Why Jim Cramer Is Wrong About The Fed And Interest Rates

Authored by Jesse Colombo via RealInvestmentAdvice.com,

On Wednesday, the Fed announced that it does not expect to raise interest rates for the rest of this year, which further confirms the complete dovish reversal of the Fed’s position from the fall of last year. The 20% stock market rout and pressure from President Donald Trump are the reason for the Fed’s flip-flop. Many market commentators – including CNBC’s Jim Cramer – cheered the Fed’s dovish shift:

“I thought that Jay was great [Wednesday],” Cramer told “Squawk Box, ” referring to Powell’s news conference at the conclusion of the central bank’s two-day policy meeting. “It’s not easy to start. You make your rookie mistakes, you come back. He’s a great guy. Anyone who knows him knows that he course corrected.”

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Throughout the fall of 2018, Cramer was criticizing Fed chairman Jerome Powell’s desire to normalize the Fed’s monetary policy after a decade of ultra-low interest rates and trillions of dollars worth of asset purchases to boost the economy and financial markets (ie., quantitative easing):

“Memo to Powell: keep listening. Be patient. Enjoy the employment gains. Let’s keep the strength going by waiting a little and not being too judgmental about rate hikes like some of your colleagues,” Cramer said.

The “Mad Money ” host reiterated his distaste in some Fed officials’ tendency to stick to traditional metrics when gauging how the economy is doing.

“How can you claim to be data-dependent if you’ve made up your mind before you see the data that you need one or two more rate hikes to get back to normal?” he asked. “Normal is where the data says you should go. Normal is the natural progression of jobs being created without a lot of inflation. Normal is not a percent.”

As I’ve said about President Trump, Jim Cramer is completely naive and misguided about the Fed and interest rates. The Fed’s ultra-loose monetary policies of the past decade have created an artificial economic boom including a dangerous bubble in stocks and other assets (read my explanation in Forbes).

Our economy is completely addicted to monetary stimulus and Trump and Cramer are advocating for the Fed to keep pumping more and more to keep the fake boom alive.

They do not realize that the more we try to put off the day of reckoning, the harder the economy is going to fall in the end.

The Austrian School economist Ludwig von Mises said it best in his book Human Action:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

As I wrote earlier this week, the Fed keeps stepping in to support the financial markets every time they stumble:

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While constantly supporting the stock market may seem like a good thing at first blush, it’s creating a massive stock market bubble that is becoming riskier with each intervention. The Fed has convinced investors and speculators that they can take virtually unlimited risk because the Fed will always have their backs. This moral hazard or Fed putis enabling risk to build up to such a high level that will eventually overwhelm the Fed’s ability to control it, which is when the ultimate crash will occur.

The Fed will throw everything (including the kitchen sink) at trying to prop up the wildly inflated stock market and economy to no avail. This desperate attempt to prop up the market and economy will entail printing ever-increasing amounts of dollars, which is what will lead to the currency crisis that economist Ludwig von Mises warned about in the quote above. By demanding that the Fed keeps interest rates low forever and never normalizing its monetary policy, Jim Cramer and President Trump are inadvertently asking for a currency and economic crisis that will be orders of magnitude worse than the one they are trying to push off now. It’s mind-boggling how people can rise to such high positions in government and the financial world and not understand basic economics – that’s why a crisis is guaranteed.

So, What Can You Do About It?

These are the things that we worry about for our clients, and we take into account when managing portfolios. Here are the guidelines that we discuss with our clients that may help you navigate a more volatile market in the future.

  • Understand that Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.

  • Check emotions at the door. You are generally better off doing the opposite of what you “feel” you should be doing.

  • Realize the ONLY investments you can “buy and hold” are those that provide an income stream with a return of principal function.

  • Know that market valuations (except at extremes) are very poor market timing devices.

  • Understand fundamentals and economics drive long term investment decisions – “Greed and Fear” drive short term trading.  Knowing what type of investor you are determines the basis of your strategy.

  • Know the difference: “Market timing” is impossible – managing exposure to risk is both logical and possible.

  • Investing is about discipline and patience. Lacking either one can be destructive to your investment goals.

  • Realize there is no value in daily media commentary – turn off the television and save yourself the mental capital.

  • Investing is no different than gambling – both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.

  • Most importantly, realize that NO investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

Gloomy Economic Outlook: The Fed Cuts The Growth Prospect For The U.S.

While there are plenty of experts out there who will tell us the economy is doing just fine and none of us should worry about a recession, the Federal Reserve slashed the economic growth prospect for the United States. The news seems bleak right now.

Federal Reserve chairman Jerome Powell has said that he doesn’t expect a recession, but he’s saying there will be an economic “slowdown.” According to CBS News, the Federal Reserve kept a key interest rate unchanged on Wednesday and said it doesn’t expect to hike rates for the rest of the year. This is quite a change from the course the Fed was on in December when the central bank expected two rate hikes. The Fed also expects the U.S. economy to expand 2.1%, which is lower than previous projections, which they assumed to be at 2.5%.

“We foresee some weakening, but we don’t see a recession,” Federal Reserve Chairman Jerome Powell said Wednesday in a press conference. In its policy statement, the Fed said that the job market remains “strong” but noted that “growth of economic activity has slowed” since late 2018. The Atlanta Federal Reserve Bank, which provides a so-called “nowcasting” tool to assess current growth, says the economy is growing only growing at a 0.4 percent in the first quarter of 2019.

The Fed also projects one quarter-point rate hike in 2020 and none in 2021, although that could all change. It will stop shrinking its bond portfolio in September as well. That move alone would help hold down long-term interest rates. The Fed’s pause in credit tightening is in response to slowdowns in the U.S. and global economies. It says that while the labor market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.”

But The Fed cannot fix credit exhaustion. 

Central Banks Prepare For A Slow Down In The Economy; But The Fed Can’t Fix This Crisis

Too many Americans are too far in debt to borrow any more money and that could present some major problems in the economy. With student loan debt, auto debt, and credit card debt at all-time highs, any interest rate hike could devastate a family living paycheck to paycheck, but it could also pop the “everything bubble” many analysts have warned about for several months now.

Living Paycheck To Paycheck: The New Crisis And Normal For The American Middle Class

Despite the recent dip in economic growth, Powell said that U.S. “economic fundamentals are still very strong,” adding that Fed officials “see a favorable outlook for this year.” They expect the unemployment rate to drop from 3.8% to 3.7%.

 

 

Gloomy Economic Outlook: The Fed Cuts The Growth Prospect For The U.S.

While there are plenty of experts out there who will tell us the economy is doing just fine and none of us should worry about a recession, the Federal Reserve slashed the economic growth prospect for the United States. The news seems bleak right now.

Federal Reserve chairman Jerome Powell has said that he doesn’t expect a recession, but he’s saying there will be an economic “slowdown.” According to CBS News, the Federal Reserve kept a key interest rate unchanged on Wednesday and said it doesn’t expect to hike rates for the rest of the year. This is quite a change from the course the Fed was on in December when the central bank expected two rate hikes. The Fed also expects the U.S. economy to expand 2.1%, which is lower than previous projections, which they assumed to be at 2.5%.

“We foresee some weakening, but we don’t see a recession,” Federal Reserve Chairman Jerome Powell said Wednesday in a press conference. In its policy statement, the Fed said that the job market remains “strong” but noted that “growth of economic activity has slowed” since late 2018. The Atlanta Federal Reserve Bank, which provides a so-called “nowcasting” tool to assess current growth, says the economy is growing only growing at a 0.4 percent in the first quarter of 2019.

