Fed’s Denial Risks More Than Its Credibility Ep.131

•  The Dow  Jones ended another down week on a down note, dropping 390 points
• The NASDAQ was down 126 points
•  This is the worst January in the history of the stock market the Dow is off about 13% from its highs, the NASDAQ about 15%, firmly in correction territory
• We are probably in a bear market right now, because ultimately these indexes will be down 20%
• Some indexes are already firmly in the bear camp; the transportation average is down about 27.5%; the Russel 2000 is down aboutr 23%
• Many sectors are in a bear market – the auto market, retailers, financials
• Home builders not quite in bear market territory yet but they are at 4-year lows
• Beneath the sectors there are many individual stocks that are down 30 – 80% – GoPro now down 82% from last year as a highly touted IPO
• Yesterday we had about a 200 point rally because the Fed’s Dudley, who saved the market in October of 2014 by hinting of QE4 causing the market to take off
• This time, Bullard came out and did say something dovish, but not dovish enough, and did not want to say  there was something wrong with the economy, so he simply stated that oil prices were too low and inflation might not rise quickly enough, so the Fed should hike more slowly
• Today, another Fed governor came out, William Dudley and contradicted Bullard, strongly optimistic, saying the market is going to grow above trend in 2016 and he said that some of the negative economic data that has come out recently (which may qualify as the understatement of the decade) should be ignored, in the context of a strong labor market
• In other words, no matter what other negative data is out there, in the markets or in the economy, as long as we’re still creating 200,000-300,000 mostly low-paying, part time jobs monthly, everything is fine
• If everything is fine, and there are so many people with jobs, why are retail sales plunging?  Why are corporate earnings plunging?
• Assuming all these jobs really exist, they won’t for long because if sales and earnings are collapsing, what are companies going to do with their work force?
• Walmart announced today they are closing about 150 stores in the U.S., laying off about 10,000 people
• I have saying for a while I expected retailers to announce significant layoffs, but I think it is going to be across the board
• Everything that was built on the Fed’s bubble is imploding; all the phony wealth that was the result of QE is disappearing rapidly
• It’s amazing that the Federal Reserve believes in the wealth effect on the way up, but somehow it is oblivious to it on the way down
• I think it is going to work even stronger in reverse; the amount of spending from cut backs will produce a reverse effect even larger than the one they tried to create with QE and zero percent interest rates
• How could Bullard, in the face of all this negative economic data say that since the Fed raised rates, his outlook on the economy has not diminished at all?
• It’s so ridiculous that he must not believe it – he is trying to pretend that everything is good
• The whole rate hike was about instilling confidence
• Based on the data, they should not have hiked rates
• Now, as the markets are imploding and the data is getting worse, Dudley is out there saying everything is great
• How much longer can he get away with saying that?
• Pretty soon, he is not going to have that much credibility
• That’s what is going on with the Fed, in fact JP Morgan today pushed back their estimate for the first rate hike in 2016 from March to June
• That’s how is started last year; everybody was looking for a rate hike, in March, then June then September, then they finally got it in December and now people are already dialing back estimates of the next rate hike
• The next one ain’t happening because we are already in a recession
• I am talking about a statistical recession that the government will have to acknowledge
• I think we have been in a recession throughout the entire recovery
• I think the government manufactured growth by fudging the inflation numbers; they’re pretending that inflation was economic growth
• But even how the government scores it, I think we are already in a recession
• It’s interesting that even as William Dudley is proclaiming how strong the economy is, while at the same time not ruling negative interest rates
• The Atlanta Fed was busy downwardly revising their GDP estimates for 2015 Q4 now down to just .6%
• I still think they are too optimistic, because there is still more bad data to come for the month of December
• By the time we get that number, even if we get .6 for the first look at December, by the time they revise it a month or two later it’s going to be a negative number
• So it could be that a data-dependent Federal Reserve, by the time they raised rates for the first time, the economy was already back in recession
• If the fourth quarter of last year was a negative number and the first quarter of this year is a negative number, we are in a technical recession
• Even if the fourth quarter of last year was not negative, but the first quarter of this year is negative, we can still be in a recession if the second quarter of this year is negative
• I think it’s a pretty good chance, that not only was the fourth quarter of 2015 negative, every quarter of 2016 could be negative, too
• This recession could extend all the way through the November election
