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5 Things To Ponder: Don’t Fight The Fed

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    April 13, 2015

    As I discussed earlier this week, the deterioration in both economic data and profitability data leave a good bit of cause for near-term concern for a Fed that is pushing to raise rates.  To wit:

    “However, with the economy currently growing at only slightly more than 2% annually, since the turn of the century, and inflation running well below the Fed’s 2% target, what incentive is there in raising the overnight lending rate? In my opinion, none. Let me explain.

    Friday’s employment report, which was not surprising in its decline, is a reflection of the deterioration in the economic data over the last two-quarters. That weakness can clearly be seen in the Economic Composite Index (click here for construction) which has fallen since the end of QE3. (Gold squares show start and end of Fed’s QE programs)”


    “While it is an accurate statement that the U-3 unemployment rate, as reported by the BLS, has dropped to 5.5% as of the latest report, there is much controversy surrounding the validity of that statement.  (For more on this read: What Is The Real Unemployment Rate?”)

    While the majority of economists and analysts continue to be confused by the ongoing sluggishness in economic growth, the Fed is likely embarking on an interest rate increase cycle out of “fear” more than anything else. With the current economic cycle more than six-years into a recovery, the real risk for the Fed is getting caught in a recessionary slowdown with interest rates at zero.

    Such an event would be extremely restrictive to the Fed’s ability to limit the impacts of a recession and would jeopardize the fragile underpinnings of the current economy.

    The economic data from March clearly suggests that the Federal Reserve should remain on hold, particularly since increasing interest rates is a policy used to “slow” an overheating economy. There is clearly no sign of that currently.”

    This weekend’s reading is a coverage of the views of the Federal Reserve’s endeavor to hike interest rates. It reminds me much of the old “Batman” television series with Adam West where they left you with the cliffhanger each week:

    “Will the Fed hike interest rates?
    What will happen if they do?
    Could it spell doom for the markets?
    Tune in next week to find out.”

    With the “cliffhanger” firmly in place, let’s get to our weekend reading list.

    1) Perma-ZIRP by Richard Salsman via Real Clear Markets

    “For three main reasons the Fed won’t normalize its policy rate in our lifetime: 1) it believes that doing so will hurt the economy, 2) it worries that higher interest rates on an ever-rising national debt will increase budgetary interest expenses, widen the deficit and further increase the debt, and 3) for political reasons it much prefers a policy of financial repression.

    There’s also a good chance that over the next decade another financial crisis or recession will occur in the U.S. which would give Fed officials a ready excuse to further delay any material rate-rising.”

    Read Also: Supply Side Yellenomics Is Losing Its Grip by Tony Crescenzi via PIMCO

    2) Forward Guidance The Way It Should Be by Bob Eisenbeis via Cumberland

    “This speech goes a long way towards fleshing out our understanding the kinds of data the FOMC is taking into account and how those data will impact decision making. But it also suggests how the Committee is likely to proceed as it assesses incoming data and implications for the path of policy. As for putting incoming data in the context of the framework that Chair Yellen laid out, clearly the effects of this winter on consumer spending, the slowdown in housing, and the weak jobs report for March would clearly bolster her concerns about the robustness of the recovery and increase the perceived risks that could come with a liftoff by mid-year that some have suggested might be in the offing. Caution and risk aversion are likely to play an important role in future decisions and, at least from this writer’s perspective, this now suggests further support for a September liftoff at the earliest and perhaps much later in the year. This likelihood argues for a continuation of low rates and will be bullish for equities.”

    Read Also: Lessons From History: Don’t Bet Against The Fed by John Silva via WellsFargo

    3) The Unseen Downside Of Strength In The Dollar by Michael Gayed via MarketWatch

    “The speed of the move is disruptive and has not yet been fully appreciated. These things take time time to filter. While we may live in the day to day of market movement, the ramifications of King Dollar the Despot have not yet fully been felt, and may only begin to filter through to the economy in the second quarter. It is this lag which myopic market participants are unable to see yet, because it is still to come.And while the media focuses on the endless debate over when the Fed will raise rates, directly in front of us is the King sharpening his sword.”


    But Also Read: Fed Now Stock Price Dependent via ZeroHedge

    4) Don’t Fight The Fed, Invest With It by Robert Powell via MarketWatch

    “Investors should know that over the long run there are pronounced monetary policy-related return patterns in the capital markets. The evidence presented in the book covers nearly a half-century and the patterns are remarkable. Most notably, stock market performance has historically been dramatically better in expansive versus restrictive monetary policy environments. We certainly don’t suggest that these return patterns are caused by Fed monetary policy. The Fed both influences the level of economic activity in the economy and reacts to the level of economic activity through changes in monetary policy. I don’t believe that the average investor understands what a significant influence Fed policy plays on security returns in the long run. It seems that too often the media and investors are fixated on what changes in Fed policy mean for the markets in the short run.”

    Read Also: Lessons From The 1937-38 Recession For The Fed by Robert Samuelson via RCM.

    5) A Troubling Theory Makes A Comeback by Alex Rosenberg via CNBC

    “Originally developed in the late 1930s by Alvin Hansen (who earns a footnote in the official transcript of Yellen’s speech), it was reanimated by former White House economic adviser Larry Summers, who in 2013 asked whether the U.S. may be mired in secular stagnation.

    Interestingly, Hansen’s theory was that a lack of technological innovations could be to blame for the stagnation; Summers, however, was more focused on an exogenous shock.

    In April 2014, Brown University economists Gauti Eggertsson and Neil Mehrotra published a comprehensive model of secular stagnation, showing how income inequality and a drop in population growth could lead the economy’s ideal interest rate to fall.

    Essentially, Eggertsson’s point is that a surplus of individuals looking to save their money, combined with a paucity of individuals looking to borrow money, can lead the market-clearing interest rate to fall to unusually low levels.”

    Read Also: Yellen Can’t Move Rates Without Growth by Jonathon Trugman via NewYork Post


    Jamie Dimon Warns Of The Next Market Crash? via ZeroHedge

    The items mentioned above (low inventory, reluctance to extend credit, etc.) make it more likely that a crisis will cause more volatile market movements with a rapid decline in valuations even in what are very liquid markets. It will be harder for banks either as lenders or market-makers to ‘stand against the tide.'”

    3 Secrets From The Book Of (Trend Following) Revelations by Cam Hui via Humble Student

    • Bull and bear markets behave differently and therefore they should be traded differently. 
    • We may be on the verge of an intermediate term top in US equities. 
    • Trend following strategy returns are subject to overbought and oversold conditions too

    “Randolph Duke: Money isn’t everything, Mortimer.
    Mortimer Duke: Oh, grow up.
    Randolph Duke: Mother always said you were greedy.
    Mortimer Duke: She meant it as a compliment.” – Trading Places

    Have a great weekend.

    Please, send emails and comments to lance@stawealth.com or tweet me.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.


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