader John was less optimistic about the outlook for the economy here and abroad. His reasoning: “The level of debt both government and private will continue to weigh down on economic growth. I think everybody knows it’s only a matter of time before interest rates explode. Then EU economies will be back to square one with increased cost of borrowing and interest payments and flat income.”
Reader John R. also weighed in on stocks, saying they’re going up because of rising valuations, but he highlighted the distinct possibility of serious, unexpected declines. His comments:
“Stocks are the only game in town and current prices do not seem to reflect the negative underlying fundamentals. This has been a rising P/E ratio driven market, and I’m in the bearish camp with trailing stops just under the market. There are oodles of potential ‘black swans’ out there which could reverse this market in an instant.”
Finally, Reader Rick said he’s been maintaining a high cash level, but has converted some of his cash into gold and silver investments. And he also notes one other disturbing development, which may play into my recent columns on inflation. His comment:
“My farm ground has gone up about 35 percent in two years. Reminds me of the ’70s prior to inflation skyrocketing. Economy is tap dancing on a razor wire at 300 feet in a heavy wind, but I guess the U.S. is the least-sickest horse in the race for now.”
If you haven’t already weighed in on your fellow investors’ comments, or added your own, I urge you to hop over to the comment section when you have time. You’ll find plenty of valuable information there.
| OTHER DEVELOPMENTS OF THE DAY |
 Earnings season is in full swing, with today’s financial stock reports fairly strong. Goldman Sachs (GS, Weiss Ratings: B) said second-quarter profit rose to $2.04 billion, or $4.10 per share on a 6 percent rise in revenue. Improvements in investment banking and its own investment portfolio offset weakness in trading of bonds, commodities, and currencies.
A “core” sales reading that goes into the calculation of Gross Domestic Product jumped 0.6 percent after rising 0.2 percent in May. That suggests the first-quarter drop in GDP won’t be repeated in Q2. We also saw a sharp gain in New York-area manufacturing activity, another positive economic sign.
Reminder: You can let me know what you think by putting your comments here.
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.
{ 42 comments }
How do you feel about TIPS at the moment?
clear as mud
I think the economy and employment situation are much softer than Yellen indicated. I’m not sure sure what she actually believes. Blaming the poor first quarter GDP numbers on the weather is shallow and too convenient. And the CEO of Wal-Mart said he has seen no increase in sales or revenue. Make up any unemployment number you want. The fact is the smallest percentage of the working age population since Jimmy Cater have jobs and no one except the wealthy and government has any “disposable” income to spend. This feels more like the beginning of the next leg down, than a recovery.
Right on Allan. We are being lied too, big time. How can investors miss this?
Mitch
I concur. However, there is some reason to believe the economy might pick up because the money supply is beginning to increase due to increased lending. The Fed can only plant the seeds for expanding the money supply. It is actually lending institutions that really control the levers along with government lending standards. Note the money supply is increasing even as the Fed ends its bond buying program.
Look the consumer is going broke. Hit with higher everything . Medical expenses . Groceries. Utilities. State taxes. The average person if they calculate what they pay in state and federal taxes every year runs about 56 percent. Do not believe me . Pencil out all the small taxes . Look at you cell phone bill. Your cable bill. Local sales tax when you purchase just about anything. Gasoline tax on every gallon of gas . When you buy new tires for each car. The sales tax when you buy a new or used automobile each 4-5 years It goes on and on.
Income is going down not up to afford the basics in life. Do the math you will see .
We need a new breed of politician to right the economy and give Americans the control of a free market system. Not a tax. Tax. Tax . Spend . Spend state and federal Goverment economy.
Excellent. Thank you. Mitch
please unsubscripe my acct david cowden
Mike:
Where did you attend grad school?
You are a nice guy but way of of your depth.
Ever been to the Federal Reserve Bank?
Most likely not.
People think you know something.
You merely use deception and hype.
I follow many news letters and also people, MIKE is one of the best for insight. He is right in like with the others. :)
Thanks for your info. I would like to also see a short Pod Cast every week with things that you think are important ,in this weakly up date. Also don’t you think its time to start to short everything? I have been short on SDS, TBT SEF and many others for a long time and just keep adding to them plus gold and silver. I am also using your buys along the way, so far so good Thanks
Another good story. I believe, as one writer commented, at the moment, the dollar is the the best of the dead horses. I strongly believe that the US ECONOMY is on borrowed time, with money flowing in from other dead countries out of desperation. The BRIC COUNTRIES are going to start their own IMF and world bank shortly , and it’s only a matter of time before our demise. You know, Russia , India, China, etc. I also believe that our government in the USA is taking in half of what it used too, as many are OUT OF WORK, and high paying jobs. With the welfare, and illegals, only an idiot can miss the time we are in now. And the media is mum. I am in big gold and silver mines only with a little on coal, since it has been beaten to a pulp and P/E is good. Ps. The gold and silver mines have proven assets, not speculations. If the BRIC countries back with gold, the fiat dollars will be rolled into fire logs.
