Rate Hike Fallout

The Fed raises rates … The American middle class is no longer in the majority … We’ve opened up access to our elite lifetime membership for a limited time…

The Fed raised interest rates for the first time in nearly a decade … As you likely know by now, the Fed came out of its two-day meeting Wednesday afternoon with its rate-hike decision — rates are officially climbing from a range of 0% to 0.25% to a range of 0.25% to 0.5%.

While it might seem like a small hike, it is a significant decision, especially because many now assume — wrongly, I might add — that it means our economy is back on track. So I’ll let Jeff get right into it this week.

Here he is:

And so begins a new adventure in the Fed’s Funhouse Hall of Mirrors, where views of reality are warped.

As you know by now, Yellen & Co. lifted interest rates off the floor last Wednesday for the first time in nearly a decade. Aside from the jabbering of various commentators — and the long-in-the-tooth promises of the Fed itself — there was no compelling reason to act. The global environment does not dictate a need to raise rates (in fact, it offers compelling evidence to maintain the status quo), nor does the U.S. economy demonstrate the strength one would hope to see before launching a rate-hike cycle.

But it’s water under the bridge now. The seal has been broken, so off we go…

A few things to be aware of as this new adventure commences:

  1. It’s not likely to last too long. I see a better than average chance that the Fed decided to raise rates simply so that it had at least one round of rate cuts in its pocket to combat the lurking recession.You might not feel the recession just yet, but it’s in the offing. Corporate profits have fallen by the largest amount since the global financial crisis, in large part because of the dollar’s strength. Raising interest rates when the rest of the world is cutting rates or keeping them unchanged only serves to strengthen the dollar even more, which means even more pain for America’s exporters.

    By the by, profit recessions historically hint at an economic recession to come.

  2. Manufacturing is in a deep recession according to the Fed’s own Empire State Manufacturing Survey, as well as the Institute for Supply Management (ISM) Index. The ISM report, in particular, has fallen well below 50, the threshold that separates contraction from growth — and 65% of the time, a sub-50 reading is indicative of recessionary breezes blowing our way.
  3. And I am not sure what medication Ms. Yellen was on when she told the world in her press conference that the jobs market was looking just dandy, but I can tell you from pulling apart the jobs report by industry that America’s employment situation is far from dandy.Government policies and Fed actions — along with technological innovations that are making so many jobs obsolete — have created a barbell jobs market. We’re heavy on highly-skilled, high-paying jobs, and even heavier on low-skill, low-pay jobs … and we’re losing the middle-class jobs.

I just completed the research on this for the January issue of Sovereign Investor, and I can share some data with you:

Across the Obama years, we have lost:

  • More than 2.2 million goods-producing jobs in industries such as mining, manufacturing and construction, representing more than 10% of that segment of the economy. On the whole, those jobs paid more than the average wage in America.
  • Nearly 300,000 jobs in publishing, broadcasting and telecom. They all paid substantially more than average, according to federal salary data.
  • Nearly 400,000 jobs in various areas of the financial-service arena. Again, higher-paying jobs that top national income averages.

And we have gained:

  • 1.9 million jobs in leisure and hospitality (think: food services, hotels, etc.), where average pay is $12.52 an hour, nearly half the average of America as a whole.
  • 2.8 million jobs in health care and social assistance, which are largely low-paying jobs in physician office support, nursing-home centers and home-health services.
  • Nearly 700,000 jobs in retail, most of which were auto dealership and auto-parts shops, food and beverage stores and general-merchandise retailers. All pay significantly less (about $31,000 a year) than the national average.
  • 2.7 million jobs in professional and business services, which as a group pays more than the national average. But there is a huge caveat: support services, temporary help and waste-management — all low-paying — accounted for half of those jobs.

Such data points underscore why a Pew Research Center report last week showed that for the first time in modern history, the American middle class is no longer the majority of the U.S. population.

In short, despite the Fed’s rate hike, and despite Ms. Yellen’s exuberance, the U.S. economy is no virile beast. It’s a 98-pound weakling acting the part of Superman. But I’m betting the façade fades soon enough. I’m betting we’re on the cusp of a recession in 2016. And I’m betting the Fed’s rate hike was simply an effort to load the chamber with one single bullet to fire as the recession strikes.

We will know soon enough…

Another hit to the middle class … As Jeff mentioned above, a Pew Research Center report released earlier this month shows that America’s middle class has shrunk so much that it is no longer the majority of the adult population. I just want to highlight that a bit more because that’s a significant detail.

After more than 40 years, the middle-class population now matches those in the lower and higher classes. Meanwhile, the population of the lowest-income tier has grown from 16% in 1971 to 20% this year — which doesn’t say great things about our economic stability. It just goes to show that we are an internally weak nation (despite what people think after this recent rate hike), increasingly populated by low-wage workers who are likely living their life on credit, one paycheck to the next. And while the highest income tier is also growing, it still represents less than 10% of adults.

That’s why Jeff uses his Profit Seeker service to profit from the growing middle class outside the U.S. As America’s middle class — what made our consumer base so strong for decades — dwindles, places like China, Myanmar, even Poland are seeing a boom, something investors can profit from if they know where to look.

If you’d like to learn more about the gains you can make with Profit Seeker, and with our other services, such as Precision Profits, which has been bringing in a steady stream of triple-digit winners (we just closed another one last Friday), check out our Total Wealth Fellowship service, which gives you access to all of our wealth-building opportunities and more. We recently opened it to new members.

Click here for more information.

In the Sovereign Investor portfolio … Metro AG (Germany: MEO, buy up to €30), our German department-store operator, announced that it had increased profits by 2.2% despite the challenging currency environment. A big part of that was thanks to its sale of Galeria Kaufhof.

It also boosted its dividend for the year by 11% — which is great news given that interest rates are not going to be going higher after this last hike anytime soon. After meeting its sales and earnings targets for the year, Metro is upbeat about 2016 and expects to continue this progress.

Our yield is now over 4%, based on our original entry price, and our position is up 7%. Metro is still trading relatively cheaply at 15 times 2016 earnings, so shares remain a buy up to €30.

In dividend news … Enagás (Spain: ENG, hold) dropped its semiannual dividend of €0.425 on December 17. Goldcorp (NYSE: GG, buy up to $20) is paying us $0.02, its regular monthly dividend, on December 29.

Until next week,

Jessica Cohn-Kleinberg
Managing Editor, Premium Services
December 20, 2015