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3 Things - Fed Mistake, ECB QE, Housing
Submitted by Lance Roberts via STA Wealth Management,
The Fed May Be Making A Mistake
On Wednesday, the Federal Reserve made their latest monetary policy announcement. Janet Yellen, the current Chairwoman, made several statements that led the markets to believe that they remain on course for increasing the overnight lending rate this year.
*FED SAYS ECONOMY HAS BEEN `EXPANDING AT A SOLID PACE'*FED CITES `STRONG JOB GAINS' AND LOWER UNEMPLOYMENT RATE*FED SAYS INFLATION EXPECTED TO DECLINE FURTHER IN NEAR TERM
However, the real state of economic expansion, as discussed yesterday, is highly questionable as the global deflationary forces have already begun to wash back onto domestic shores. While the Federal Reserve stated they were not worried about the decline in oil prices, as it boosts disposable household incomes, it is a point that they should reconsider since there is little evidence supporting that claim.
In addition, the strong job gains, as examined earlier this week are also quite suspect. Given that the employment numbers are likely extremely overinflated, which accounts for the extremely low labor force participation rates and declining wage growth, the negative feedback loop to employment could occur very quickly.
The real concern for investors and individuals is the actual economy. There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get out of the potential trap they have gotten themselves into without cratering the economy, and the financial markets, in the process.
It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy. However, I also believe that the Fed understands that we are closer to the next economic recession than not. For the Federal Reserve, the worst case scenario is being caught with rates at the "zero bound" when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed’s perspective this might be the “lesser of two evils.”
The ECB’s QE May Lead To Further Declines In Euro Equities
There is much hope that the ECB’s newly minted QE program of €60 billion a month will be the spark that creates inflation in the Eurozone, sparks economic growth and boosts asset prices. It is a lofty objective to say the least considering there is very little evidence that QE programs either create inflation or economic growth. A quick look at Japan and the U.S. suggests that the ECB will likely be disappointed on both counts.
However, when it came to asset growth, the Federal Reserve was very successful as the liquidity that was pumped into the system was recycled into the financial markets. As I have shown many times in the past, there was a high degree of correlation between the expansion of the Fed’s balance sheet and the S&P 500 index.
The reason this worked in the U.S. was because the excess reserves created by the quantitative easing program yielded a positive interest carry. This is not the case in the Eurozone where the reserves created by the bond buying program with the ECB are held with a negative interest rate. This makes the program much less attractive to sellers of the bonds.
However, there is another issue that was recently pointed out by the very smart gentlemen at GaveKal Research:
“When we overlay the MSCI Europe, we find a somewhat surprising relationship-- equities have risen as the central banks' assets have contracted over the last several years, implying that asset purchases (inverted on the following chart) could actually be negative for stocks:”
“We have no way of knowing for sure whether or not this pattern will hold, but this chart would seem to suggest that MSCI Europe equities could decline ~30% by the end of 2016.”
Given that the majority of the Eurozone is either near or in recession, there is little reason to hope that a QE program the size that is being suggested by the ECB will be effective. However, there is currently little evidence that investors should be betting heavily on a resurgence of international asset prices. As shown in the chart below the correlation between domestic and international equities has been quite high and more correlated to the Federal Reserve’s repetitive QE programs.
With the domestic markets now struggling due to lack of liquidity, it is unlikely that international equities will provide any safety net for investors. Of course, while the mainstream media may be telling you to keep investing in stocks, it is clear that the “smart money” has been heading into the safety of bonds.
Low-Interest Rates Failing To Spark Housing Recovery
Dr. Ed Yardeni penned an interesting note recently stating:
“In particular, US exporters could suffer if the greenback continues to strengthen. However, that could be offset by stronger US consumer spending and home building.”
There is currently little evidence that US consumer spending is getting stronger. But the point I want to address today is this continued hope for a revival of home ownership in the U.S. That hope is grounded in the belief that if more people buy homes, not even considering whether they can afford it or not, it will boost the economic recovery. This has been one of the points that the Federal Reserve have pointed to in supporting their monetary interventions.
However, despite abnormally low interest rates, home ownership rates in the U.S., as I showed in “Housing, Not Much Recovery,” have fallen markedly while renters now make up the majority. The percentage of apartments, relative to total new home construction, is near the highest levels on record which explains the chart below.
