Yellen's Shock to the Market
Well, here we are again — at yet another fork in the road that never would have existed if not for Yellen and the Federal Reserve.
The Yellen posse concludes its November meeting today, and, with the presidential election a week away, there’s no chance the Fed governors will hike rates. They’d be lambasted globally for playing politics. And given the depths to which the Fed’s credibility has sunk, the Yellen gang has no stomach for yet more negative press.
It’s that credibility, however, that worries me at this point.
It’s Damocles’ sword hanging over the markets and, thus, over all of us.
While this November meeting is largely a chance to smile for the cameras, the December meeting bears the weight of every major stock and bond market in the world. What the Fed chooses to do next month will send stock and bond prices either up or down, and potentially meaningfully.
And the question, of course, is: Does the Yellen & Co. raise rates as it has promised to do through all of 2016?
Or does it realize that raising rates carries with it all the wisdom of a dimwit playing Russian roulette with six bullets in the chamber?
I’ve consistently written since May 2012 that the Fed will not raise rates. And since May 2012 I’ve consistently been correct — except for once.
A year ago in December, when the Fed raised rates by a quarter of a percent, its first rate hike in nearly a decade.
That is the only time I was wrong. And I was wrong only because the Fed caved in to Wall Street pressure and the Fed’s own stupidity. Fed governors had been yapping for so long about raising rates — and how the weak-kneed U.S. economy was well-prepared to handle it — that Wall Street either believed the BS or it simply wanted to call the Fed’s bluff to prove the point that the U.S. economy isn’t prepared for higher rates and has, like a druggie reliant on his pusher, become overly reliant on Fed money to maintain some semblance of life.
The proof that the Fed made the wrong decision is apparent across this past year. Economic growth has floundered to the point that the Fed’s early expectations of as many as four rate hikes this year has, instead, come down to this: the remote possibility that the Fed might raise rates once.
And if it does, it will be yet another in a long line of Fed blunders.
Swallowed by Debt
Despite the blathering from economic sycophants and a media that has the analytical aptitude of a goldfish in a glass jar, the U.S. economy is not robust. I’ve spelled out why many times so I won’t spill more ink here. Suffice it to say that the jobs we’re creating are great in quantity but lackluster in quality. The unemployment rate, meanwhile, is a fiction. Recent data show that many Americans have two and three part-time jobs — raising concerning questions about just how many jobs are really being created for just how many workers.
But beyond that there are bigger problems that seem to be ignored. The slow death by debt of the U.S. consumer.
Just this week, news emerged that entry-level homeowners are more leveraged today than they were back before the housing boom went bust. Moreover, their household expenditures are back to the same dollar level even though their incomes are not. This is a reflection of what I wrote a few months ago when I pointed out that the American consumer is not a lion but a lamb.
Along with overleveraged houses, consumers have nearly $1 trillion in credit-card debt, a level not seen since the Great Recession. They’re carrying more than $1 trillion in auto loans, and another $1.3 trillion in student loans.
Simply put, consumers have way too much debt. They cannot continue to carry the economy on their backs. Their paychecks won’t allow it. At some point, a bunch of broken-back camels will litter suburbia.
And therein lies the Fed’s big rate-hike dilemma: The consumer has been almost wholly responsible for the tepid economic growth we’ve eked out this year. So what happens when the Fed raises rates and the consumer rolls over?
Business certainly isn’t going to step up to the plate. Higher rates would widen the interest-rate gap between the dollar and the rest of the world’s key currencies, driving higher investor demand for the buck. The resulting strong dollar would crush U.S. exports again, sending the U.S. economy toward recession and prompting a round of layoffs that would push unemployment higher, thereby undermining everything the Fed seeks to do these days
Strangle the consumer by raising debt-repayment costs and the Fed strangles the economy.
But that just brings us back to Damocles’ sword…
December Déjà Vu
Regardless of the underlying fragility of the U.S. economy/consumer, the Fed’s credibility is in question again.
The governors all but swore a blood oath to raise rates multiple times in 2016, but they haven’t raised once, and we’re approaching the final month of the year.
Does Yellen’s Fed have the guts to flip a middle finger to Wall Street and tell it like it is? “We can’t raise rates because of the myriad knock-on effects it would have on the dollar, the emerging markets, consumer debt repayments, federal debt repayments and the U.S. economy.”
Or do the Fed governors succumb to self-imposed pressures? Will this be a December déjà vu? Will the Fed hike again because it feels it has to maintain its street cred, only to see the economy backslide again like it did after last December’s ill-advised hike?
I still think the Fed won’t raise rates. There’s simply no reason to, and no argument for it.
But … this is the Fed. And just as it did last December, it could very well choose to act stupidly this December, too. I would not be surprised if that happens.
But if it does happen, that rate hike will be short-lived.
The Fed will be forced to cut rates in 2017 as it becomes clear the U.S. economy (and the global economy) cannot handle higher rates in America. And when that rate cut happens, the dollar will weaken, which will be great news for emerging markets and U.S. multinationals … though it will also expose the stagflation I first wrote about in the January issue of Total Wealth Insider. But that’s a topic for another day.
Until next time, good trading…
Jeff D. Opdyke
Editor, Total Wealth Insider