The Fed also projects one quarter-point rate hike in 2020 and none in 2021, although that could all change. It will stop shrinking its bond portfolio in September as well. That move alone would help hold down long-term interest rates. The Fed’s pause in credit tightening is in response to slowdowns in the U.S. and global economies. It says that while the labor market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.”

But The Fed cannot fix credit exhaustion. 

Central Banks Prepare For A Slow Down In The Economy; But The Fed Can’t Fix This Crisis

Too many Americans are too far in debt to borrow any more money and that could present some major problems in the economy. With student loan debt, auto debt, and credit card debt at all-time highs, any interest rate hike could devastate a family living paycheck to paycheck, but it could also pop the “everything bubble” many analysts have warned about for several months now.

Living Paycheck To Paycheck: The New Crisis And Normal For The American Middle Class

Despite the recent dip in economic growth, Powell said that U.S. “economic fundamentals are still very strong,” adding that Fed officials “see a favorable outlook for this year.” They expect the unemployment rate to drop from 3.8% to 3.7%.

 

 

Stock futures higher as Fed kicks off policy meeting

March 19, 2019

By Medha Singh

(Reuters) – U.S. stock futures rose slightly on Tuesday as investors anticipated a more accommodative policy stance from the U.S. Federal Reserve in a two-day policy meeting this week.

A flurry of downbeat economic data this month has supported market expectations that the Fed may reinforce a halt to further rises in interest rates.

The Fed concludes its deliberations with a news conference on Wednesday.

Investors will also be watching out for the central bank’s “dot plot,” a diagram showing individual policymakers’ rate views for the next three years, along with details on its plan to reduce holdings in bonds.

Traders currently expect no rate hikes this year, and are even building in bets for a rate cut in 2020.

Optimism that the Fed will remain less aggressive in raising rates and hopes of a resolution to a bitter trade dispute between the U.S. and China helped the markets claw back most of their losses from late last year.

The benchmark S&P 500 hovers at a five-month high and is just 3.5 percent away from its September record closing high.

At 7:04 a.m. ET, Dow e-minis were up 102 points, or 0.39 percent. S&P 500 e-minis were up 11.25 points, or 0.4 percent and Nasdaq 100 e-minis were up 27 points, or 0.37 percent.

Technology and financial stocks helped Wall Street’s three main indexes rise on Monday, the benchmark index and the tech-heavy Nasdaq’s fifth rise in last six sessions.

The blue-chip Dow’s advance has been hindered by Boeing Co as the world’s largest planemaker faces increased scrutiny in the wake of two deadly crashes of its 737 MAX aircraft in five months.

Boeing shares slipped 0.6 percent in premarket trading on Tuesday after shedding about 12 percent since the March 10 plane crash in Ethiopia.

Chip designer Nvidia Corp jumped 1.6 percent on partnering with Softbank Group Corp and LG Uplus Corp to deploy cloud gaming servers in Japan and Korea later this year.

In economic news, data at 10 a.m. ET is expected to show new orders for U.S.-made goods rose 0.3 percent in January after edging up 0.1 percent the month before.

(Reporting by Medha Singh in Bengaluru; Editing by Shounak Dasgupta)

Chairman Powell’s “Wait and See” Approach May Let Price Inflation “Run Hot”

from Birch Gold Group: Once you heat up a pan on a stove top, the pan will stay hot as long as the stove top continues to provide heat, even if you ignore the stove top. Right now, CPI inflation since 2011 is providing “heat” like a stove top. Future rate hikes are the “pan,” […]

The post Chairman Powell’s “Wait and See” Approach May Let Price Inflation “Run Hot” appeared first on SGT Report.

Stock futures flat amid Brexit uncertainty; Boeing falls again

March 13, 2019

By Amy Caren Daniel

(Reuters) – U.S. stock index futures treaded water on Wednesday, as investors took a cautious stance ahead of a clutch of domestic economic data and another make-or-break parliamentary vote on Brexit, which could send a shock through global markets.

British lawmakers crushed Prime Minister Theresa May’s European Union divorce deal on Tuesday, forcing parliament to decide within days whether to back a no-deal Brexit or seek a last-minute delay.

Lawmakers will now vote at 3:00 p.m. ET (1900 GMT) on whether Britain should quit the world’s biggest trading bloc without a deal, a scenario that business leaders warn would bring chaos to markets and supply chains.

The S&P 500 and Nasdaq rose on Tuesday after tame inflation data underscored the Federal Reserve’s dovish stance on rate hikes, but the Dow ended down as Boeing Co’s shares sank for a second day after one of its planes crashed in Ethiopia.

Boeing was down more than 2 percent in premarket trading on Wednesday after more countries grounded the company’s best-selling line of jets following the crash.

On the trade front, U.S. Trade Representative Robert Lighthizer said the United States and China may be in the final weeks of discussions to hammer out a deal to ease their tit-for-tat tariffs dispute.

At 6:51 a.m. ET, Dow e-minis were down 2 points, or 0.01 percent. S&P 500 e-minis were up 4 points, or 0.14 percent and Nasdaq 100 e-minis were up 10.75 points, or 0.15 percent.

Rite Aid Corp jumped 19.4 percent after the drug store chain operator said its chief executive officer would exit as part of a revamp of its leadership and that it would slash about 400 jobs.

A report on durable goods orders is expected to show a 0.5 percent drop in January from a 1.2 percent rise the month before, while Labor Department data is expected to show producer prices edged up 0.2 percent in February from prior month’s 0.1 percent dip. Both sets of data are due at 8:30 a.m. ET.

(Reporting by Amy Caren Daniel and Medha Singh in Bengaluru; Editing by Anil D’Silva)

Powell: Fed not in ‘any hurry’ to change rates amid global risks – tv

March 10, 2019

WASHINGTON (Reuters) – Federal Reserve Chairman Jerome Powell said on Sunday the U.S. central bank does “not feel any hurry” to change the level of interest rates again as it watches how a slowing global economy affects local conditions in the United States.

Rates are currently “appropriate,” Powell said in a wide-ranging interview with CBS’s 60 Minutes news show in which he called the current rate level “appropriate” and “roughly neutral,” meaning it is neither stimulating or curbing the economy.

An economic slowdown in China and Europe, and other global issues, currently pose the largest risks to an otherwise healthy U.S. outlook, he said, though even in those place he felt “very negative outcomes” were not likely.

The interview, eight years after former chair Ben Bernanke appeared on the same show to discuss the Fed’s aggressive actions during the deep 2007 to 2009 recession, crossed a range of issues, including the health of the financial system and President Donald Trump’s aggressive criticism of central bank rate hikes.

“The financial crisis did a great deal of damage to many people’s lives. And, of course, not all of them will be made whole,” Powell said. “We tried very hard to learn the lessons of what went wrong and to build a much stronger, more resilient, better capitalized financial system so that it will be more resilient to the kinds of shocks that happen.”

Regarding the president, Powell said that it would not be “appropriate” for him to comment on Trump’s remarks, which included calling the Fed “crazy.”

But he did say that he did not think the president, by law, had the power to fire him over a policy dispute.

(Reporting by Howard Schneider; Editing by Marguerita Choy)

Here’s What Fed Chair Powell Will Say On “60 Minutes”

A decade after Ben Bernanke appeared on “60 Minutes”, vowing that the Fed could easily crush inflation, as it could “raise interest rates in 15 minutes”, of course with the occasional “pause” along the way should the S&P dip by 20% or so, current Fed Chairman Jerome Powell will follow in his footsteps on Sunday night, when surrounded by former Fed Chairs Bernanke and Yellen, he will try to reach beyond the Fed’s traditional audience of markets, journalists and lawmakers to counter the attacks from President Trump, even after the Fed’s paused on raising interest rates, said Sarah Binder, a professor of political science at George Washington University, quoted by MarketWatch.