I have a large holding in CLV nice %
oh, ever want to discuss this?
Call me at 312-399-1851
And that goes for anyone.else.
Sorry you cant have everything your way. :(
Neal, I believe our economy is done for, period. I would not put it past the FED as the pumper of the market, or other dying Countries believing the lie that they are safe here in the USA. People do not have jobs, and most have given up. If they have a job, it’s for less wages. Lies continually from the media. Any thoughts??? Thks. Mitch
So who do you pick as a advisor? I would really like to know. Check out R.C. Peck
Companies rise and fail on leadership. Countries are no different. We are screwed.
Why would anyone dump insured, AAA/BBB rated corporate or Tax Free Municapal Bonds that are generating 5% – 6%.If and when they are called all principal is returned. I think this is a nice return on a 500K investment. Most of my bonds are callable in 4 to 15 yrs.
If you don’t mine loosing 50% in a crash like I did, not all thing come back 100% ,REMEMBER if you loos 50% IT TAKES 100% TO BREAK EVEN.
So Bob, If interest rates move well above 5-6%, do you think your bonds will be called away? Get ready to take some lumps.
No, I agree, however I have had most of my bonds for several years and 75% are callable within 3-4 years,which is some years prior to their maturoty dates.There has been talk of interest rates going up for several years, but when? Also, I do not believe the Fed will let interest rates rise very high, as our Federal Goverment . could not afford to pay the interest on the debt. How would you have invested this money? All of my dividends are reinvested in the stock market. I have had several CD’s just sitting there for years, waiting for interest rates to rise to 4 or 5 %.It has not happen.
Why would any one in there right mind keep there money in the bank for .02 interest rate when the bank loans your money from 5-20 percent interest. I would rather bury my money in the back yard. If they had brains enough to raise the rate then people would feel more like spending a little of what they have saved. Common sense which no one seems to have!!! And they want the economy to return ” GOOD LUCK ” .
If you put money in a bank , its really not yours any more thanks to D. Frank
Mike,
You seem to disregard our unsustainable National Debt Crisis. When, NOT IF, the dollar loses it’s WORLD RESERVE CURRENCY statis very few, if any, of these Stocks, Bonds etc will be worth much of anything. I would suggest that everyone should have at least some Gold and Silver and be very cautious in their investments.
Please explain how the economy can do anything positive if
few people can get decent full time jobs?
knuckel head john bannre will comc to his right mine as soon as the koch brothers tell him to and stop paying him he have been on the take for a while thats the reason he got rid of eric cantor we have all been had with out a kiss f++K IT FOLLOW ME I AM VOTING DEMOCRAT THEY GET THE JOB DON
i am going to let you in on a little secert when we big investors want you to sell and drop the market so we can buy cheep we will preach doom and gloom so you will run and sell hang in there dont sell dont run you will make lots of money idid and still is
I sure wish I could be investing and trading along with some if you but I find myself in a position to help them “sharply lower” the unemployment rate by reaching the end of my claim amount and not being anywhere near tge end of the claim time… There are no extensions at either the state or fed level. Don’t get me wrong, I’d rather not contribute to the wasteful subsidies spending but the job markets tough… I don’t know where these jobs that they say are being created but I can tell you there not near me… So, I’ll take any job tgat will pay over the cost to have. Look out job market, over skilled labor coming your way soon.. I’m sure I’m not the only one…
Mike, you say to dump bonds. Does that include foreign bonds and bond funds, or just USD denominated bonds?
Don’t complicate everything. 1.) Count the boxes going down our hi-ways. If you can’t do that then ount the loaded trucks. They are the slow trucks going up hills. When trucks are full of card board boxes the economy is working again. When trucks aren’t pulling product down our roads the economy is sagging. 2.) The financial institutions (crooks) will either make money investing it or loaning it. With the party ending for the free money, the banks will insure interest rates go up. So “They can start loaning money again to little Americans at higher interest rates. One last thought: The reason our parents could buy a new large house in 1962 for $18,500 is interest rates were over 18%. Those whom think homes won’t fall or level off in value when rates rise are not seeing the picture; nor are they considering all these rentals will hit the market for sale at the same time, due trying to beat the progressive rate hikes. Cheers!
Don’t publish my email.
Mike! Don’t you recognize jaw-boning when you see it? Yellen is a serial counterfeiter who will not stop dollar devaluation ever.
Do you thing that is the time to buy this stock .
lorrilard cigarette compagnie or do thing that is not the right time to buy stock at this time .
Sincerely MRS T
The question is not whether we will begin to see the effects of inflation. The question is how soon they will manifest. Inflation of the currency is nothing more than printing money.
What confuses people is the time delay.
A depressed economy, such as we experienced from 2008-2013, does not react quickly to inflation. Price rises that George W Bush set in motion, during the 2008 financial crises, are just showing up today. The trillions that Bernanke printed, for which Krugman applauded, won’t noticeably raise prices until the economy tries to recover.
Once that recovery happens, rising prices will become unstoppable.
