The Fed's Decemberist revolution

You have to wonder about Janet Yellen and the Federal Reserve governors. They voted 9-1 to hold rates at zero, but suggested December is on the table for a rate rise.

I’ll have what they’re having.

Let’s ticked off what’s wrong with their thought:

  • China just cut interest rates to combat slowing growth as it moves toward recessionary pricing pressure.
  • Europe’s central bank is promising further easing in December to pull out of a recession.
  • The December meeting is on the 15th and 16th of the month. How many bond trading desks will be staffed leading into the holiday? What does that mean? A liquidity crunch not seen in seven years.

It’s all jawboning as a way for the markets to correct its exuberance. Stocks sold off, and then bounced because of the impossibility of the move. But its having the desired effect as strong dollar has futures market showing lower stock prices.

Bonds sold off with 10-year falling in price, due to uncertainty.

Yes the Fed did take out the language about monitoring conditions overseas, because it sees such weakness in China, Europe, South America and other BRIC nations, that its narrative would never hold up if the wording was left in.

As an aside, why do you think China is ending its one-child policy? It sees that it will need to grow its consumer class as a means to grow. It’s not out of the goodness of their heart or love of family.

We get GDP at 8:30 this morning. It’s the first look at Q3 after the Q2’s 3.9% print, which showed huge inventory build.

I believe it will come in at 1.1% to perhaps 1.4%, which is a marked slowdown.


Special Saturday post

I’m not a portfolio adviser, but I think there needs to be some perspective offered on what stocks and bonds did at the end of this week.

  • The Dow Jones index rose 2.8% or 480 points on Thursday and Friday.
  • The S&P 500 index gained 2.2% or 44 points over those two days.
  • The Nasdaq soared 4% or 192 points the last two days of the week.
  • US ten-year bond prices fell as yield went from 2.01% to 2.08 rate to close on Friday.

With moves like this you would think prosperity has turned the corner and is throwing money and jobs to everyone on the street. The US dollar strengthen over the same time frame.

However, none of what I wrote about the US economy is true. The run up in stocks and bond yields is predicated on currency wars.

On Thursday ECB chief Mario Draghi — formerly head of Goldman Sach’s Italian operations — told the markets that due to weakness in the euro zone the central bank would more than likely increase its version of quantitative easing in December at its next meeting.

On Friday the Chinese central bank cut its key interest rate by a 0.25% citing weakening economic growth and to combat a stronger yuan.

Neither of two events suggest that the global economy is doing well. In fact two of America’s largest trading partners said they¬† are in trouble.

So why do we have such a move to the upside in the markets?

The world will be awash in new money coming from central banks. This new money will find its way into the markets (but not into your pockets through increased wages), so get in now before the run up. It’s a fresh bag of heroin for the addict markets.

To give some credence to the slowing global economy crude oil fell more than $2.00 a barrel on the central bankers words and actions.

Now of course this doesn’t end well, but who knows when it would end. Suffice it to say the Fed will not be raising rates in this environment anytime soon, since all indications are that we are about to import more recessionary inputs as Europe and Asia slows and South American economies crater.

All the BRICs — with possible exception of India — are swimming just like a brick, straight to the bottom. And the only way to hope to stay afloat is to cheapen their currencies against the dollar.

So the recent market rise is based on the premise that fresh money from overseas is coming, since again the US is the cleanest dirty shirt in the pile, but for how long?

We’ll see.

Apple's ready to print more money with lease program

What can we take away from market reaction to Apple’s new product conference Wednesday?

The stock traded down as the presentation went on, despite Apple unveiling a new business model for its most successful product, which may return more cash to the mothership.

Apple is moving to selling more iPhones through a leasing program, which guarantees consumers have the latest model phone for $32 a month for a year.

This move can take the mobile service providers, AT&T, Verizon et al out of the equation and end subsidizing sales.

However, institutional investors appear to be skittish about US consumer discretionary spending going forward, which seems to be the only hurdle CEO Tim Cook faces.

So Brazil’s debt was downgraded to junk late Wednesday by S&P with a bias to further downgrades given the dire straits of the country’s currency and its reliance on China trade.

Brazil is suffering from stagflation — persistent high inflation combined with high unemployment and stagnant demand in a country’s economy — which is a condition that the US could suffer if bond vigilantes had their way with Treasuries.

The BRICs are being taken to the woodshed as their economies are not robust enough to buoy the 90% of the people not participating in the stock market run up during the bubbles.