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CBS released a photo from Powell’s “60 Minutes” appearance where he is flanked by Janet Yellen and Ben Bernanke.

“He wants to counter the president’s message that policy is all wrong,” Binder said.

Binder said she was struck by the still photo of the “60 Minutes” interview that shows Powell alongside his two predecessors Janet Yellen and Ben Bernanke.

“This puts a human face on the central bank. It says, ‘we’re the Fed and we’re here to help,’” Binder said.

Bernanke also faced criticism when he went on “60 Minutes” in March 2009. The Fed was facing concerted attacks by lawmakers and populist “End the Fed” groups, who considering the record wealth divide in the US created by the central bank, were spot on.

Robert Brusca, chief economist at FAO Economics, said Powell may also try to restore some enthusiasm in the outlook for the economy, especially in light of the collapse in Q1 GDP estimates.

Ironically, Trump was right in calling for an end to the Fed’s rate hikes, as the Fed itself confirmed, albeit indirectly. In December, the Fed had penciled in two interest-rate hikes into its dot plot. Then in January, Powell – once again flanked by Bernanke and Yellen, almost as if in hopes of deflecting attention, reversed course and said he didn’t know if the next move would be rate hike or a cut.

The Fed chairman wants to make sure his wait-and-see attitude “isn’t taken as an indication that something is wrong with the economy,” Brusca said although considering the near record plunge in retail sales, the sharp drop in payroll growth and the declining GDP estimates for the first quarter.

Meanwhile, Tim Duy of the University of Oregon said the Fed chairman wants to push back on the idea that this policy switch was due to Trump’s pressure.

“It is no secret that last fall the president was harping on the Fed and Powell and suddenly it looks like the Fed has a complete change of heart,” Duy said.

“It would be easy [for the casual observer] to take away a message that Fed caved to Trump pressure,” Duy said.

Alternatively, it would be just as easy for the casual observer to conclude that Trump had a better grasp of the economy than the Fed, much to Yellen’s chagrin.

Of course, as Mizuho’s chief economist Steven Ricchiuto, said the recent weak data shows the Fed made the correct call to move to the sidelines.

“Their [tightening] policies were much too quick. Trump called them out on it,” adding that it wasn’t politics that caused the Fed to change. “They reassessed the situation and realized they made a mistake,” he said.

* * *

In any case, according to an early look at what Powell will say courtesy of Bloomberg, the Fed chair will repeat that interest-rate policy “in a very good place right now”, and that the Fed is in no hurry to change rates.

Powell will say that the Fed won’t overreact to inflation modestly above 2%, i.e., the Fed will accept an inflationary overshoot which is good news for markets as it means the Fed won’t rush to hike even if inflation keeps rising (as it has been, or rather soaring if measured accurately), and will say that “the U.S. outlook is a positive one.”

Powell will say that financial conditions are generally healthy, credit spreads and stock market are at normal levels.

More importantly, the Fed chair will say that he didn’t stop rate hikes because of pressure from President Donald Trump, and that he plans to serve his full four-year term, adding that Trump can’t fire him while declining to comment on Trump’s criticism of the central bank.

On deciding the direction of interest rates, he says “we’ll be looking at a range of data. For here domestically, we’ll be looking at growth, we’ll be looking at the state of the labor market, job creation, wages and that kind of thing. We’ll also be looking at inflation, of course. And abroad, we’ll be looking to see how foreign growth is evolving, particularly in China as I mentioned and in Europe.”

In other words, Powell will once again use the great deflection routine, claiming that the US is doing great, and it’s everyone else that is at fault for the Fed “pausing.”

Asia cheered as Trump delays tariff deadline

February 24, 2019

By Wayne Cole

SYDNEY (Reuters) – Asian share markets looked well set on Monday after U.S. President Donald Trump said he would delay a planned increase on Chinese imports as talks between the two sides were making “substantial progress”.

The Australian dollar, a liquid proxy for China investments, got a mild lift from the news and further gains were expected for the yuan.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.14 percent to the highest since October, and is up 10 percent for the year so far.

Futures pointed to a firmer opening for Japan’s Nikkei, while E-Mini futures for the S&P 500 edged up 0.3 percent.

Shanghai blue chips are already up almost 17 percent so far this year, helped in part by Beijing’s efforts to pump new credit into the financial system.

Trump on Sunday tweeted he would push back the March 1 deadline for higher tariffs and looked forward to a meeting with Chinese President Xi Jinping when a deal was sealed.

U.S. and Chinese negotiators were discussing the thorny issue of how to enforce a potential trade deal on Sunday after moving ahead on structural issues, a source said.

Trump tweeted progress had been made on intellectual property, technology transfers, agriculture, services and currencies.

Hopes for an end to the trade standoff had helped the S&P 500 post its highest close since Nov. 8 on Friday, while the Dow and Nasdaq boasted a ninth straight week of gains.

Stocks have also been underpinned by a dovish shift from the U.S. Federal Reserve which has set aside rate hikes for now. Fed Chairman Jerome Powell will testify on U.S. monetary policy on Tuesday and Wednesday.

“Expect him to emphasize patience, stating that any more hikes this year would likely require some pickup in inflation,” wrote analysts at TD Securities in a note.

“On the balance sheet, he will not front-run the FOMC and announce anything new, but repeat that the Committee expects the runoff could end later this year.”

In currencies, the trade news deflated the safe-haven yen a little and lifted the dollar to 110.76. The euro was flat at $1.1336 and still well within the $1.1213/1.1570 trading range that has held since mid-October.

Against a basket of currencies the dollar was a fraction firmer at 96.514.

Sterling was idling at $1.3061 as markets awaited some clarity on where Brexit talks were heading.

Prime Minister Theresa May put off a vote on her Brexit deal until as late as March 12 – just 17 days before Britain is due to leave the EU – setting up a showdown this week with lawmakers who accuse her of running out the clock.

The Telegraph reported May was considering whether to delay Britain’s exit for up to two months.

In commodity markets, spot gold edged up a touch to $1,328.11 per ounce.

Oil prices were near their highest since mid-November, despite record output from the United States.

U.S. crude was last off 9 cents at $57.17 a barrel, while Brent crude futures eased 15 cents to $66.97.

(Editing by Richard Pullin)

Japanese firms see flat business spending amid trade frictions, tax hike jitters

February 19, 2019

By Tetsushi Kajimoto

TOKYO (Reuters) – Business investment in Japan has been a rare bright spot in the world’s third-largest economy but that may now be fading amid anxiety over an upcoming sales tax hike and global trade frictions, a Reuters monthly corporate survey showed.

Just over half, or 56 percent, predict domestic investment in factories and equipment will be flat in the next fiscal year that starts in April, while 30 percent project an increase and 14 percent a decline, the survey of more than 250 companies in Japan found.

The outlook for foreign capital expenditure was even less optimistic: two-thirds of firms expect that to remain unchanged while 19 percent see a rise and 15 percent a drop.

Figures out on Monday suggested a slump in demand may have already started. Overseas orders for Japanese machinery posted their biggest fall in more than a decade in December and manufacturers expect orders to sink further as trade friction weighs on global demand.

“We have no choice but to become cautious when we take into account the global slowdown,” a manager of a transport equipment manufacturer said in the survey. Respondents’ answers to questions and comments in the survey are anonymous.

