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5 Things To Ponder: Don't Fight The Fed

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

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)"

 

EOCI-1974-Prsent-LEI-040615

"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."

 

 

Gayed-Dollar-040915

 

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


BONUS READS:

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.

 

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Fri, 04/10/2015 - 16:47 | 5980286 adr
adr's picture

If the Fed were a walking breathing person, it would look like Ben Bernanke, Yellen, or Greenspan.

Um if something like that got in a fight with me, pretty sure they would go down. In fact my first punch would probably snap the Fed's brainstem.

Fri, 04/10/2015 - 17:02 | 5980349 semperfi
semperfi's picture

my mental image was of  "Pizza the Hut"

Sat, 04/11/2015 - 07:32 | 5981610 GetZeeGold
GetZeeGold's picture

 

 

The devil went down to Jekyll Island...

Fri, 04/10/2015 - 17:04 | 5980360 lester1
lester1's picture

Face it, the Fed basically nationalized the stock market and the big banks.

Fri, 04/10/2015 - 17:26 | 5980438 Hype Alert
Hype Alert's picture

"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 mistake was all the arm waving about raising rates in the first place.  They can't.  They won't.  In addition to all the flat out wrong predictions Bernanke made, this was just another head fake from the FED.  Not even .25%  ZERO

Fri, 04/10/2015 - 22:50 | 5981228 chilli sauce
chilli sauce's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Fri, 04/10/2015 - 16:49 | 5980295 LawsofPhysics
LawsofPhysics's picture

From where I sit, The Fed is doing a pretty good job of destroying itself.

"Full faith and credit"

Fri, 04/10/2015 - 16:53 | 5980311 Mister Delicious
Mister Delicious's picture

Who owns the Fed? {edit: i.e. the stock in the constituent regional banks]

I'm seriously asking - I have never, once, seen anything that was current and reliable.

Fri, 04/10/2015 - 16:58 | 5980314 Thirst Mutilator
Thirst Mutilator's picture

 "Don't Fight the FED = DON'T FIGHT THE JEWS"

 

~~~

 

Junk my ass & I'll explain what I REALLY mean, [complete with HISTORICAL, & UNREFUTABLE, COMPILATIONS ATTACHED] by that...

 

Happy Friday bitchez!... NOW is as good a time as any to get the festivities started!

Fri, 04/10/2015 - 18:57 | 5980719 Thirst Mutilator
Thirst Mutilator's picture

2 HOURS LATER... So far nothing except CH1 with a piddly downvote, dearth & benign of intellectual reply...

Fri, 04/10/2015 - 20:59 | 5981000 weburke
weburke's picture

methinks you need to be a tad more edjumacated on the power structure. 

Fri, 04/10/2015 - 16:56 | 5980321 world_debt_slave
world_debt_slave's picture

one would think that being strung along so long that one would realise it.

Fri, 04/10/2015 - 17:07 | 5980366 lester1
lester1's picture

THE FED HAS A MONEY PRINTING MACHINE AND IS UNAUDITED

 

EVEN RON PAUL SAID, "THE FED CAN DO WHATEVER THEY WANT"

 

 

Fri, 04/10/2015 - 18:58 | 5980498 Thirst Mutilator
Thirst Mutilator's picture

because they're JEWS <I got a junk ABOVE, without rebuttal, HERE is your 2nd chance to ILLUMINATE the world as to your righteous cause>...

 

<AS ABOVE = BELOW>

Fri, 04/10/2015 - 17:07 | 5980368 davidalan1
davidalan1's picture

Fed is now resorting to stealing bull semen so you KNOW things are getting bad.

http://abcnews.go.com/Weird/wireStory/police-70k-bull-semen-stolen-minne...

Fri, 04/10/2015 - 17:31 | 5980460 Fun Facts
Fun Facts's picture

“While boasting of our noble deeds we're careful to conceal the ugly fact that by an iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.”

— Horace Greeley

Fri, 04/10/2015 - 17:53 | 5980546 SirBarksAlot
SirBarksAlot's picture

RIP, Aaron Russo.

https://youtu.be/0mtY0dLfK1Y

Fri, 04/10/2015 - 17:58 | 5980560 TrustbutVerify
TrustbutVerify's picture

Raise rates by 5 basis points.  5 basis points would send a loud message that any raises might be a very slow, and safe, slog. 

Sat, 04/11/2015 - 07:37 | 5981612 GetZeeGold
GetZeeGold's picture

 

 

5 basis points....on 18 trillion dollars debt?

 

Are you going to cut us a check for that?

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