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3 Things Worth Thinking About

Tyler Durden's picture




 

Submitted by Lance Roberts of STA Wealth Management,

The Fed's "You Say Potato; I Say Potatoe" Statement

Yesterday, the Federal Reserve released their financial FOMC meeting statement for 2014. The primary focal point by the financial markets has been answering the question of WHEN the Federal Reserve will begin tightening monetary policy by hiking interest rates. Yesterday, did not answer that question as Tim Duy summed up well:

"Policymakers were apparently concerned that removal of 'considerable time' by itself would prove to be disruptive. Instead, they opted to both remove it and retain it:

 

'Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.'

 

If you thought they would drop "considerable time," they did. If you thought they would retain "considerable time," they did. Everyone's a winner with this statement."

As I have written in the past, the Fed has lost its focus of managing for price stability and "real" full-employment by trying to appease WallStreet and keeping its member banks "fat and happy."  

(I say "real" full-employment because it is hard to suggest that the U.S. is anywhere near full-employment levels when only 46.5% of working-age individuals, those between the ages of 16-54, are employed full or part-time. Read here)

There are two important points to be made about yesterday's FOMC statement. 

First, when the Federal Reserve has begun hiking interest rates in the past, GDP was averaging between 4% and 5% annual growth rates. The Fed historically has raised interest rates "slow" a rapidly growing economy and abate rising inflationary pressures. Now, however, the Fed is discussing raising interest rates in an economy that is barely growing above 2% with deflationary pressures and falling interest rates.  As shown in the table below of the FOMC projections, estimates for future GDP growth remains at very sluggish levels.

FOMC-Projections-GDP-121814

My guess is that the Fed realizes that the economy, now over six years into the current expansion, is closer to the next recession than not. Therefore, the Fed likely feels compelled to raise interest rates regardless of near term market or economic consequences in order to have some capability of lowering rates to offset the next recessionary drag. Ironically, it will likely be the Fed's actions that trigger the next economic slowdown.

Secondly, it is important to remember that the Federal Reserve CAN NOT tell the truth. In a liquidity driven world where the financial markets parse and hang on every word uttered by the heads of Central Banks worldwide, can you imagine what would happen to the financial markets if Janet Yellen stated:

"Despite many years of supporting the financial markets in hopes of a resurgence of economic growth, it is committee's assessment that Keynesian economic theory is flawed. While our monetary interventions have inflated asset prices as desired, it has only served to widen the "wealth gap" while having little effect on the real economy. It is the conclusion of the committee that our policies have failed to achieve realistic economic objectives and has potentially imperiled the financial markets with a third 'asset bubble' in the last 15 years."

The ensuing collapse in the financial markets would immediately create a recessionary environment. Financial markets would crumble as credit markets froze as economic activity plunged. This is why there is such great emphasis focused on the Federal Reserve statement and the guidance they provide. It is also why the FOMC has repeatedly stated that following the end of the current large scale asset purchase programs (LSAP or QE) that they would continue to focus on the use of "forward guidance" as a policy tool.

The ability to "move" markets with words, rather than actions, has become the trademark of the European Central Bank (ECB) over the last couple of years. It is ultimately the hope that the Federal Reserve can pull off the same trick as they begin to extract liquidity and accommodation from the financial markets as the economic recovery takes hold.  The problem for the Federal Reserve is that they are still looking for that elusive economic recovery to take hold after more than six years. Unfortunately for the Fed, economic recovery cycles do not last forever, and the clock is ticking.

 

Retail Sales Not What They Seem

I have been extremely vocal about the fact that shifting consumption from gasoline sales to retail sales does not create economic growth. It is just a "shift" in where the same dollars are spent.

However, there has been much "hoopla" over the recent retail sales report for November that saw retail sales jump for the month by 0.7%. While on the surface this appears to be a strong retail sales report, a quick look below the surface quickly destroys that claim. 

First, as shown below, the "seasonal adjustment" to the retail sales report was the fourth largest in the history of the report. Of particular note, in the last two years, the seasonal adjustment were negative. The three previous record level adjustments were made immediately following the last two recessions. 

Retail-Sales-November-Adj-121814

Secondly, let's take a look at the NON-seasonally adjusted data for some guidance using a simple 12-month moving average to smooth the data rather than a potentially corrupted, by the financial crisis, seasonal adjustment methodology.

Retail-Sales-NSA-12moAvg-121814

As suspected, there is little evidence to support that retail sales actually surged in November. While the seasonally adjusted data, which is rather volatile, the smoothed NSA data suggests a weaker retail, consumer, spending environment. This corresponds closely with the premise that I discussed recently in the weekly newsletter (subscribe for free E-delivery) that falling gasoline prices really have little impact on overall retail sales. To wit:

"While the argument that declines in energy and gasoline prices should lead to stronger consumption sounds logical, the data suggests that this is not the case.