“There’s growing uncertainty in our overseas outlook due to the U.S.-China trade war and Brexit,” a transportation firm manager wrote.

The darker outlook comes after upbeat results from the December “tankan” survey, which showed that major corporations plan to raise investment by an average 14.3 percent for this fiscal year, the highest since 1990, at the end of Japan’s Bubble Era.

Despite gloom surrounding the external environment, more than two-thirds of respondents want Japan’s proposed tax hike to 10 percent from 8 percent, scheduled for October, to go ahead, the survey showed.

“The sales tax must be raised this time. Japan’s public finances will collapse sooner or later, which would throw the economy into turmoil, if the current balance between revenue and expenditure is left unattended,” said an electric machinery maker manager.

Japan’s mounting public debt, at more than twice the size of its economy, is the industrial world’s heaviest.

Additionally, many firms expect to make investment in cutting-edge technologies such as artificial intelligence and the Internet of Things to expand. Popular investments include labor-saving efforts, boosting capacity and research and development, the Feb. 1-14 poll showed.

STAGNANT WAGES

Jitters over trade friction and the tax hike are also keeping a lid on wage gains.

Some 51 percent of companies polled expect wages to rise around 1.5-2 percent at annual spring wage talks between unions and companies. That’s lower than last year’s 2.07 percent average across all Japanese industries.

One-third of firms see wage hikes of under 1.5 percent and the remainder expect them to rise 2.1 percent or more.

Since taking office in late 2012, Prime Minister Shinzo Abe has been pushing companies to raise wages by around 2 percent to stimulate growth, and many companies have acquiesced.

Companies are wary of raising wages, even though many have been raking in hefty profits, because it commits them to higher fixed personnel costs at a time of uncertainty.

“Japanese firms are probably turning cautious about wage hikes out of fear that the U.S.-China trade friction may cause a deteriorating economic outlook,” a manager of a machinery maker wrote in the survey, compiled for Reuters by Nikkei Research.

“Even though the outlook is murky, we hope to raise wages to an extent that would help employees keep their living standards and cope with the October tax hike,” another machinery maker manager wrote.

BETTER WORKING CONDITIONS

Steps to improve working conditions will also be in focus during this year’s labor talks, as part of Abe’s reforms to curb Japan’s notoriously long work hours and narrow the pay and benefit gap between salaried employees and contract or part-time workers.

The survey showed that half of Japanese firms expect overall personnel costs to increase in the coming fiscal year as they seek to encourage flexible working schedules and develop talent. Some 45 percent see personnel costs unchanged, while 5 percent see lower costs.

“Personnel costs will rise as curbing working hours per employee will force us to hire more people,” a manager at an electrical machinery maker wrote.

Japan’s retirement age is also seen as an issue given the aging and declining population. Currently, many firms require full-time employees to retire at 60, with an option of five more years’ work for reduced pay and terms, however, the government is considering raising the age at which people would be eligible to receive pension benefits to 75 eventually.

When asked the age to which firms could raise their employees’ retirement, 89 percent chose 65, and the rest opted for 70.

(Reporting by Tetsushi Kajimoto; additional reporting by Izumi Nakagawa; Editing by Malcolm Foster and Sam Holmes)

Peter Schiff: “This Is The Beginning Of The End” For The Economy

Authored by Mac Slavo via SHTFplan.com,

Peter Schiff, the President and CEO of Euro Pacific Capital, and one of the few who predicted the 2008 Great Recession before it happened has said that what we are experiencing now is “the beginning of the end.” Schiff made his comments during his keynote speech at the Vancouver Resource Investment Conference.

The economic guru says that the Federal Reserve has made the decision to halt interest rate hikes in order to attempt to save the flailing stock market – the key indicator for far too many of how “healthy” the economy is at current. According to Seeking Alpha, the markets responded to the Fed’s decision in a positive manner, leading many to think we are “out of the woods” and no longer in danger of a recession.

However, Peter traces the moves of the Federal Reserve all the way back to the first rate hike of December 2015 and shows how the central bank has put the United States on a path toward a financial crisis that will be bigger than 2008. Peter insists he’s been right about what would happen all along, it’s just taken us a little longer to get to the actual financial disaster than he expected.

“The reason that I originally said that I did not expect the Fed to raise rates again was because I knew that raising rates was the first step in a journey that they could not finish, that in their attempt to normalize rates, the stock market bubble would burst and the economy would reenter recession.

Normalizing interest rates when you’ve created an abnormal amount of debt is impossible.

I knew all along that at some point, that would be it, you know, the straw that breaks the camel’s back. I didn’t know how many rate hikes the bubble economy could take, but I knew there was a limit. And I still knew that there’s no way they were ever going to get back up to normal or neutral. Whatever that number is, it ain’t 2%.” –Peter Schiff

Schiff also cautioned against more quantitative easing (money printing.)

We’ve just created a massive amount of inflation. Quantitative easing is just a euphemism for inflation. That’s what inflation is – expanding the money supply. Printing up money and buying government bonds is the definition of inflation. The Fed has been inflating like crazy. –Peter Schiff

Unfortunately, people will look for the central bank to save them from this disaster the central bank has created. But there’s nothing the Fed can do to help anyone once the debt based economy implodes and the sooner people realize that, the better off they will be and the more likely they are to prepare themselves and their families for what the Central Bank has planned.

People are going to realize that we checked into the monetary roach motel that I talked about from the beginning and that there’s no way out, and then the dollar is going to fall like a stone.

When they find out that it’s never over and it didn’t work, then there’s going to be nothing propping up the dollar and it’s going to drop like a stone, the price of gold is going to take off, and the recession that we’re entering into, which is going to be an inflationary recession, is going to be worse than what we now call the Great Recession.

Maybe it’s taken longer than we might have thought to play out, but this is the beginning of the end.” Peter Schiff

Peter Schiff: ‘This Is The Beginning Of The End’ For The Economy

Peter Schiff, the President and CEO of Euro Pacific Capital, and one of the few who predicted the 2008 Great Recession before it happened has said that what we are experiencing now is “the beginning of the end.” Schiff made his comments during his keynote speech at the Vancouver Resource Investment Conference.

The economic guru says that the Federal Reserve has made the decision to halt interest rate hikes in order to attempt to save the flailing stock market – the key indicator for far too many of how “healthy” the economy is at current. According to Seeking Alpha, the markets responded to the Fed’s decision in a positive manner, leading many to think we are “out of the woods” and no longer in danger of a recession.

However, Peter traces the moves of the Federal Reserve all the way back to the first rate hike of December 2015 and shows how the central bank has put the United States on a path toward a financial crisis that will be bigger than 2008. Peter insists he’s been right about what would happen all along, it’s just taken us a little longer to get to the actual financial disaster than he expected.



 

“The reason that I originally said that I did not expect the Fed to raise rates again was because I knew that raising rates was the first step in a journey that they could not finish, that in their attempt to normalize rates, the stock market bubble would burst and the economy would reenter recession.

Normalizing interest rates when you’ve created an abnormal amount of debt is impossible.

I knew all along that at some point, that would be it, you know, the straw that breaks the camel’s back. I didn’t know how many rate hikes the bubble economy could take, but I knew there was a limit. And I still knew that there’s no way they were ever going to get back up to normal or neutral. Whatever that number is, it ain’t 2%.” –Peter Schiff

Schiff also cautioned against more quantitative easing (money printing.)

