Fed’s rate hike hurts the ailing US consumer

I stand corrected. The Federal Reserve raised rates by 0.25 points Wednesday.

However, that does not mean it was correct to do so.

If you look at the US economy right now we have a slowing economy as GDP projections of +3% for the quarter are being pulled back to sub 2%. We also have inflation targets that are well below the Fed’s 2% target. Right now it’s at 1.6%.

The US has credit constriction you don’t have to look any future than look at the retail sector to see that the cost of cash is rising and more difficult to attain.

The growing asset bubbles are no longer the sure-fire collateral for extending credit.

So into this environment, the Fed takes it funds rate to a range between 1% and 1.25%. We already see that the consumer has tapped out on credit card usage with available credit at a years low-level, while outstanding balances hit all-time highs.

Student loan debt also at all-time high levels and mortgages for new and existing homes have been flat to slightly lower as rates rise. Car loans are persona non grata for originations and resale in the market due to low quality (think NINJA mortgages) and high quantity.

So why would the Fed raise rates at this time? To put another bullet in the chamber in case it needs to lower them again. To also tell Wall Street to tighten its reigns on credit and bring the bond market inline with other asset classes.

However this rates rise only affects us on the downside. We will pay more for credit and still get little to no interest on our savings.

And how the markets reacted tells you there is little change in either stocks or bonds. It was expected.

Now the Fed also announced the beginning of a plan to unwind its $4.5 trillion balance sheet. These were toxic mortgages and other troubled assets along with plenty of treasury bills and notes.

Now the Fed reinvest those proceeds as they mature, next year it will pare back the reinvestment according to a schedule that will be phased in.

There are lots to say about this and I will address it in the near future, but let’s just say I don’t believe the unwinding will be able to be pulled off beginning in 2018 for reasons I will address later.


$10,000 bitcoin can’t happen with these exchange outages

While bitcoin was dropping like a stone on Monday with sellers clamoring for the exit, thereby crashing the Coinbase exchange, another digital crypto-like token, ethereum, soared to record highs.

Other exchanges like BTC-e, tweeted on Monday that it was hit by a distributed denial-of-service attack, or DDoS. Their website was back online at 4:00pm EST.

This was the second outage for Coinbase in the last three weeks and both outages were when bitcoin was falling.

So what is with the bitcoin exchanges, that they work fine when there are $200-$500 run ups in price, but fail miserably on the downside? And why can’t they get their stories straight?

For any cryptocurrency to gain broader appeal safeguards must be put in place to give each investor equal opportunity to buy and sell. The last thing anyone needs is a government to step in to regulate the market.

Another question is how is it that a digital currency exchange is developed that is not robust enough to handle spikes in traffic? The exchanges are built with the express purpose of having scalability. It’s not like you built a physical market and then people started trading it online and you were caught short.

The exchanges by using the ploy of server outages due to traffic or DDoS attack at a critical junction are setting themselves up for comparison with Mt. Gox and its implosion some years ago.

If you want to see a $10,000 bitcoin price, these exchanges — and there are about 10 of differing sizes on bitcoin — must come together to execute sales for each other if one exchange goes down.

You can’t expect neophytes, new to the cryptocurrency markets, to be able to manage navigating different exchanges to find one to buy or sell on.

The Federal Reserve is schedule to announce Wednesday the result of its two-day meeting on whether to raise rates another quarter point.

I’ve written numerous times that Yellen & Co. will not raise again this year.

So I’ll stand by that and say the Fed will stand pat and wish to monitor the markets and inflation and stand ready to raise at upcoming meetings, but will stand pat today.

While the low rates have created numerous asset bubbles from stocks to bitcoin, the tightening of credit will have a disastrous effect on the overall economy. GDP is looking at below 2% for the quarter after coming off a sub 1% first quarter.

That’s my call we will see at around 2PM EDT whether I am right or not.

More dismal news coming out of the retailers

Tuesday brought more bad news for America’s biggest retailers.

Macy’s reported that margin loss was accelerating as the troubled department store continues with deep discounting of merchandise to stem eroding sales.