• If’ we’re in a recession now, it’s only a matter of time before the Fed admits that we’re in recession and reverses policy officially or the markets figure out without the Fed telling them, that we are in a recession
• And, of course, there goes all the Fed’s credibility
• The reason I thought the Fed would not raise rates is that I assumed they were smart enough not to risk credibility by raising rates only to have to reverse policy
• Now they are resisting admitting the economy was too weak for a December interest rate hike and talking as if the economy is strong because they don’t want to claim responsibility for a mistake
• If they do cut rates and do QE4, they will blame it on something outside the economy beyond their control
• Whatever the excuse, that is not the cause; it will be a cover-up
• And, of course, President Obama announced in his State of the Union address declared that anyone who says the U.S. economy is in decline is peddling fiction
• The only fiction being peddled is the administration spin that the economy is great
• They want to keep up the pretense all the way up to the November elections so that Hillary Clinton can be elected
• I think they will not be able to do it, because the economy will be so weak, the market will be so weak, that they will have to come back not only with QE4, but a massive Keynesian fiscal stimulus which I think will come before the election
• It’s going to be a middle class tax cut, a big increase in government spending, there will be stimulus checks in the mail and the budget deficit will explode back up to $1 trillion for 2016, or even bigger
• I think in the next 2 years we could see our first $2 trillion deficit
• Then Obama’s claim that he reduced the deficit by 60 or 70% – by the time he leaves office it will be just as high as it was when he entered it and the bigger problem is that the National Debt, which is the sum total of all those deficits will have doubled to about $20 trillion
• Let’s get into the economic news that helped prompt the Atlanta Fed to reduce its forecast for Q4 GDP and which Dudley was obviously completely ignoring
• Let’s start with retail sales: they were supposed to come in flat; instead they came in -.1%
• Where it gets worse, is X autos; they were supposed to rise by .2 instead they fell by .1 and they took the prior month down from an original estimate of .4 increase to .3
• In fact, less automobiles and gasoline, they were looking for .3% increase; instead we were unchanged
• In fact December, year-over-year, we had a decline in retail sales for the first time since the 2008 financial crisis
• That’s exactly what I said was going to happen and now the data is bearing me out
• The worst report was another manufacturing report, this time for the Empire State for the month of January
• December was -4.59, which is a bad report, they were looking for another bad report, but they thought it would improve to .4; instead we got -19,37
• That’s the worse since the Lehman crisis in 2008
• Now let’s look at industrial production; the December number came out today; they were looking for -.2; instead they got -.4
• It gets worse, because last month’s -.6 was revised to -.9, so the drop in November was revised to a 50% bigger drop than was initially reported
• And the December decline, instead declining another -.2 from -.6 we declined .4 from -.9
• In fact, capacity utilization went down from 77% the prior month to 76.5%, on an expectation of a .1% drop
• Let’s look at business inventories: This is a November number, expected to be unchanged, it was -.2, so inventories are contracting but they also revised October from zero to -.1
• So, instead of flat from flat, we dropped .2 from a drop of .1
• That is subtracting from Q4 GDP, and I think the December number will contract even more
• Meanwhile, business inventory to sales ratio: 1.38 again, the highest level since the 2008 financial crisis
• Inventories are piling up across the board; auto dealerships, department stores, you name it, they can’t sell it
• If this economy is so good, and we are creating all these jobs, why isn’t anybody shopping?
• The reason is that people can barely pay their rent with low paychecks from these part time jobs
• Or they’re loaded up with debt and they are too busy spending money on what they bought in the past to buy new stuff today
• The only thing keeping them afloat is that they can borrow more money and their gasoline bills are lower
• In fact crude closed today below $30/barrel, not only in West Texas but in Brent
• This is because the U.S. dollar is continuing to rise, with the exception of the euro, Swiss franc and the Japanese yen, where the dollar is falling, but the dollar is rising against commodity-linked currencies
• All this is because everybody continues to believe that despite all these rotten numbers, that the economy is in good shape and that it will keep growing and the Fed will keep raising interest rates
• This is what is screwing up the global economy
• Oil prices are going down for that reason – the Chinese market is going down for that reason, because the rising dollar is screwing up the global economy
• When the dollar goes up, things get more expensive for everybody outside the United States
• Meanwhile companies outside the U.S. that have have borrowed in dollars have a hard time paying their bills
• Countries that export commodities are having a harder time because the value of their exports are coming down
• You  think, “Why isn’t the strong dollar helping America?”