We’ve just created a massive amount of inflation. Quantitative easing is just a euphemism for inflation. That’s what inflation is – expanding the money supply. Printing up money and buying government bonds is the definition of inflation. The Fed has been inflating like crazy. –Peter Schiff

Unfortunately, people will look for the central bank to save them from this disaster the central bank has created. But there’s nothing the Fed can do to help anyone once the debt based economy implodes and the sooner people realize that, the better off they will be and the more likely they are to prepare themselves and their families for what the Central Bank has planned.

People are going to realize that we checked into the monetary roach motel that I talked about from the beginning and that there’s no way out, and then the dollar is going to fall like a stone.

When they find out that it’s never over and it didn’t work, then there’s going to be nothing propping up the dollar and it’s going to drop like a stone, the price of gold is going to take off, and the recession that we’re entering into, which is going to be an inflationary recession, is going to be worse than what we now call the Great Recession.

Maybe it’s taken longer than we might have thought to play out, but this is the beginning of the end.” Peter Schiff

 

The Great GOP Tax Cut Heist a Year Later: Federal Deficit Ballooning to More than a Trillion Dollars Annually

The Trump promoted GOP scam was all about benefitting corporate interests and high-net-worth households.

Wage hikes attributed to tax cuts have been mostly hype. Big business gained hundreds of billions of dollars from the law – used mostly for stock

The post The Great GOP Tax Cut Heist a Year Later: Federal Deficit Ballooning to More than a Trillion Dollars Annually appeared first on Global Research.

Fed to finalize plans to end balance sheet runoff ‘at coming meetings’: Mester

February 12, 2019

CINCINNATI (Reuters) – The Federal Reserve will chart plans to stop letting its bond holdings roll off “at coming meetings,” Cleveland Fed President Loretta Mester said on Tuesday, signaling another major policy shift for the Fed after pausing interest rate hikes.

“At coming meetings, we will be finalizing our plans for ending the balance-sheet runoff and completing balance-sheet normalization,” Mester said in remarks prepared for delivery in Cincinnati. “As we have done throughout the process of normalization, we will make these plans and the rationale for them known to the public in a timely way because transparency and accountability are basic tenets of appropriate monetary policymaking.”

The Fed built up its balance sheet in the aftermath of the 2007-2009 financial crisis, buying trillions of dollars of bonds in an effort to push down longer-run borrowing costs after it slashed short-term borrowing costs to near zero.

It began retreating from its crisis-era policy in 2015, first by raising interest rates and then in October 2017 by allowing its balance sheet to slowly shrink by no longer replacing all maturing bonds with an equal amount of new bonds. The monthly runoff was capped at $50 billion to minimize any impact on financial markets.

But late last year, prominent investors took to blaming the Fed’s balance sheet runoff for market volatility.

President Donald Trump took up the drum beat against the program in December, tweeting at the Fed to “stop with the 50 B’s,” a reference to the $50 billion monthly cap.

Fed Chairman Jerome Powell said in late January that the U.S. central bank could wind down its asset-shedding operation sooner than thought and end that process with a bigger balance sheet than earlier anticipated. The Fed also said it would be “patient” in determining whether to raise rates further.

In recent weeks policymakers have signaled other changes may be in the offing.

On Friday, San Francisco Fed President Mary Daly said policymakers were considering whether they to use bond purchases not just as a last resort in a financial crisis but perhaps even before the Fed has done as much as it can with rate cuts alone.

(Reporting by Trevor Hunnicutt; Editing by Leslie Adler)

French Gov’t Roll out ‘Anti-Riot’ Law to Ban ‘Troublemakers’ from Protesting

https://www.rt.com/news/450735-france-riot-law-yellow-vests/

The French government are preparing to roll out a new “anti-riot” law designed to ban “troublemakers” from participating in protests.

The French National Assembly overwhelmingly approved the law by 387 to 92, despite claims that it will curb the civil liberties of French citizens.

Rt.com reports: The anti-riot law makes it illegal for protesters to hide their faces, gives law enforcement more powers to remove potential “troublemakers” from rallies, and allows the authorities to ban some individuals from even showing up at demonstrations.

That last provision has caused objections from even some members of President Emmanuel Macron’s own party, who called it an attack on the fundamental freedom to protest.

French Interior Minister Christophe Castaner, who presented the bill in the parliament, has argued that it was about “stopping the brutes” and showing “zero tolerance for violence.”

Under the new law, those who “participate in disorder” or even find themselves in the vicinity of a violent demonstration on a public road may be punished by a year in prison and a 15,000 euro fine.

The bill will be considered by the Senate on March 12 as the government of President Emmanuel Macron hopes for its swift adoption into law as the country remains gripped by the Yellow Vest protests.

Thousands of people wearing high-visibility jackets have been protesting across France every weekend since November. The rallies, which were ignited by government-proposed fuel tax hikes but quickly morphed into broader discontent with Macron’s policies, frequently got out of control.

The demonstrators in Paris and other cities destroyed property, torched cars, blocked roads and clashed with police. The authorities haven’t hesitated to apply violence to suppress the rioters, putting tear gas, water cannons and non-lethal guns to use and seriously injuring dozens of people.

Video: Yellow Vest Protest in Paris: Act XII

Yellow Vest protesters call for a new demonstration in Paris on Saturday, February 2, the twelfth in a row since the movement has emerged in November 2018, after French President Emmanuel Macron announced hikes in fuel taxes to reportedly encourage

The post Video: Yellow Vest Protest in Paris: Act XII appeared first on Global Research.

Take Five: Dogs and Pigs – World markets themes for the week ahead

February 2, 2019

(Reuters) – Following are five big themes likely to dominate the thinking of investors and traders in the coming week and the Reuters stories related to them.

GONE TO THE DOGS

Investors burnt in the 2018 stock market rout will be happy to put the Year of the Dog behind them. Instead, the end of the Chinese Lunar New Year holiday will usher in the Year of the Pig, a symbol of wealth and prosperity.

The first month of the Gregorian calendar may augur well, too. The $4 trillion MSCI world stocks index just enjoyed the best start to a year since the benchmark began in 1988. The question is: Can the Pig help global equities sustain this stellar run?

Some bargain hunting and short-covering were to be expected after December’s historic rout. Hopes that the trade spat between Washington and Beijing may ease and signs of a pause in U.S. interest rate hikes also helped. But a major issue behind the selloff – China’s cooling economy – has not gone away.

What’s more, investors obsessing over whether the global economy is sliding towards recession are heading into February starved of crucial macroeconomic data that would normally guide them.

China will be shut for a week for the Spring Festival. That may drain global financial markets of some liquidity. On the data front, Beijing tends to combine some industrial activity data for the first two months to prevent a skew in the numbers.

In the United States, the 35-day government shutdown that ended a week ago has complicated the release and interpretation of macroeconomic data for the world’s biggest economy.

Brace for more black holes in spring: In an unprecedented move, Japan will close its stock and bond markets for a 10-day holiday in April to mark the ascension of a new emperor.

(Graphic: All aboard the stocks express – https://tmsnrt.rs/2Ba7t8X)

BOE-ING

The UK parliament’s Jan. 29 rejection of efforts to delay Brexit has subtly raised the risk of Britain leaving the EU on March 29 with no deal in place on their future relations. Most still expect a last-minute agreement. But money markets have cut the probability of a Bank of England December interest rate rise to around 55 percent, versus 62 percent a week ago.

The BOE’s Feb. 7 meeting may not offer much clarity. Rates last went up in August 2018, and the next move likely hinges on how Brexit plays out. Governor Mark Carney has been unequivocally negative about the impact of a no-deal Brexit, warning of tumbling house prices and a sterling slide that fans inflation.