More importantly, given that the Federal Reserve has spent the last six years artificially suppressing interest rates to boost borrowing and home buying, it has been of only marginal success. Considering the trillion’s of taxpayer dollars spent on bank bailouts, TARP, mortgage fraud forgiveness, HAMP, HARP, etc., the results are quite disappointing.
Now, with the Fed set to start raising interest rates, the collapse in energy prices, and rising concerns about financial market stability, don’t be surprised to see housing activity begin to slow in the months ahead.
Real estate related investments are already far ahead of the underlying activity as investors have chased “yield and hope.” Both of those reasons are quite devoid of fundamental realities that have subsequently tended to have a nasty bite when ignored.
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"fairly negative response."
/facepalm
The plunge with make them backtrack so fast I'll be amazed if Yellen doesn't rupture a testicle sprinting for her DeLorean for a do-over.
Maybe the Fed thinks it's opposite day and are saying the opposite of what
they mean. Otherwise they are very dumb and/or are liars.
Vandelay Industries
This sucker's going down.
Steve Schwartzman, his nose, his Blackstone friends [& their noses] thank you for your contributions to the tribe at the behest of his money counterfeitting comrades [& their noses]...
SOB's are ALWAYS around to 'sniff out' a deal... [because they're so SMART & all that]...
where is the chart of average banker bonus? As that is correlated to nothing...they always go up
The Fed does not care about low rates -- the can always do a Swiss or Denmark and turn ZIRP into NIRP! There is no end to how far NIRP can go. And if a recession hits then the Fed does MOAR QE -- and if that fails they Turn Japanese, and buy everything in every market.
I'm not sure about that. The Fed is pretty much out of bullets with interest rates near 0%. If they raise a token 1/4% and a recession hits, they can always use that one bullet and go back to 0% with another QE and save the day again. It's all a rigged casino and It's all Bullshit!!!
Deflation coming to a town near you.
Cash will be king then gold then real estate for rental income
Yeah..."yield hungry investing" say hello to an uber dollar.
Oil prices can go down a lot further...and so can food.
If rents collapse "there goes your equity in the business."
Ironically the debt might still be worth something...but the actual real estate itself could wind up being a BALL AND CHAIN.
I am not a big fan of calling a shitty economy deflation. It implies there is a monetary solution. There is not one. We have enough money. It was just all given to greedy asswipes with no motive to ever use it outside of a closed banking system. Our problem is that there is more corruption than actual economy.
We're only an empty toilet paper shelf away from becoming Venezuela.
Next stop on the Handbasket to Hell Express......Cuba.
Do you know what a "negative feedback loop" is?
I am in Houston, while not in oil, was born in 1961 and mature enough in the last oil bust to be able to compare the two cycles. I believe this one will be much worse. The number of industries benefiting from the oil patch inflating every cost going into production is not understood by this administration. There is a reason Houston is the fastest growing city in the U.S. and now that those streroids boosting this economy are imploded before our eyes, you will see the Uhauls begin to go north, east, and west. Comparing 1980 to today, I believe this cycle halted so fast that their is much higher inventories of rigs, equipment, pipe, trucks, trailers, rail cars, and all types of service equipment. The oil patch has bid up every facet of our economy, welders, truck drivers, pvc pipe, steel pipe, rail cars, rail rates, tuck cost, truck rates, concrete, construction equipment, basic labor, and I can go on and on. Some of the Pnuematic trailers we used, tripled in cost over the last 10 years because of the fracking demand. Rail rates increased 5-10 percent every year because of the frack sand and crude oil pressure. Hell, BNSF just hit me with a 10% rate increase after their main cost - fuel collapsed! And this is after their worse year of service!
Drive by a pipe yard and mountains of pipe stacked as far as you can see with all of the trucks parked! Hang on folks, because this oil economy has deep roots that underpinned much of the current economic boom. The current commodity bubble cause by deregulation and the fed's printing press was carrying a large portion of our economy. Agriculture and oil are both imploding. Does Uncle Sam not realize allowing people to write off $500,000 in depreciation from a section 179 created massive price inflation? In farm equipment prices exploded during this cycle because the economic gain was always in the buyers favor. What we did was rob from future sales and now the bill is due! All of these over inflated assets will now depreciate in value, because the underlying economic support by commodities is now collapsed!
Rinse, wash, repeat!