The Fed Has a Dirty Secret

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Recessions are, by one admittedly strained measure, like pregnancy: Both are an either/or proposition. Your belly, or your economy, is either growing or it’s not. There are no gradations.

For a while, too, you can hide both from view. Slip on a muumuu, or hedonically adjust the bejeezus out of the economic data you release to the masses, and all seems normal to everyone. Until suddenly it’s not. Suddenly you’re showing. And when you’re showing, everyone knows the truth — someone’s been fooling around.

Well, let me tell you, soon enough headline numbers will show the Federal Reserve has been fooling around.

The realization will not be good for the dollar, though, I suspect, gold will have a grand ol’ time with what’s now traveling our way…

A recent spate of numbers I want to share you:

  • The Atlanta branch of the Federal Reserve, with an uncanny accuracy in estimating the GDP before its release, has a fourth-quarter GDP growth expectation now at just 0.7%. Given the magic with which the government massages economic data, that 0.7% could really be closer to zero-point-zero. Whatever the case, the cheerleaders and economic sycophants told us at the beginning of the quarter to expect 2.7% growth. Oops!
  • The Institute for Supply Management (ISM) posted in January the latest in a line of six consecutive months of increasingly lower readings for its ISM Manufacturing Index. The last two months have seen back-to-back readings below 50, a sign of contraction and routinely indicative of a coming recession.
  • Same for the ISM’s Purchasing Managers Index, another recession marker.
  • The Producer Price Index has been heading south since the summer of 2015: recessionary in its direction.
  • The Empire State Manufacturing Index, a key gauge of manufacturing in the important and manufacturing-heavy New York region, plunged into negative territory, yet another worrisome sign of recession in the wind.
  • And rail-freight traffic volumes have been declining at a pace seen only five times previously. Four of those lead into a recession, the fifth was a function of horrendous weather — and so far winter has caused no transportation snafus. Read into that what you will…

The stock market (down), the bond market (yields down; prices up), the gold market (up, more than 5% already this year) — they’re all saying that the Federal Reserve was fooling around when it raised rates in December.

The Fed told us all that the economic data supported the rate hike. Seems implausible, given that less than a month later all these recessionary numbers are flooding forth. But maybe the Fed really hasn’t a clue that the economy is weakening, despite its own Atlanta branch having a GDP model so prescient that other economists now mimic it.

Maybe the Fed knew but wanted to shut a whiny Wall Street up by dishing up a rate hike the Fed knew would ultimately collapse stock prices.

Maybe the Fed knew and, before recession hits, wanted a future rate cut in its quiver before having to move to negative interest rates in America.

Or, maybe the Fed didn’t know and the economy is suddenly falling apart that fast.

The data that seemed to move the Fed to act were the October and November employment reports that showed a bunch of jobs — though upon further research lots of those jobs were sort of made up through the extrapolation function the Bureau of Labor Statistics uses to gauge employment data, and many of the real and hypothetical jobs were in crummy-pay careers that do not support a middle-class economy.

Now, Wall Street is beating the drum for the Fed to beat a retreat from its December decision.

The Fed Can’t Hide Anymore

When it raised rates, the Fed told us that the future was looking so peachy that it could see raising rates as many as four times this year.

Not so probable anymore.

I’d bet we see a rate cut before we see another rate hike.

The Street is already in conniption mode, and probabilities are good that we’ll see a recession blow through Main Street. Another rate hike would put the already preciously positioned U.S. economy careening toward an even-sharper slowdown that jeopardizes lots of very real jobs. The Fed can’t cotton to that. Won’t cotton it, actually.

Today, when the Fed announces the verdict in its January deliberations, it will offer up milquetoast analysis. Probably say something about noting the slowdown in economic activity recently and how it will closely monitor coming data points before its next meeting in March … but that it sees no imminent signs of worry.

I’m telling you to worry!

The signs are there. They’re all over the place.

Grab you a handful of gold — some bullion, some old gold coins in various denominations from Switzerland, the Netherlands, France and elsewhere. Sign up for an automatic gold-purchase plan at EverBank for as little as a $100 a month. (For the sake of full disclosure, we receive a marketing fee based on our relationship with EverBank. But, honestly, we’d work with them regardless.) Just do something to own physical gold at current levels.

A recession will force the Fed to abandon its notion of any more rate hikes this year, and most likely will have Fed governors reversing their December hike. The muumuu is off, and it’s clear the Fed has been fooling around.

Until next time, stay Sovereign…
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Jeff D. Opdyke
Editor, Profit Seeker