The US can’t un-print all of that phony money. To do so, is to default on our debts.
But the US can’t pay interest on it’s debts, either.
The only thing that can balance out those two opposed forces, is for US bond prices to collapse so badly, that the Treasury can buy back those bonds at a discount.
An interest-rate rise from 2.5% to 7.5%, would collapse the selling price of $12 trillion in national debt, to $4 trillion. If the Congress can find a package of spending cuts that make $300 billion of tax revenue available for paying interest on debt, the resulting $4 trillion debt will stabilize and the budget will balance.
It will balance upon the backs of every person who put any money into bonds, because anyone foolish enough to hold bonds, will get 33% of their money back, and lose the other two-thirds.
As for our so-called Social Security, the Social Security Act itself, limits the benefits paid in any one year, to the actual amount of money in the Social Security Trust Fund.
Since Congress has made certain to invest the Social Security Trust Fund in its own bonds, we can plan that 2/3 of the money in the Trust Fund will be lost, when the bond prices collapse. Meaning that everybody needs a survival plan, to live on a Social Security Check that’s 2/3 less than the one they get today.
And that’s with a rise in the price of everything we used to buy.
It’s not the end of our world.
Hell, it’s not near as bad as the Andrew Jackson Administration’s forced march of Cherokee and Seminole people from Georgia to Oklahoma. That budget move pumped money into federal coffers, paid off debts from the Revolutionary War and War of 1812, by selling Cherokee land to rednecks for cash…who in turn bought slaves to build plantations on it. Cost to the Cherokee: The oldest/least healthy quarter of the population, died. The Supreme Court ruled President Jackson’s actions unconstitutional. Jackson continued genociding Cherokee elderly and enslaving African-American children for cash, and paid off the national debt entirely. He said of Supreme Court Chief Justice John Marshall, “It’s his ruling, let him enforce it.”. Which, lacking command of the Army, the Court was unable to do.
Compared to Jackson’s crime against humanity, today’s echoes of it are relatively minor. The sight of Barack Obama openly expressing contempt of the justices of the Supreme Court in his first State of the Union address, was ugly…but not nearly as ugly as Jackson’s death march for the Cherokee and expansion of slavery…done also with contempt of the Court.
I’ll take our present mess, over the one Andrew Jackson created, no contest.
When Yellen talks I don’t have a clue what she said. She should stay home
and concentrate on her knitting. I really am not impressed with her at all.
b
Your not alone, my favorite day is testimony day too. The last time Yellen spoke, she seemed terrified about something and this time it all came out. She and the Fed are losing control over the variables you and Larry speak of. The fed cannot be found out in this regard. She won’t raise rates because she feels policy dictates…, she will raise them because she must!…. before they go up on their own. I also have to agree wtih Larry on Large Scale Gold manipulation, but disagree with him on a small scale type. The Fed also must try to control Gold if at all possible. They can try through very large Central bank sales and swaps to affect the price (to a small degree) to discourage unknowing people. This kind of manipulation is enough to make the price move down, temporarily. I believe I saw that yesterday. If anyone thinks that Central Banks won’t try to sell the same unallocated gold over and over in large quantities to make some kind of illusion, then they have not seen enough magic shows themselves. It only makes me more bullish on gold and it’s true place as money. Trust me, I have made large TBT and TBF shorts these last few months as well. Keep up the good work you two!
What the hell is the Fed chairman doing commenting on the price levels of specific market sectors?
Yellen is engaging in saber-rattling without the saber. Even at record low rates, we can barely service out $17T debt. There’s NO realistic way the Fed can raise interest rates to a material degree.
http://www.brillig.com/debt_clock/
Dear Mike: I believe that we are in the 8th inning of the Bernanke bubble. Inflation is here. I believe that it is 7%. Energy prices have gone up 467% in ten years, food prices 164% during the same period of time. The term core inflation which does not include food and energy should be eliminated from our vocabulary. The PPI does not include food and energy. This is what the Fed uses! The CPI includes food but no energy. Someone should tell Chairwoman Yellon that food and energy are the two essentials of life and she has more inflation then she could ever want. Chairwoman Yellon, the middle class in our country is being squeezed out of existence. Please raise the Fed funds rate today to1.5%! Regards, Robert Calabro.
I believe that one or two years out that inflation will start up a steeper rate than at present and there will be hell to pay. The world population will have far less money and crime, disease, homelessness. and utter despair will be rampant, even in the middle class. The Federal Reserve will use any and all money policy to control inflation, as they already have, but to no avail. Hyper inflation is in store for the whole world, not just the United States. This will be a world changing event.
About Gold a great hedge against inflation BUT only while anticipating a down-turn. After the large down turn Gold always dies. So if the market drops have a quick and reputable dealer ready to take your Gold at a moments notice. Or you could be looking a 70% LOSS square in the face.
America’s Trading partners drop the dollar as the world reserve currency. China and Russia drop the dollar.
We are on track for this dream to come true. Did you know this was coming back in 2008?