“Speak softly and carry a big stick.”
Market Roundup
Our 26th president, Theodore Roosevelt, famously adopted that foreign policy approach at the dawn of the 20th century. The general idea? America should try to negotiate solutions to the world’s problems peacefully … but simultaneously maintain a strong military and make clear it would be used if necessary.
But today’s monetary policymakers are doing the exact opposite. They’re talking loudly and carrying no stick. They’re grabbing microphones at every opportunity to share their views on the economy and interest rates. But their opinions are so wildly divergent that nobody can figure out what they really think – and they’ve cried “Wolf!” so many times that many investors are convinced they’ll never wield the rate hike “stick” again.
Yesterday, it was Federal Reserve Vice Chairman Stanley Fischer’s turn at the podium. He told an audience in Aspen, Colorado, that “we are close to our targets” on growth, and that inflation was “within hailing distance” of the Fed’s 2% target. But he also lamented the economy’s lousy productivity and talked about longer-term challenges.
So the dollar bounce and the bond selloff that initially followed Fischer’s comments in overseas trading didn’t hold. That’s almost exactly what we saw after New York Fed President Bill Dudley’s comments last week, which ostensibly had a slightly hawkish bent.
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| Fed Chairman Janet Yellen will grab the microphone on Friday at 10 a.m. |
Of course, all of these Fed comments are just a warm-up for 10 a.m. on Friday. That’s when Chairman Janet Yellen grabs the microphone in Jackson Hole, Wyoming, at the Kansas City Fed’s annual symposium. Since she’s at the top of the Fed hierarchy, her words carry the most weight of all.
But what I find interesting is all the “think piece”-style speeches and articles coming out in advance of the gathering. This one today from the Wall Street Journal‘s “Fed Whisperer” Jon Hilsenrath is a prime example, as is this other article from the Financial Times.
The general theme that runs through all of them? Growth is never going to get back to where it was in, say, the 1990s … that rates will therefore have to remain lower than they otherwise would be for a much longer period of time … and that mad monetary experimentation is going to be the rule, not the exception, as a result.
That doesn’t seem like the kind of thing we’d be reading and hearing about if the Fed was about to embark on a serious tightening cycle, or if policymakers really believed the economy was in solid shape. So anyone waiting for the Fed to pull out its big stick – and to simultaneously stop speaking loudly – is likely to be disappointed.
That’s my take, anyway. What’s yours? Should the Fed just stop talking and start hiking? Will it do so? Does any of that impact your investment approach? Or do you think trends in the real economy and the markets themselves are going to overwhelm all the Fed speak? Let me know in the comment section here at the website.
Until next time,
Mike
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Distortions, distortions everywhere, and not a drop of reasonably priced assets to drink … er … buy? That seems to be the situation we find ourselves in as investors.
Reader Donald L. said: “I could not agree more with your take on the Fed and the horrible distortions in interest rates. Insurance companies, retirees, pension plans, and a host of others have suffered and in many cases, the full price has yet to be paid.
“Not only is the Fed raising in small increments, it is doing it slowly to increase, not ameliorate, the pain. One would almost think these actions are deliberately designed to cover bad fiscal policy. This will not end well.”
Reader Gordon added: “As someone now 78 years old and having lived many years and looking back, I must say we have lost our way in this world – mostly morally. I agree with the gentleman who said that in his 40 years of investing, he has never seen the investment world so upside down. It’s like a three-ring circus with the Fed as its ringmaster.
“Sadly by now people should see through the Fed, but they have not. Investors still make investment decisions based on Fed speak and spin. They are being disingenuous to investors and financial markets. They keep acting like the Gods on Mount Olympus, but in essence they are emperors with no clothes laid bare for all the world to see.”
But will things change anytime soon? Reader Ian is skeptical: “Yes, they’re stupid interest rates. But surely they can’t afford to raise them. That’s the mess we are in with fiat money, plus the bubbles are everywhere.”
Reader Lorne D. added: “The S&P 500 companies aren’t concerned because they always benefit from federal actions, whether through taxing, regulating, and punishing mom-and-pops out of competition, or by taxpayer bailouts – otherwise known as privatizing gains and socializing losses.
“The vast majority of individuals responsible for past insider transgressions went unpunished before. Obviously, they do not fear prosecution in this coming round, either. Someone needs to be made to pay, but the feds always sell out the little guy to save the Big Fish and Fat Cats!”