Most data indeed shows a very mixed picture for Britain’s economy. GDP may grow 1.5 percent this year and inflation is just above the 2 percent target. Manufacturing is slowing and businesses are stockpiling goods. A smooth exit from the EU will see the BOE tighten policy in Q3, analysts predict. But what if Brexit is disorderly? Carney has said the BOE may not be able to rescue the economy with rate cuts and may in fact hike rates to head off a sterling slump.

(Graphic: No-deal Brexit probabilities – https://tmsnrt.rs/2sY1Whz)

SHUTDOWN OVER, TRUMP SPEECH ON

On Tuesday, President Donald Trump will deliver the State of the Union address before Congress – a week late after House Speaker Nancy Pelosi yanked the original invitation during their showdown over the government shutdown.

Trump looks sure to keep up the pressure for the border wall and may renew calls for infrastructure spending. Even with Wall Street focused on upcoming company results, including Alphabet and General Motors, the annual address has the potential to move markets.

While the S&P 500 rose 0.05 percent the day after Trump’s speech last year, it jumped 1.37 percent after his 2017 inaugural address, its second largest gain after the 1.51 percent rise that followed George W. Bush’s January 1991 message.

In fact, big market moves that followed State of the Union addresses in the past have tended to be downward.

Since 1965, when Lyndon Johnson gave the first televised State of the Union address, the S&P500 has fallen 1 percent or more the following day on 12 occasions. The biggest loss came after Bill Clinton’s 2000 speech when it fell 2.75 percent. The market rose more than 1 percent only four times.

Initial reactions are not necessarily telling, however. Last year Trump addressed the nation days after the S&P hit record highs so its next-day firmness was unremarkable. But no one knew a 10 percent-plus correction had begun.

(Graphic: Wall Street eyes State of the Union address – https://tmsnrt.rs/2TpicDM)

RATES DOWN UNDER

With China on holiday for Lunar New Year, the spotlight is on its Asian neighbors. Having enjoyed its boom, they are now enduring the fallout from its slowdown.

In Australia, a common proxy market for Chinese risk due to their trade links, China’s slowdown has translated into a run of grim economic data. Those may lead the Reserve Bank of Australia to signal at its Feb. 5 meeting that interest rates will stay at 1.5 percent until well into 2021.

Until now, the RBA has been doggedly optimistic, insisting its next rate move will be up. But recent dismal readings on the economy have led markets to scrap forecasts for a policy tightening; instead some are pricing in a cut.

The shift is unsurprising. Beijing is engaging in stimulus while the U.S. Fed has signaled a pause in rate increases. That in turn may have turned the rate-tightening tide across the rest of the world, including Australia.

(Graphic: Australia’s jobless rate not low enough to stoke wage growth, inflation – https://tmsnrt.rs/2t05L5W)

READY TO TURN?

Last year’s surge in global borrowing costs and the dollar got emerging markets sweating, forcing many central banks to jack up interest rates to bolster their flagging currencies. Now there are signs of relief: Net interest rate hikes across a group of 38 developing economies showed just one increase in January, compared with 11 in November.

Analysts predict India will start its policy turnaround on Thursday, shifting its stance to “neutral” with rate cuts expected by mid-year.

The Philippines meanwhile looks certain to leave rates on hold for a second straight meeting on Thursday, having paused the tightening cycle in December after five straight hikes.

Poland’s central bank is due to announce its decision on Wednesday, with Mexico, Romania and the Czech Republic scheduled for Thursday. Brazil may be the exception; it publishes its interest rate on Wednesday and could signal rate hikes in the second quarter.

(Graphic: Shifting gears – https://tmsnrt.rs/2CTbsIU)

(Reporting by Alden Bentley in New York, Marius Zaharia in Hong Kong, Josephine Mason, Sujata Rao, Karin Strohecker and Ritvik Carvalho in London; Editing by Hugh Lawson)

An Obituary To Fed Credibility

Authored by Sven Henrich via NorthmanTrader.com,

As with many terminal patients the initial hope is that aggressive treatment would work and cure the patient. But when the one time emergency round of drugs didn’t cure the patient additional drugs were needed and turned the patient into a hopeless junkie. After multiple injections a sense of dread was making the rounds. QE1 did not cure the patient, QE 2 and 3 were required with a little twist here and there thrown in. But the Fed doctors kept promising all would be well and the addiction could be stopped and the patient returned to normal.

And so it looks promising for a while. There was that scary flare up in 2016 when the patient regressed and the normalization had to be put on hold, but then a miracle drug came along called Tax Cut and suddenly it seemed as if the removal of drugs from the system could be accelerated.

So jubilant and optimistic were the Fed doctors that they promised further rounds of withdrawal and kept pointing to their dot plot of normalization.

Yet here we are, a mere 3 months later and the Fed doctors are at a loss again. Unable and unwilling to admit to the patient the true nature of the disease the Fed doctors once again decided to stop all withdrawal of the drugs, worse, they indicated they may have to administer new drugs to come. The patient begged for more drugs and the Fed doctors absolved themselves of their hippocratic oath and capitulated once again to the patient’s scream for another high, a scream only drowned out by the dying sigh of the Fed’s credibility, the initial casualty in this war on monetary drug dependency.

For it is true, the Fed doctors failed to wean off the patient:

Because deep down everybody knows, the Fed is the market’s bitch:

It’s not a secret, everybody knew all along:

But now Jay Powell has made it official and killed off the Fed’s credibility in the process.

It’s probably just as well. It’s been painful to watch as everybody knew the probability of survival was low. It was a slow death. And nobody wants to see suffering longer than needed and everybody knew it anyways.

As to the patient? Well, he’s back on the drip, smiling at the prospect of his final fix. The 10 year addiction never ended and the patient remains uncured. Yet the patient can’t get a new high without new drugs and so the current satisfaction at seeing the drip may turn into a great disappointment first before the new drugs finally arrive. See the Fed doctors have been withholding a vital piece of information from the patient: We can’t cure you, we can only get you hooked on drugs to make you feel better. In medical terms that’s called malpractice, which typically kills off the credibility of any medical professional. It shouldn’t be any different for a central bank. And it isn’t.

*  *  *

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Peter Schiff: “The Recession Is A DONE DEAL” Thanks To The Fed’s Interest Rate Hikes

In his latest podcast, financial expert Peter Schiff said that what we’re seeing right now in the economic climate is a typical bear market correction and a recession is right around the corner. Schiff said that optimism over a trade deal with China won’t stop the markets from going into recession.

According to Seeking Alpha, pundits on CNBC emphasized that the Dow has risen out of “correction” territory, meaning it is no longer 10% below its highs. They blasted this all day Friday. But Schiff took issue with this analysis and said the talking heads just don’t understand how it all works.

First of all, we didn’t enter a correction. We entered a bear market. Now, bear markets have corrections too. They’re called rallies. Except the people and CNBC don’t get that. They think the only correction is a move down in a bull market.” -Peter Schiff via Seeking Alpha

And Schiff declared that the Federal Reserve is once again, the cause of this correction.

As I’ve been saying, I began forecasting, even before the first rate hike in December of 2015, that if the Federal Reserve ever tried to normalize interest rates, it would never succeed. It would never be able to get rates back to normal because somewhere along the way they would tip the stock market into a bear market, cause a recession, and the Fed would back off. And that’s exactly what happened. The minute the stock market went into a bear market in the fourth quarter of last year, by early this year, everybody did an about-face, and all of a sudden, there are no more rate hikes, no more autopilot. They’re just, you know, being patient.” -Peter Schiff via Seeking Alpha

San Francisco Fed President Mary Daly said rate hikes are “on pause” last week, even though she sees no sign of a recession.  But Shiff ponders what the Fed will do when an actual recession is staring these central bankers in the face.  Many allege that during the next recession, there will be nothing the Fed or government can do to stop it.  After all, they are responsible for all depressions and recessions in history.