 

Simply put, lower oil and gasoline prices may have a bigger detraction on the economy that the “savings” provided to the consumer

 

In any economy, nothing works in isolation. For every dollar increase that occurs in one part of the economy, there is a dollars’ worth of reduction somewhere else.

The data over the next couple of months will be interesting to watch.

 

Chart Of The Day

I have addressed previously the divergence the economic indicators such as the ISM surveys and actual industrial production. Today's release of the Markit Service Sector activity shows a continued drop in services activity that belies recently released ISM Services surveys and retail sales data. Importantly, both cannot be right.

PMI-Sector-Services-121814

 

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Thu, 12/18/2014 - 16:53 | 5569908 gcjohns1971
gcjohns1971's picture

It would seem that the presumtion that the only place money otherwise destined for purchasing energy can go is to retail products is, putting it mildly, pre-mature.

What about savings?

What about investment?

What about CAPEX?

 

Gas-pump savings is the  least of it.  Most of low-energy-price savings happens in the production chain where it makes all the factors of production cheaper.

But if too much of your production is involved only in producing energy...well, then it's a real problem...

Thu, 12/18/2014 - 17:07 | 5569965 Stuck on Zero
Stuck on Zero's picture

If oil prices are expected to stay low why aren't the oil company stocks in the tank?  They have barely budged.

 

Thu, 12/18/2014 - 18:41 | 5570422 Wait What
Wait What's picture

Wait What spent his gas savings on a couple of handfuls of silver rounds.

the best thing people can do with those savings is just that. the more volatile markets get, the more likely SWHTF before anyone is ready for it. just ask Russia.

Thu, 12/18/2014 - 16:54 | 5569912 Philo Beddoe
Philo Beddoe's picture

Nice ramp today! Bravo. Holy shit, they are playing BlackJack with 12 aces out of one card shoe. 

Thu, 12/18/2014 - 17:02 | 5569916 cowdiddly
cowdiddly's picture

You want higher oil prices? No problemo

Here, let me help you.

"Gas prices might not stay low for a considerable period, just be patient."

Boom, instant 1000 pt rise death defying rally even though in reality nothing changes from before.

What a joke this has become.

Thu, 12/18/2014 - 16:56 | 5569917 Al Huxley
Al Huxley's picture

Fuck this mumbo junbo, new DOW all time high over 18000 tomorrow and 20K by Christmas!  Thanks Santa Yellen!

Thu, 12/18/2014 - 17:01 | 5569943 Philo Beddoe
Philo Beddoe's picture

Mary his mother, and fell down, and worshipped him: and when they had opened their treasures, they presented unto him gifts; gold, and frankincense, and myrrh" (Matthew 2:11)

Anything but Gold. Draghi 1:1 

Thu, 12/18/2014 - 17:06 | 5569955 Al Huxley
Al Huxley's picture

Gold was looking especially strong into the close!  Any time a commodity hangs around just UNDER a major marker, like 1200, you know it's gathering steam for a big liftoff, like when the high jumpers run up to the bar and then stand there for a few minutes to catch their breath before leaping over, or when you climb onto a trampoline and stand there waiting for the big liftoff. 

 

Plus, gold going up will send all those cocksuckers who've been crushing oil to get a Putin a message they won't forget - just because you own the system doesn't mean you can fuck with the prices.

Thu, 12/18/2014 - 18:20 | 5570320 actionjacksonbrownie
actionjacksonbrownie's picture

Gold has popped over $1200 a few times this week, but "they" keep stuffing it back in the jar. I wonder how long the Asian and Euro markets will tollerate NY handing them losses on a daily basis? Will the overnight markets stage a monster rally that forces Shorts to cover during NY trading hours, or will they abandon the $1200 level and let it fall?

Thu, 12/18/2014 - 17:05 | 5569959 SickDollar
SickDollar's picture

 

+20k

exactly fuck the mumbo jumbo crap (felt like I was  reading a GS report FFS

 

Thu, 12/18/2014 - 16:56 | 5569922 alexmark2013
alexmark2013's picture
Jim Rickards: People have been debating whether the Fed will raise rates in March or June. The March people got whacked today. June will get whacked next http://investmentwatchblog.com/jim-rickards-people-have-been-debating-whether-the-fed-will-raise-rates-in-march-or-june-the-march-people-got-whacked-today-june-will-get-whacked-next/
Thu, 12/18/2014 - 17:10 | 5569987 SheepDog-One
SheepDog-One's picture

Anyone believing the Fed will be raising rates anytime during any of our lifetimes is fucking retarded.

Thu, 12/18/2014 - 17:28 | 5570086 negative rates
negative rates's picture

It's been proved they can't do it, cement boots were to blame.

Thu, 12/18/2014 - 16:58 | 5569931 Al Huxley
Al Huxley's picture

Buy the close!  You don't want to miss the opening gap up!

