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.

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Quiet markets as Trump sets out his cabinet

The holiday shortened week will give a temporary reprieve to the strengthening dollar as most bond and currency traders take time off before the year-end push.

A bit of an explainer for some readers.

The strengthening dollar against other currencies makes import items more expensive, but it is also a trigger for higher bond yields, which increases costs of servicing the debt. Now the argument goes that the cost of servicing the debt is less with a stronger dollar, but the strength is temporary.

In December, when the Fed raises interest rates, which is almost a certainty, it should weaken the greenback, but send Treasury interest rates higher. So cost of capital will be higher for mortgages, car loans and the like, causing a further fall in those sales. You won’t see any type of appreciable interest in your savings deposits as a result to offset that rise in debt service.

Where the stock market goes is pretty simple. Just like last year, when the Fed went 0.25 percentage points in Dec. the stock market went higher, because of year-end window dressing.

This is the practice of making portfolios look good for the year-end statement to clients and then after New Year’s equities will sell off on the rate hike. It’s a time-honored tradition on the Street.

So I don’t expect much market-moving news this week. After Wednesday’s market close and well before Monday’s opening bell we should get President-elect Donald Trump’s announcement of Secretary of State and perhaps Treasury Secretary as well.

This will give markets a reasonable time to digest the news, without whipsawing the markets.


Just some thoughts on the cabinet positions. The Trump Administration needs to have Ted Cruz and Jeb Bush in it to thwart any type of insurrection in four years.

Jeb Bush has not come up in any conversations since the animosity between the two is legendary , but I would think the State job might tweak his interest and help with the resume. Cruz’s name has been floated for Justice and that might make sense given his temperament.

I don’t think JPM’s Jamie Dimon will take Treasury job, but I do see Steve Mnuchin in that spot. He does have the necessary Goldman Sachs background (lol) and he has worked for George Soros, which means he has a globalist agenda to offset Trump’s nationalistic campaign rhetoric. This is what I meant last week when I wrote “Meet the new boss, same as the old boss.”

Market analysts' crude projections

Let’s correct a fallacy that is being trumpeted by whatever financial commentator your hear.

Cratering oil prices are not sending stocks down. The global recession is sending everything lower except bond prices, because large investors are looking to preserve wealth in US treasuries.

Crude is the canary in the coal mine for economic growth. The Saudi’s are not trying to break the backs of US frackers. The House of Saud is trying to hold on to power by keeping money coming into the country. They can handle $10 oil, since they still make a profit on it.

The Saudi’s have a meaningful war going on with Yemen that they are losing (but you won’t hear about that in the US media).

The Arab population is restless and we could see a renewal of an Arab Spring in the country as power has passed to a younger generation of leadership. These GenXers have never worked for a living, were educated overseas and have little need for the Muslim religion and its radical elements. This has a ringing truth to France in the early 1800s.

As I said late last year, Saudi Arabia’s implosion with its currency cratering while fermenting unrest will be a bigger story than China in 2016. It’s just no one in the West is writing about us losing an ally in the Middle East just yet.

Crude oil prices are a by-product of a cratering global economy, which takes down valuations of stocks as price/earnings ratios fall. That’s what we are facing today, not the tail wagging the dog.


Large US investors are at a loss to find a bottom in stocks. Every run up in equities is met with wholesale selling. Rumor buying in Twitter yesterday sent stock up 12% only to be shot down by yours truly as false, and the stock fell.

Big money from all over the globe is piling into US treasuries. The 10-year note is back to The Beatles invasion levels at 1.964% yield and falling.

The 540+ point cratering Wednesday on the Dow mid-morning felt like capitulation, as the index bounced higher, but its does not appear to be a bottom as futures are down triple digits Thursday. I am seeing some green on the screen in Europe off of China injecting $60 billion to buoy its markets, which did not help its equity markets.

All this puts the Dow Jones index  off 10.4% for the year, the  S%P is down 10% and the Nasdaq fell 11.7% (if you take the closing prices on Dec 31, 2015 and not the depressed opening prices in January).

All this worry, as Washington sends out its message that the US economy is getting stronger. Tell that to the small investor who sees creeping inflation everyday and no salary increase to speak of at the beginning of the year.

As I wrote last month, Janet Yellen hiking the Fed Funds Rate target to 0.5% was wrong-headed and the market is making her pay, now.

The reason we did not see an instant market reaction to the hike was Wall St.’s insatiable appetite to window-dress their returns at year’s end. They always run stocks and bonds up in the last 10 days, so the books look good for bonus season.

As soon as the calendar flipped to 2016, it was sell, sell, sell.

 

Turkey shoot comes early for Fed

The Turks shooting down a Russian military jet, these are the nightmares the Fed governors have.

As Yellen & Co move toward their mid-Dec. meeting still jawboning about a possible rate increase, world events may take the ball out of their hands.

Or flip it on its head and world events will provide the Fed  with cover to not raise rates. This is what I have said since Jan. that there will be no rate increase this year.


To add more fuel to fire on whether we are in a recession, let’s look at Tiffany & Co., which reported results on Tuesday morning.

Tiffany’s revenue and earnings both missed and it cut its previous guidance for the holiday quarter and the year by 10 percent.

So you have retailers across the spectrum cutting guidance for the all-important 4th quarter and the year.

Wal-Mart, Macy’s and Tiffany all see strong headwinds. Meaning that the US consumer, as well as overseas buyers in the case of Tiffany, are pulling back on purchases.

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.