Thanks for taking some time out to share your thoughts. My belief is that the Fed won’t voluntarily end this state of affairs. The market will force its hand. The interest-rate market tremors I wrote about recently suggest that process may be getting underway, but only time will tell. Anything else you want to add? Then make sure you take advantage of the comments section.
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Drugmaker Pfizer (PFE) is buying the California biotechnology firm Medivation (MDVN) for $14 billion, or $81.50 per share. The move will add Medivation’s prostate cancer treatment Xtandi and an experimental drug Talazoparib to Pfizer’s product line.
Not only is the European Central Bank buying bonds in the secondary market. Now it’s acting as a direct investor in corporate bonds via so-called “private placements”. That’s when a company sells hundreds of millions of dollars to just a select handful of buyers with no public marketing, no public roadshow and little transparency. Just another in a long list of QE-driven market distortions.
The Rio Olympics are now in the history books, with last night’s ceremony bringing the two-week Summer Games to a close. Brazil handed the metaphorical torch off to Japan, which is hosting the 2020 games in Tokyo. U.S. athletes ultimately brought home 121 medals, with China coming in second at 70 and Great Britain right behind with 67.
Do you think we’ll continue to see more health-care and drug-sector M&A? What do you think about the ECB going straight to corporations and buying their bonds? Did you watch the closing ceremony, and what was your impression of the overall Olympics? Share your thoughts in the comment section below.
And by the way, if you’re more interested in learning about the gold market than tracking the gold medal count, make sure you join me this October at the New Orleans Investment Conference. It’s one of the longest-running, most important gatherings focused on metals, mining shares, and the broad markets.
I’ll be speaking there, as will several other experts. It runs from October 26-29, and you can find out more by clicking here. You can also call 800-648-8411 for more details. Just be sure to mention that you’re calling as a Safe Money Report or Money and Markets reader.
Until next time,
Mike Larson
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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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Hi Mike
Most baby boomers have been through boom and bust cycles before. I would imagine that the careful ones are now in protection mode. The fed doesn’t make or grow anything. They don’t employ large numbers in manufacturing, retail or in any productive capacity at all. They’ve used up all their ammunition and are now firing blanks in the air. Frankly I couldn’t give a toss what Janet and her band of contradicting misfits have to say. My money is safe, accessible, secure and ready for the mess the fed has helped create.
I agree with Howard, but would like to see the Fed disbanded entirely. If all the risk of failure rested on individual companies, the poorly managed firms and institutions would fail, and the strong would thrive. As a result, our large companies would ultimately be stronger and better-managed.
It is important to realise the connection between this post from Mike and yesterdays post from Martin. Firstly, the fed is a collection of privately run banks who are protecting their CDS positions with souring European banks. When this collapse begins it is our banks that will suffer the consequences as the CDS positions are triggered. Secondly, the safety I have sought is in gold related products in foreign currencies that have not been manipulated.
If we get a president, that is serious about shaking up Washington, cutting corporate taxes and repatriating corporate cash overseas, then we can get back to 3+% economic growth, and higher rates. I think the net recession could turn into a global depression, before we get back to a more healthy economy.
Hey Mike — imo, zero % chance of Yellen raising rates before election if she wants Clinton in the White House. If she raises, markets will sell off viciously like they did at the beginning of 2016, following last December’s rate increase…..and Trump will become POTUS!! Enjoy reading your commentaries, Mike!
the market is being manipulated. bad news for small invester.
If the Fed leaves interest rates low, they destroy Too Big To Fail pension funds and insurance companies. If the Fed raises interest rates, they destroy other TBTF entities – like the Federal Government, the several state governments, and a great many large companies which have levered up to take advantage of low rates.
Whatever the Fed does, it all ends badly.
Janet is hamstrung. She wanted to raise rates a couple times this year–but the PBOC said no no. Do that and we will do a one day devaluation of the Yuan–incinerating the markets. I believe they have a tacit agreement—one rate per year.
Hi Mike. Have you heard anything on Neural Imprinting? Mark Zuckerberg put $2.1B into it so that is worth watching. Thank you.
The times we’re in screams of 1929 all over again. When everyone tells you “everythings OK” yet their actions tell a different story, it’s time to step back, way back. It’s going to implode.
Where did all the helpful/interesting comments go?
