Dog days of August are barking loudly

Well it’s the last week in August and although the living is easy, there’s little in the way of economic news to move the markets, since everyone is gone.

That’s the way the news business is. Need to find something to report on, so we have  the annual Jackson Hole retreat and a storm-ravaged Houston as the key drivers for the markets today.

While the central bankers met in Jackson Hole, Wyoming, the market reaction Monday morning is muted. Neither Fed chief Janet Yellen and ECB head Mario Draghi gave the markets any tip on what monetary policy will look like in the next 6 months.

The simple answer is they can’t say because they don’t know and if they did say a direction it would be a self-fulfilling reaction once they announced it.

If Yellen said we will pause on rate hikes, then the market takes off again. Something the Fed is concerned about allegedly. The converse to pausing would send markets lower with the debt ceiling concerns greasing the skids, as well.

So no news is no news out of Jackson Hole. And since most trading desks will be manned by black boxes this week and next, look for one step forward and two steps back in stocks.

The possibility of a trillion dollars in damage caused by Hurricane Harvey to the Texas oil industry and infrastructure will be hanging over us for years in the form of higher gas prices.

It hasn’t been addressed yet since its too early, but look for the news today suggesting that the Port of Houston and all along the coast, the oil services industry has been so devastated by the category 4 storm that will not be able to come back online fully for some time to come.

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Chair Yellen is no Joe Namath

All I’m going to say is the Fed chair Yellen is no Joe Namath.

On Wednesday in a speech the Fed head said, “Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

Namath guaranteed the New York Jets would win Super Bowl III and backed it up.

Yellen, who seems to be on the path of bursting asset bubbles with a credit-busting, rate-raising strategy, also said, “asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates.”

Even if you discount the 2.5% drop in Google yesterday on the huge European regulator’s $2.7 billion fine for skewing its search results, stocks sold off hard on her comments.

Now I’m not one to pandered to ageism, however at 70 years old, Chair Yellen has a different time horizon than the rest of us.

But if the Fed thinks it can burst stocks, art and home asset bubbles by constricting credit in a low inflation environment, then Yellen & Co are looking at a possible deflationary crisis, which they have little in their toolbox to combat.

One can think that the Fed can always lower rates again and expand its balance sheet to fight deflation, but that’s just continuing the boom/bust cycles.

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.

Italian view of US election

A side trip to Florence showed similar reaction to global recession with merchants deeply discounting their wares.

Seeing 50% to 70% off perhaps slightly elevated products in stores as well as cart vendors.

In discussions with friends living in Florence, they all mentioned the lack of economic growth. Followed by talk of the upcoming presidential election.

Let’s say there is little enthusiasm for Donald Trump or Hilary Clinton and far more support — not unexpected– for Bernie Sanders.


The Federal Reserve cut a check to the Treasury Department for $100 billion from its 2015 profits.

That represents a four-fold increase in profits from it buying US bonds and paper from 2007.

 

 

Hey Janet, can you spare a trillion for what's left of the middle class?

I’m not sure what economists are seeing, but from where I sit, we have a global recession taking hold.

It’s really quite simple. The monetary policies of the last 7 years in the US and more recently in Europe and Asia have been directed towards banks, which in turn have put that cash to work in the markets. These actions by the banks have created asset bubbles in the equity and bond markets.

Very little of this “helicopter money” has made its way down the food chain in the form of higher wages. So you have stealth inflation, due to commodity prices rising on sugar, corn, wheat and meats.

In the US at least, you have a “robust” jobs recovery where people are working two lousy part-time jobs or more with no benefits, to make up for the one full-time job they lost which provided a middle-class existence for them.

The Federal Reserve Bank of Atlanta, which allows its economists to speak something closer to the truth on the economy through its GDPNow survey, slashed its Q4 projection for GDP almost in half yesterday on weak manufacturing numbers here. The prior projection was a “robust” 1.3% growth. GDPNow has it at 0.7% growth.

For the holiday quarter with all the consumer spending, which is 70% of the economy and hence the GDP, we come out with sub 1% growth.

What does that tell you? It tells me its a recession. Don’t give me textbook definitions of a recession. The Federal Reserve’s actions over the last 7 years have perverted what we thought was true, that you needed 2 quarters of sub 0% growth to be called a recession.

Trillions upon trillions awash in the markets, propping them and the bulge bracket banks balance sheets up and we get to do the same job we had in high school to support a family.

By Janet Yellen’s definition we are not seeing any inflation, because the first place you look to see if there is price acceleration is in wages. But the Fed has not sterilized the trillions printed by allowing it any velocity in the greater economy, so naturally we get that “US inflation is running below the Fed’s 2% trend” line every time Yellen speaks.

The $4.8 trillion question is why is the monetary policy of the US to have wages stagnate so that they are by to 1995 levels, if the Obama Administration wants growth?

What’s the use of having a Fed, which has a mandate of full employment, cite a jobs recovery where average hours worked is below 30/hrs a week? Or have just under 50% of the population receiving some form of government assistance?

The US will never have an economic recovery with those type of numbers. What you will see is what the stats show. A disappearing middle class and a disproportionate compensation ratio between the haves and the have-nots.

The Federal Reserves has all the tools in the world to combat inflation, it has no tools to fight deflation and a recession if they are already at zero or near-zero rates. So why is the Fed and the Treasury Department not allowing some of this printed money get into the economy in the form of business and personal loans?

A trillion dollars in infrastructure projects given to private industry would do more for the economy, than a trillion to the Wall Street banks to buy treasuries, which it sells back to the Fed.

But if we did that we may impair the bank’s balance sheet. Would not want another Lehman Bros. on our hands, would we?