Thu, 12/18/2014 - 17:00 | 5569938 GFORCE
GFORCE's picture

http://investfts.blogspot.co.uk/2014/12/oil-charts-look-ominous.html

Oil's fall today looks bearish. OPEC won't hold it up as in the 80s.

Thu, 12/18/2014 - 16:59 | 5569940 mototard
mototard's picture

Potatoe:  I thougth that was Dan Quayle that said that.

Here is my take on falling gas prices:

 

A guy drives his four year old Ford F-150 up to the pumps and fills 'er up.

OLD HIGHER PRICE:  100.00 dollars

NEW LOWER PRICE:  60.00 dollars.

He pays for this with his credit card as he does not have the cash for it anyway.  So instead of being another 100.00 dollars in debt, now he is only another 60.00 dollars in debt.  It is not as though he suddenly has 40.00 dollars to spend on something else.  He is just 40.00 dollars LESS in debt that he would have been otherwise.

Sooooooooooo, the drop in gas prices will not spill over much into new sales of other retail products.

Just my view.......

 

Thu, 12/18/2014 - 18:27 | 5570350 actionjacksonbrownie
actionjacksonbrownie's picture

Or, if they happen to actually have any money, and intend to spend it rather than save it, chances are they will buy something produced offshore. So instead of buying a product pumped and refined in u.s., they will send their money overseas - never to be seen again.

Thu, 12/18/2014 - 18:47 | 5570443 Wait What
Wait What's picture

"never to be seen again"

oh yeah, it will be seen again, in the form of a Lamborghini Aventador, driven by a community college attending child of a chinese politburo official. circle of life, eh?

Thu, 12/18/2014 - 17:01 | 5569944 fatlibertarian
fatlibertarian's picture

Holy crap santa clause Yellen.. Dow up 400, LOL, such a joke. 

The next BURST may be the FINAL.

Thu, 12/18/2014 - 17:05 | 5569956 Atomizer
Atomizer's picture

Can We Send Alan Gross Back to Cuba? http://www.americanthinker.com/articles/2014/12/send_alan_gross_back_to_cuba.html

Sucking up a new Obama Stimulus plan to open new money laundry scams.

Thu, 12/18/2014 - 17:08 | 5569969 richiebaby
richiebaby's picture

So we tank hard at some point tomorrow and scalp the todays lemmings. Then resume the march to the 20k dow

Thu, 12/18/2014 - 17:10 | 5569978 Goldilocks
Goldilocks's picture

La maison en petits cubes (The House of Small Cubes)(Tsumiki no ie) Corto (Gen.: Animación, drama)
http://www.youtube.com/watch?v=50-fWCXvhAY (12:03)

Thu, 12/18/2014 - 17:23 | 5570045 s2man
s2man's picture

Why don't they just report the real inflation rate?  Then a rate hike would look like the correct thing to do...

Thu, 12/18/2014 - 17:27 | 5570080 moneybots
moneybots's picture
The Fed's "You Say Potato; I Say 'considerable time' for buy algos" Statement
Thu, 12/18/2014 - 17:31 | 5570101 bid the soldier...
bid the soldiers shoot's picture

Anyone trying to make sense out of market action, government news releases and MSM stories, please report to the principal's office for remedial economic homework.

Everyone else contact your tinfoil hatted, paranoid schizophrenic for the latest updates.

If you need to sell the farm, we're buying.

Thu, 12/18/2014 - 17:31 | 5570103 AdvancingTime
AdvancingTime's picture

What a tangled mess they have created! The American and world economy has entered uncharted waters and weird crosscurrents are clouding our economic future. Throw in some social unrest and geopolitical hotspots and it becomes a question of continue to sail along or sink like a stone. 

Last quarter America's GDP came in at a strong 3.5% but the fact that a 10% jump in federal spending, mostly on Pentagon hardware bolstered growth and was very much behind the numbers. This was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package.

Mix in an upbeat November number concerning job creation, falling oil prices and ever higher stock market prices and new record highs and many people have the impression we are on a roll. The truth is this market is over extended and distorted and a crash may occur at any time. The article below delves into some of the many crosscurrents at work that could bring the economy to an abrupt halt.

http://brucewilds.blogspot.com/2014/12/crosscurrents-cloud-future-economic.html

Thu, 12/18/2014 - 17:38 | 5570145 Coldcall
Coldcall's picture

so lets moan about the decreasing cost of gas...you could not make this up.

 

Thu, 12/18/2014 - 17:39 | 5570151 mt paul
mt paul's picture

the amount of dollars saved, on fuel this week

paid for shipping on the latest silver order...

Thu, 12/18/2014 - 19:21 | 5570552 TheReplacement
TheReplacement's picture

BS.  Money spent is money spent but what matters if you are going to spend it is how you spend it.

Spending money on a one time use item and making evil sheiks is good?

Spending money on things that last more than one use is bad?

FU.  Every dollar I do not spend on gas I can spend on something more valuable to me, like gold.  Again, FU.

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