When Mike quit having daily comments, I know I became less interested in them. I am not much interested in the other people who replace him – especially the ones that aren’t connected to the stock markets. Bonds, gold, monetary, self defense and such should just have their own columns, separate from Mike’s. His is the one I like best.
The problem is the federal government being monitoring economic conditions such as unemployment and inflation.
The government has so much debt, it can’t afford to pay interest on rising interest rates. Hence, an excuse will be manufactured by the government whenever the FED is considering a rate hike.
During May, the Government provided a deflated Jobs report that convinced the Fed not to raise rates. The next month’s job’s report was vastly higher.
The government will now claim that inflation is 2%. The rising value of TIPs supports this claim. The Federal Government needs to get out of the economic barometer business.
Interest rates are never going to be raised, at least, not to any level that will produce any significant income. As long as the U.S. government continues to borrow enormous amounts (that we no longer hear about but also – constitutionally remember – the government is authorized to print money without any requirement for interest – President John F. Kennedy authorized the printing of “United States notes” with “red” seals (blue seals were silver certificates; green seals are now Federal Reserve notes…..one reason why he was murdered?). The reason is simple. With a national debt at $20T, the simple interest on that money at 5% would be $1T – with compounding – even more. That’s fully 1/3 of the the total U.S. budget at present. Remember, when it was said, we cannot sustain (read survive?) such staggering debt? We’ll, that time is now and the crisis soon to come will be one disaster we will wish had not come to pass.
The Fed has no stick.
Our debt is so high that the Fed dare not raise rates. The next chaos will come when bankers and other financial interests begin to raise rates to address concerns of rampant inflation. Then American leadership will be sorely tested.
Hey Mike,
Please tell us what you think about SRS as an investment ?
Interesting and how could the average person invest in the SRS ?????
My thoughts, the Fed is going to continue to shoot their mouth off about raising rates. The economy is going to continue what it is doing namely poorly especially with productivity going lower. Eventually the Fed will get lower and maybe even negative rates. Then if they get to negative rates the explosion will occur. The call to fix or eliminate the Fed will get very loud.
There is ample historical precedent where central banks have pumped an economy with easy money only to have it blow apart despite their best efforts. Why should this time be different? The question is not if it will happen; the question is when will it happen and how will it manifest itself. Whether or not the Fed willingly raises interest rates anytime soon is irrelevant to the outcome.
IN A LOW-GROWTH ,YIELD-STARVING ,SENARIO ,HOW CAN CENTRAL-BANK OF THE WORLD THE FED ,RAISE INTEREST-RATE TO SUCK THE CAPITAL FROM EMERGING MARKET WHERE GROWTH IS AND APPRECIATE ITS CURRENCY .IT WOULD BE DISASTROUS FOR WORLD .WE HAVE TO LIVE IN THIS LOW-RATE ENVIROMENT ,HOW LONG WE DON’T KNOW .MAY BE THE ECONOMIST CAN FIND A BETTER PATHWAY .
We are hoisting ourselves onto a petard of our own manufacture. Cancerous corporate written trade treaties, welfare to placate the underclass, tax cuts to pander to everyone else, insane military/security spending to protect ourselves from our own inane foreign policies and ZIRP in a vain attempt to nullify our other policies disasters have created a one way street to economic and social Hell. No one will speak the truth to the American people that they have been had by both Parties. Thousands of our brave soldiers have died not to protect our Nation but for crass political purposes. Bush is a war criminal and Obama is a coward. Each was surrounded by political hacks. The media is worse than useless and Congress is so corrupt that we would be better served if they were all put into medically induced comas. The light at the end of the tunnel is the proverbial freight train and we’re all in its path.
This is the BEST comment ever made on this Site …
The Fed Bought our government time to get there act together and balance the Budget but these Knuckle Heads kept spending more and more and have left us with almost 20 Trillion in Debt . If rates were to go up the interest payments would go up leaving the government in a bigger bind . Think of it a 5% interest rate and our interest payments alone would approach the Trillion Dollar Mark .
Hi Mike.
What will happen to the USD with the Chinese entering the SDR next month?
Thank you.
Mike Tugwell
The globalisation of food production pushes small, self reliant farmers off their lands and replaces them with large chemical and machine intensive corporate farms. It does not not emphasise food for hungry local communities. Globalisation equals mass unemployment.
The fix is in. The Fed will skirt around the edges until November 9. Their actions following will be determined by the outcome of that election. Opportunities for savvy investors will present either way but I’m keeping most of my powder dry until November.