I have been documenting much of the hurt going on with the struggling consumers staying home instead of going to the mall.

Shares of Macy’s fell 8.2% in Tuesday’s trading as the company said it could see a 40% in margin levels as it battles with high inventory coming out of the 2016 holiday season.

Most retailers were down big on the Macy’s news. JCPenny was down 4%, Kohl’s fell 5.8% and Nordstrom was off 3.6%.

Many big box stores saw weak holiday sales forcing deep discounting, which squeeze already reduced margins and come right down to the bottom line.

In other retail retaliation, Sears came out after the bell on Tuesday to say it was closing an additional 72 stores this year. Earlier this year CEO Eddie Lampert announced he was closing about 180 Sears and K-Mart stores along with some Sears Auto Centers.

These new announced closures bring the number of Sears’ store to around 1,200, down from 2,080 fin 2012. Sears shares were off more than 1% in Wednesday pre-market trading.

So what can retailers do to stem the outgoing tide?

“We don’t need the massive parking lots that we had in the 1970s,” Doug Sessler, the head of Macy’s real estate division, told analysts during the company’s investor day on Tuesday, my New York Post colleague reported.

This is a huge departure for these big box stores. They have acres of parking lots, which sit idle for many months, and the Macy’s and others are looking to create strip malls and standalone properties to bring in rental revenue.

It appears the new model, which I doubt has legs since it’s doubling down on the thought that brick and mortar can still work. Macy’s says they are looking for restaurants and other businesses like medical facilities to take up the space.

Macy’s is already selling space inside its stores to different brands in order to bring in revenue. So now they will compete with the mall operators, who are looking at open storefronts inside the mall, to attract tenants.


May’s job number will give Fed reason to pause

Unexpectedly May’s job number came in at a paltry 138,000 and April’s hot number was revised down by 66,000 jobs.

The labor participation rate, which measures how many able-body adults are in the workforce shrank by 0.2 percentage points as less Americans are even marginally employed.

However, the unemployment rate declined by one tick to 4.3%, based on a separate household study. Wages move slightly, growing 0.2 percentage points month over month.

All in all not a very good report and it may give the Federal Reserve a reason to pause on its June rate hike, which I said would not happen anyway.

There’s too much weakness in the labor force as whole industries such as retail and casual dining are going through monumental contraction due to weak spending.

Friday the Labor Department will release the May jobs report. Wall Street analysts are  expecting 185,000 jobs were created, which is lower than April’s 211,000.

I believe it will come in around the 210,000, since the Bureau of Labor Statistics, which compiles the data, usually adds more than 240,000 to the May number.

This bureau’s guesstimate is for jobs it believes were created but has no proof of from the data just yet. May is one of the larger adjustments for the guesstimate.

I’ll update this after 8:30 EST Friday once the number is released.

Bankruptcies soar in NY federal court filings: Judge

Chapter 11 bankruptcy filings are soaring in New York and Delaware, according to a New York Federal judge speaking at a bar association panel discussion late last week.

“Chapter 11s have exploded” said U.S. Bankruptcy Judge Shelley Chapman told the panel suggesting that businesses are suffering mightily in the latest near zero business growth.

Chapter 11s have tripled in the first quarter of the year, Chapman added.

“The report is that for at least a lot of retailers, it is certainly a difficult, if not flat-out impossible environment to operate in,” Judge Shannon said in her discussion. “We do see more of those cases likely on the horizon.”

And according to other data Delaware state court, according to Judge Brendan Shannon  has also seen an uptick in Chapter 11s filings, though not as marked as in New York. Shannon also sees the trend in retail and energy sector bankruptcies continuing, based on current cases.

So Delaware state court, which administers many corporate filings due to its pro-business laws, and the federal court in New York are both seeing upticks in businesses failing.

These are retailers that offer entry-level jobs for some and a much-needed part-time jobs to people displaced from their full-time career are reorganizing in bankruptcy, which usually means closing stores and laying off tens of thousands in the aggregate.