• It is helping, it prevents us from completely imploding, yes, a strong dollar makes it easier for Americans to spend, but the problem is they don’t have the money to spend – most Americans are in debt
• So a strong dollar increased their liabilities
• Paychecks are so small Americans are not saving much, so it is not doing the global economy any good that Americans have the greater purchasing power because they are maxed out
• People around the world, like in China, have lots of savings, and don’t have any debt, can’t spend as much because their currency is going down
• When the dollar turn, as soon as people figure out, either on their own or because the Fed acknowledges the obvious, then it will unleash these global economies
• You will see a boom, all of a sudden prices will come down, debt service costs will come down
• It’s the threat of higher interest rates and a stronger dollar is undermining all the global economies
• The root cause is when the Fed initially did QE1 & QE2, the rest of the world screwed up and accommodated what we did
• To prevent the dollar from collapsing, they ran up their own money supply, absorbed our QE and it created a situation where we were basically immune to some of the negative consequences of what we were doing
• We didn’t have the price inflation, we didn’t have the spike up in long-term interest rates and because it looked like there were no negative consequences to what we were doing, we kept doing it
• And in the case of people of like me,  who were saying QE is a bad thing and will cause prices to go up, the fact that it wasn’t obvious, we were judged wrong – there’s no reason we can’t do this indefinitely because there’s no consequence
• Of course, when the Fed started talking about ending QE, raising interest rates and shrinking its balance sheet, everybody assumed they could actually do it
• I said from the beginning that it was impossible to do that
• Our governments and the central banks abroad never should have participated by cutting interest rates, they never should have fought that currency war, they never should have protected their currencies from rising because not they’re reaping the consequences
• They are seeing the stronger dollar and the tightening of interest rates negatively impacting them.  Had they allowed their currencies to rise, thy would have been fine and America would have been stuck with its own problems
• Instead, we exported the problems. but the next time when the Fed re-launches QE, I don’t think the world is going to make that mistake twice
• In fact, I think the Chinese are setting the Yuan up for a huge increase; that’s why they are letting it go down now so it can go up later
• It will go down while the dollar is strong, but it will go way up against a weaker dollar
• That will be a big game changer internationally; we will have to choke on our next round of QE because it will not produce the results it did before because we will not have help
• Meanwhile, by the time the Fed acknowledges this weak economy and come to the rescue with stimulus, it’s going to be too late
• The recession will continue, the economic data will continue to worsen even after the Fed starts to stimulate it
• The stimulus may stop the stock market from falling, and believe me, I think that merely the admission that there will be no rate hikes will not be enough
•  There might be a knee-jerk rally in the market when it realizes interest rates are not rising, but the implications of of weak corporate earnings and unjustified high stock valuations will allow the U.S. stock market to resume its decline
• Not so overseas, because once the Fed admits that it can’t raise rates, that’s a game changer for the currency markets, commodities, precious metals – they are all going to go up
• Of course, initially, when the oil market spikes up because the Fed takes rate hikes off the table, people will want to buy the U.S. stock market because they’ve convinced themselves that the tail is wagging the dog; that the market is going down because oil prices are rising and when they see oil prices rise, they will buy stocks
• But higher oil prices will compound the other problems in the U.S. economy
•  Of course, layoffs, are just getting started. We are just one bad Non-Farm Payroll report from QE4, because if the only thing the Fed is hanging its hat on is a good jobs number, all we have to do is get a bad one
• And of course, they can go back and revise down the previous number to mitigate the perception of the bad number
• These are one of the most regularly revised data points; sometimes they are revised a year later
• Why does Dudley can put so much confidence in that number, yet no confidence in all the other data points?
• That number is not only the least reliable but is also a lagging indicator
• Just as inventories rose against sales on optimistic jobs numbers, additional employees were hired on the expectation that the economy was getting better
• A lot of the people who have been hired will be laid off, because they would not have been hired, if the Administration, the Fed and Wall Street had not talked up the economy
• The bad advise goosed the economy in the short run, but it will precipitate a sharp decline when mistakes have to be unwound
• This brings me to the big picture: everybody is convinced that the Fed’s monetary policy worked, but I always said, this victory dance is premature – you don’t know how they will end it
• When you take away all the supports and the thing you built stands, there’s nothing beneath it but hot air, the whole structure will come crashing down
• The belief that the Fed’s monetary policy was a success created the dollar rally. When it becomes obvious that it failed to truly strengthen the economy and was just window dressing, we will not be back where we started, we will be in a deeper hole, with trillions of dollars in debt that we didn’t have 8 years ago
• We’ve doubled the Federal debt, we’ve quintupled the balance sheet, we’ve decimated the labor force.
• The U.S. economy is in so much worse shape today than it was 8 years ago
• When it becomes obvious that the Fed didn’t solve our problems, they made them worse
• This is a huge game changer all at once. The market will react violently
• The problem is, when all the people who have been buying dollars want to sell, who is going to buy them?
• Everybody will have the same information – it’s the most crowded trade ever
• When all the people crowded into the dollar based on the Fed’s information,
• When we find out the Fed is now at negative rates and QE4 is bigger than 1,2 and 3 combined and everybody wants out of the buck, who is there to take the other side of the trade? Nobody.
• The same thing with gold: all the people who have been selling gold because they think the Fed solved all the problems in the U.S. economy realize the recovery was not real, and the Fed loses its credibility, everybody is going to want that gold back that they sold
• Problem is, the gold is not there any more and it’s not for sale, so the price is going to skyrocket
• So this will be a game changer.  Buckle in, this is going to be a big roller coaster ride, I know that people will have a queasy stomach as the markets and foreign currencies are under pressure, we will go down that roller coaster and it’s scary
• But this will be a quick turn up and we will just shoot straight up when reality sinks and people figure out what we already know
• So I don’t want to jump off the roller coaster and miss the ride up
• I would hate to be in there for the pain and not experience any of the gain

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