Of course, stock market investors are clueless about that. They’re just having a party because the Powell Put is back on the table. And they think simply because the Federal Reserve is no longer hiking rates that they no longer have to worry about the Fed pushing the economy into a recession. Well, it’s too late for that. The rate hikes of the past have already guaranteed that the economy is headed for recession. It doesn’t matter whether they continue to raise rates in the future. The recession is a done deal. It’s just now you have that calm between the storm while investors are still clueless and haven’t yet connected those, what should be, very obvious dots.” -Peter Schiff via Seeking Alpha

Schiff appears increasingly confident that the recession is a “done deal” and that it’s just around the corner.  Take the time to prepare yourself the best you can before it hits. 

 

“Recent Market Dynamics Would Be Consistent With The Economy Already In A Recession”

One week ago, when we discussed why the Fed now finds itself trapped by the slowing economy on one hand, and the market’s response to the Fed’s reaction to the slowing economy (namely the market’s subsequent sharp rebound, only the third time since 1938 that we’ve seen a V-shape recovery of this magnitude when the market dropped down more than ~10% and spiked +10% in the subsequent period), we said that the “obvious problem” is that the Fed is cutting because the economy is indeed entering a recession, even as market have already rebounded by over 10% from the recent “bear market” low factoring in a the economic response to an easier Fed, effectively cutting the drop in half expecting the Fed to react precisely to this drop, while ignoring the potential underlying economic reality (the one confirmed by the bizarrely low neutral rate, suggesting that the US economy is far weaker than most expect).

Ultimately, what this all boils down to as Bank of America explained yesterday, is whether the economy is entering a recession, or – somewhat reflexively – whether the suddenly dovish Fed, trapped by the market, has started a chain of events that inevitably ends with a recession. The historical record is ambivalent: as Bloomberg notes, similar to 1998 and 1987, the S&P fell into a bear market last month (from which it immediately rebounded) following a Fed rate hike. The difference is that in the previous two periods, the Fed cut rates in response to market crises – the collapse of Long-Term Capital Management in 1998 and the Black Monday stock crash in 1987 – without the economy slipping into a recession. In comparison, the meltdown in December occurred without a similar market event.

And yet, a meltdown did occur, and it has a lot to do with confusing messaging by the Fed, which did a 180-degree U-Turn when in the span of just two weeks, the Fed chair went from unexpectedly hawkish during the December FOMC press conference (which unleashed fire and brimstone in the market), to blissfully dovish when he conceded at the start of January that the Fed will be “patient” and the balance sheet unwind is not on “autopilot.”

But it wasn’t just the Fed’s messaging in a vacuum that prompted the sharp December drop: it is also the fact that the Fed and the market continue to co-exist in a world of perilous reflexivity, a point made – in his typical post-modernist, James Joyceian, Jacque Lacanian fashion – by Deutsche Bank’s credit strategist Aleksandar Kocic, who writes that “the underlying ambiguities of the market’s interpretation of economic conditions are an example of financial parallax – the apparent disorientation due to  displacement caused by the change in point of view that provides a new line of sight” (or, said much more simply, the Market reacts to the Fed, and the Fed reacts to the market in circular, co-dependant fashion).

Yet while there is nothing new in the reflexive nature of the coexistence between the Fed and market, this process appeared to short-circuit in Q4. So “where is the problem and what are the sources of misunderstanding” asks Kocic, and answer by taking “the timeline from November of last year as the onset of the subverted perspective and the beginning of the self-referential circularity” (as we have said before, Kocic takes a certain delight in using just a few extra words than is necessary for the attention spans of most traders, even if liberal majors find a particular delight in his narrative). Anyway, continuing the Kocic narrative of where the reflexivity between the Fed and market broke down, in the chart below the Deutsche Bank strategist shows two snapshots of the swaps curve from November and January.

As we noted repeatedly over the past 4 weeks, while the long end has largely experienced a parallel shift lower, Kocic correctly points out that “the biggest drama has occurred in the belly of the curve which has inverted through the five-year horizon”, yet where Kocic’s view differs is that according to him, this is not indicative of a risk off trade but is instead “a radical repricing of the Fed.” Meanwhile, according to the DB strategist, the inversion of the front end is the main source of the reinforcing loop “as it brings in the uncomfortable mode of what we think is a misidentified alarm and incorrect interpretation of its economic significance.”

To make his point, Kocic looks at the previous episodes of curve flattening during the past two tightening cycles.

As DB notes, unlike the past two episodes of Fed tightening, when rate hikes were responsible for bear inversions, the last three months represent a bull inversion. In other words, “the recent flattening and inversion of some sectors of the curve has been driven by a decline in long rates that outpaced the decline in short rates.”

As others have observed, this departure from history highlights a potential flaw in the logic behind the connection between inversion and recession, Kocic writes, and explains:

If excessive Fed tightening is the likely trigger of the next recession, then the underlying logic and causality must go as follows. The Fed continues to hike until it becomes restrictive and the economy begins to contract which eventually forces the Fed to reverse its direction. The former causes curve inversion and a tightening of financial conditions through a decline in the stock market and wider credit spreads together with an economic slowdown. The Fed then begins to cut rates in order to counter the effect of excessive tightening and the curve re-steepens.

Simple enough, and also extremely problematic, because as we explained last weekend, it’s not the Fed tightening that is the recession catalyst: it is when the Fed begins cutting rates that one should be worried as all three prior recessions followed within 3 months of the first rate cut after a hiking cycle:

… while many analysts will caution that it is the Fed’s rate hikes that ultimately catalyze the next recession and the every Fed tightening ends with a financial “event”, the truth is that there is one step missing from this analysis, and it may come as a surprise to many that the last three recessions all took place with 3 months of the first rate cut after a hiking cycle!

If that wasn’t bad enough, Kocic notes that if “this were how things work, the recent market dynamics would be consistent with the US economy already being in a recession” and explains that “with rates already rallying, the implication is that the Fed deliberately and mistakenly continued to hike. This is the territory of a serious policy mistake.”

In other words, bull inversion and rate hikes would indicate that the Fed was totally detached from the realities of the market.

Yet after laying out this scenario, one which the market was obsessed with for much of December, Kocic counters that a closer look at the recent repricing “suggests that this narrative of a policy mistake may be misleading and market dynamics reveal something very different from a recessionary market mode” and further claims that what happened fits with the Fed sticking to the script of market normalization as a priority to wit:

this interpretation runs contrary to the recent response from the Fed, in which they have shown an unmistakable attention to detail with a thorough understanding of the complexity of the situation with all the risks associated with the stimulus unwind. The Fed has also gone to great lengths throughout this normalization process to prepare the markets for its exit and take care not to generate additional problems along the way. The well-telegraphed unwind of the balance sheet, which has come under increasing scrutiny over the past month is just one example of the Fed understanding the potential pitfalls of providing too little guidance.

Kocic then goes on to further claim that the market reaction is “a clear demonstration that the Fed is on track with the normalization of the rates market”, and thatr “by sticking to its script, the Fed has forced another leg of normalization. The two aspects of this are shown both in the decline of the correlations back into negative territory as well as the migration of volatility to the front end of the curve, both corresponding to the pre-2008 curve functioning.”

