Janet Yellen’s Playing With Fire

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As Bud Fox was called into his first meeting with Gordon Gekko, he absentmindedly said to Gekko’s secretary, “Life all comes down to a few moments. This is one of them.” For America, such a moment comes tomorrow.

What vote Janet Yellen and her crew of central bankers cast — raise interest rates for the first time in nearly a decade or stand pat a while longer — will determine the future not just in America but in countries around the globe … and in stocks, bonds, commodities and currencies.

I don’t feel I’m being hyperbolic in stating that no economic decision since that which allowed Lehman Brothers to collapse is as important to our path forward. If you play the odds, then you’re betting that Janet Yellen (and the Fed) will raise rates.

I, however, give zero credence to the odds; they’ve been wrong every time in the last several years. As we approach yet another Fed decision, I am sticking to my guns: The Fed, I believe, has no capacity to boost interest rates. Nor does it have any pressing need to, aside from placating the wrongheaded hawks who call for rate hikes without playing through the implications here at home and abroad.

That said, though, I see one reason the Fed might raise rates. And if does, it will signal bad news for the American economy, the stock market and your wealth.

Since May of 2012, I’ve continually declared with every Fed meeting that the arbiters of monetary policy would refrain from raising rates — despite all the voices at the time insisting on the opposite. I see no compelling reason for that to change tomorrow.

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Despite the pabulum you hear from Keynesian cheerleaders desperate for a win, or the poorly reported economic data presented to you as proof of American economic vigor, the sad truth is that the U.S. economy is not a bastion of strength, I don’t care who claims otherwise.

As Americans, we don’t want to hear bad news. We are culturally biased against reality when reality contravenes what we wish to believe. But there are some indisputable facts to consider:

One in five working-class Americans is either unemployed, underemployed or out of the job market completely (a figure worse than Europe). The McJobs we are creating do not support a middle-class life, helping explain why new research out last week shows that most Americans are, for the first time in modern history, no longer a member of our much-vaunted middle class. Corporate earnings and the U.S. manufacturing sector are both in recession. Income growth has gone basically nowhere for a generation or longer.

Raise rates and the Fed strengthens the dollar, which slams U.S .manufacturers selling goods overseas, driving down corporate earnings even more, leading to layoffs, worsening a horrible employment situation here at home. In short, by lifting interest rates now, the Fed would only strengthen the headwinds that are already retarding American progress.

So let’s posit the obvious question: Why would the Fed raise rates with that world as our backdrop?

Precisely because that world is our backdrop!

Janet Yellen’s Race to Recession

The Fed realizes the U.S. economy is in a bad way, though it certainly can’t say so. But its actions tomorrow will say what its words won’t.

If the Fed raises rates, it’s only because Janet Yellen & Co. see the future. They see the recession that’s on the way — a potentially grinding recession (that turns into stagflation, as I’m writing about in the January issue of the Sovereign Investor). Fed governors might want at least one bullet to fire at the recession (not that such a limp-wristed response would do much. Plus, ironically, raising rates would worsen the sting of the recession and hasten its arrival because of the impact higher rates would have on corporate profits as the strong dollar strengthens more.)

As it stands, the Fed has few options to battle another sustained economic downturn. It can restart quantitative easing, though that would simply fuel asset bubbles already plump. It could, figuratively, dump $100 bills out of a helicopter, as Ben Bernanke once suggested, though that would risk inflation/stagflation and a debt spiral. Or it could pursue negative interest rates, the latest experiment globally in unconventional monetary policy with unknown and potentially catastrophic side effects.

Though the best course of action right now is for the Fed to stand down until the dollar weakens, many will cheer the governors if they announce a rate hike tomorrow. It will be a pyrrhic victory.

Underlying such a vote is tacit, if unspoken, acknowledgment that recession hunts America. With it will come increasing unemployment, rapidly rising Federal debts (to provide social services, welfare, economic stimulus, etc.) and a bear market in stocks.

So, the world awaits the news of tomorrow. I’m betting the Fed gives us more of the same. But I see why it might not.

And that will be very bad news, indeed.

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