Why does Kocic take such a contrarian view, at least relative to the broader market? Because, as he explains, “if bear steepeners and bull flatteners were to continue to be the dominant curve modes, monetary policy shocks are at risk of being amplified, and the potential for a disruptive unanchoring of the back end of the curve, with its hazardous ramifications for risk assets and credit in particular, is heightened.”

This is why normalization requires front-loading monetary policy shocks and focusing on the front end with the fed funds rate remaining the primary policy tool, while – despite some calls to the contrary – the balance sheet unwind should remain predictable and controlled.

Whether Kocic is correct or not we will know shortly, perhaps as soon as March, when the Fed – which as we discussed previously remains a hostage to markets – will be pressed to halt its balance sheet reduction, and which would immediately crush Kocic’s theory that the Fed is purposefully normalizing instead of simply being forced to react to the market’s every whim.

In any case – accuracy of the DB strategist notwithstanding – the bigger problem, and this goes back to our point from last week, is that no matter what the Fed does at this point, its actions will almost certainly precipitate the very recession it hopes to avoid.

Why? The following chart from SocGen answers that question in grandiose simplicity: because it is not the curve flattening that is the recession catalyst – it is sharp curve steepening, whether bull or bear-driven, that precedes the immediate onset of the recession.

And once the steepener trade finally takes off, Kocic’s variant perception that “recent market dynamics would be consistent with the US economy already being in a recession” would be spot on: at that point, the bond market would finally admit that everything that happened ever since the Fed though it could normalize has been one massive mistake…. just as Ben Bernanke predicted admitted in May 2014, when he said that there would be “no rate normalization during my lifetime.”

Fed policymakers leave little doubt: Rate hikes can wait

January 18, 2019

By Trevor Hunnicutt and Ann Saphir

SOMERSET, N.J./SAN FRANCISCO (Reuters) – “Patience” is the new mantra at the Federal Reserve, less than two weeks ahead of the U.S. central bank’s first policy meeting of the new year, as officials leave little doubt they want to stop raising interest rates – at least for a while.

Fed Chair Jerome Powell first used the word “patient” to describe his approach to monetary policy early this month, in words that soothed financial markets after months of volatility.

This week seven other policymakers followed Powell in embracing a “patient” approach or otherwise signaling an inclination to pause the cycle of rate hikes.

That follows a wait-and-see approach laid out earlier this month by several other Fed policymakers, making clear that a consensus has emerged among the 17 Fed officials who will meet on Jan. 29-30.

Slower global growth, a stock meltdown last quarter, and a partial U.S. government shutdown that threatens consumer confidence and spending have many of them worried about what Fed policymakers only last month called “strong” economic activity. And, they say, the economy has yet to feel the full effects of the Fed’s four rate hikes last year.

“The approach we need is one of prudence, patience and good judgment,” New York Fed President John Williams said on Friday, adding that if growth continues, further rate hikes could be needed “at some point.”

But for now, he said, the tail winds that propelled the U.S. economy for most of last year have “lost their gust.”

Mary Daly, who used to work for Williams when he ran the San Francisco Fed and now is president of that regional bank herself, is “leaning toward pausing for a while” to see how the economy progresses, the Washington Post reported Friday, in remarks confirmed by a bank spokesman.

Similarly, Dallas Fed President Robert Kaplan said on Tuesday the Fed’s “patience” should run a quarter or two. Even Kansas City Fed President Esther George, who made her name as the lone backer of rate hikes when most policymakers opposed them, made the case for a pause on rate hikes.

Chicago Fed’s Charles Evans and Minneapolis Fed’s Neel Kashkari this week reiterated their support for pausing rate hikes, and St. Louis Fed’s James Bullard and Atlanta Fed’s Raphael Bostic staked out that view earlier this month.

Concerns range from broad ones like slowing growth in China to narrower ones like the ongoing budget stalemate in Washington that has kept parts of the federal government shut down for 28 days.

Uncertainty around such issues, as well as over the outlook for Britain’s contentious exit from the European Union, presents negative risks for the U.S. economy, Fed Governor Lael Brainard said in a Marketplace interview aired late Friday.

“The longer these drag on the more I worry that they really materially weigh on consumer confidence, business confidence, and then start to work their way through actual activity in the economy,” Brainard said.

That may already be happening. Consumer confidence has fallen to a two-year low, a gauge released early Friday showed, in part because of the shutdown, which Williams said could shave as much as a full percentage point off of first-quarter economic growth.

Not all policymakers are equally worried. Fed Governor Randal Quarles on Thursday said the “base case remains very strong” for the U.S. economy. Boston Fed’s Eric Rosengren said earlier this month that the Fed may still need to raise rates twice this year. That is what the Fed signaled when it lifted rates in December to a target range of 2.25 percent to 2.5 percent.

Markets, however, are not buying it. On Friday U.S. short-term interest-rate futures were pricing in just a one-in-four chance of a single interest-rate hike this year.

(Reporting by Trevor Hunnicutt in Somerset, N.J., and Ann Saphir in San Francisco; Editing by Leslie Adler)

Small Caps Soar To Best Start Since 1987 As China Adds Record Liquidity

Wondering why stocks are soaring?

Simple really – Global Central Bank balance sheets are soaring again…

And China just injected a record 1.16 trillion yuan into the financial system… (yea trillion with a ‘t’)

Sigh…

Which lifted Chinese stocks handily…

And European stocks soared…

 

It seems the algos did not get the message the first time as Trade headlines pumped and dumped… and then they ripped…

 

Trannies are best this week…

 

Trannies are also the best performer of the US majors YTD, but the Russell 2000 is off to its best start to a year since 1987…

 

But Canada is better – up 7% YTD – the best start since 1980…

 

The S&P is up 4 weeks in a row – just like it was to start 2018…

 

 

“Most Shorted” stocks continue to squeeze higher (up 14% YTD!)

“Most Shorted” Stocks are up (squeezed) 13 of the last 14 days

But, as Bloomberg noted, bearishness remains stubbornly high, judging by the SPDR S&P 500 ETF. At 5.4% as of a couple of days ago, short interest is roughly double the two-year average (with most of that span of time covering a steady grind higher).

“Bird Box Buying”

Fannie and Freddie exploded higher on headlines that Treasury is considering how to exit conservatorship…

 

Tesla tumbled – catching down tot its bonds reality once again…

This was one of its biggest drops in history…

 

Credit Spreads collapsed again after decoupling initially from VIX…

 

Treasury yields surged across the curve this week with the belly underperforming (7Y +10bps)…

 

with 10Y yield at 2019 highs…

 

 

And investors should perhaps be careful what they wish for from stocks as the markets’ implied expectations for 2019 rate hikes has shifted back into hawk territory – now expecting 3.5bps of tightening…

 

The dollar surged this week – its first weekly gain in 5 weeks – bouncing off significant support at around 1180…

 

Yuan tumbled on the week – biggest weekly drop in 3 months (accelerating as the dollar surged this afternoon on trade talks headlines)

 

Cryptos were down across the board in a very choppy week…

 

Despite dollar strength crude and copper surged on the week with PMs weak…

 

WTI neared $45 but faces serious resistance…

 

Silver’s demise at the same time as Oil’s surging seems to have found historical support working again…

 

 

Finally, US equity markets are right back where they were at the end of the year… the year 2017!

And with a big h/t top Gluskin Sheff’s David Rosenberg, we note that “More How fascinating to have seen on the same day a ripping production report on the back of the auto sector coinciding with consumer auto buying intentions falling to a five-year low.”

So if you bought the market today on the heels of great industrial production data – don’t hold your breath.

Spot The Odd One Out…

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