The Economy: “Veni Vidi Vici” is the new Black and it couldn’t be more appropriate for the Ides of March. It rightfully belongs with Caesar but this week has seen a bevy of contenders who deserve participation trophies: Shia LaBeouf, Rachel Maddow, John McCain and Bruce Loveless were joined by Fed Chair Yellen. Uber Dove Yellen continued to lead from the rear with a ¼ point interest rate hike. Yellen’s comment to consumers was, “The simple message is the economy is doing well.” 3 or more rate hikes are expected in 2017; roughly one every other meeting till year end. Analysts were quick to call it a Goldilocks Rate Hike with a dovish statement. The Trump Animal Spirits provide the perfect cover for the Fed to reload monetary policy before the next recession hits. Having kept interest rates at zero for almost a decade, the Fed must now scramble to hike rates enough that they have room to ease when the economy eventually slows. Let’s keep those zombies and buglies dancing around the bonfire. Maybe no one will notice that credit is tightening. Bored? Try this Thought Experiment: Enter a Prime Rate of 7% into your operating calculations. What does that that do to your organization? … only a matter of time.
Food for Thought: Quantitative Easing (QE) is alive and well. While the Fed has cut back, nothing is being done to shrink its bloated balance sheet. Equally important, Central Banks continue to pump $200 billion per month into the global financial system. The EU alone pumps $80 billion per month and “We’ll Do Whatever It Takes” Draghi shows no sign of easing off. If global growth is accelerating, why is $2.5 trillion in stimulus still needed? … that is the fly in the Animal Spirits’ ointment. Next up, raising the U.S. Debt Ceiling from its 2008 limit. This used to be cause for government shutdowns and hand wringing. Maybe it’ll get some play when The Donald issues his budget.
Music of the Week: Jimi Hendrix “Axis: Bold As Love”
The Economy: Holiday Cheer continues for the 6th week with global financial markets hitting levels of euphoria not seen in years. Donald Trump’s election was supposed to unleash Forces of Darkness that would obliterate life as we know it. Instead, optimism and euphoria have taken hold of financial markets around the world. Even oil markets are screaming higher on production agreements that ignore the OPEC’s history. The Fed ended its meeting and raised interest rates ¼% as expected. The call is that the Age of Central Bankers is drawing to a close with Trump’s fiscal spending to take the lead in pumping up the economy. Global markets have priced-in immediate results for the Trump agenda. As the post-election rally continues to hit new all-time highs, the Shiller cyclically adjusted P/E (CAPE) ratio now stands at 27. This reading is only exceeded by 1929 and 2000. Stocks are getting expensive.
Food for Thought: The Fed tightening unleashed a selloff in financial markets. Stocks tanked; Mortgage rates jumped to the highest in 2 ½ years. In her press conference Fed Chair Yellen indicated that 3 rate hikes were in store for 2017. Markets were expecting 2. Higher mortgage rates will eventually put a damper on real estate. Higher treasury yields will eventually begin to compete with stocks. But one day does not a market make. The Trump rally took taken a breather today but it may continue upwards till the inauguration on January 20, 2017.
Music of the Week: Elvis Presley “Elvis Christmas Album”
The Economy: Happy Holidays! It’s all good. Home prices up 5% year over year. The U.S. economy expanding at the fastest pace in 3-years. Consumer confidence far above expectations. On the near horizon: Votes in Italy and Austria that may see more exits from the EU. Expectations that the Electoral College will confirm the U.S. Presidential Election. Anticipation of a ¼% Fed interest rate hike in mid-December. Prospects that we’re on the verge of another leg up in equities.
Food for Thought: Holiday joy is offset by the aftermath of the election. Partisans on both sides have sharpened their knives and created their lists. Though Republicans have The Hill and the White House, no one is calling it a mandate with the popular vote having eluded them. However, Trump is a man of a different color; arguably the first Man on Horseback since Teddy Roosevelt. Obama has established the precedent of rule by Executive Order; bypassing the Constitution, Congress and the Courts. Expect this to continue; first with the unwinding of the Obama agenda and then with its replacement. As The Circus leaves town, it looks to be replaced by The Wild West Show.
Music of the Week: Elwood Brothers “Jazz Tannenbaum”
The Economy: The Fed’s latest buzz-word is the “High Pressure Economy.” … as in The Fed is going to run a “High Pressure Economy.” The High Pressure Economy is one in which inflation is allowed to run beyond levels deemed prudent. It’s the latest Fed-Speak for managing a sluggish economy that refuses to respond to 8-years of unbridled stimulus and low interest rates. While the focus is on whether the Fed will raise interest rates in December, attention might be better placed in the future. Another ¼ point hike in rates isn’t going to do much more than blow marginal players out of dubious deals. But keeping interest rates artificially low for several more years will have a significant impact on many aspects of society. Pension plans are especially at risk. Yellen rules until at least 2018 possibly 2022. Bigly. Come the new year, the voting members of the Fed Open Market Committee (FOMC) who are hawks, reach the end of their terms. Coincidently, their replacements are uber-doves who will play into Yellen’s “lower for longer” policy. Inflation is persistently running below target. The U.S. and global economies are showing weak to inconsistent metrics. Why would the Fed feel compelled to raise rates at all?
Food for Thought: Finding safe income in a zero interest rate environment is a desperate challenge for investors in general and retirees in particular. Bank deposits and money markets are losers when you figure in taxes and inflation. The long treasury at 2.49% is a bust as well. Dividend paying stocks are now being touted as the answer. But the dividend can always be cut and the stock can always plunge in value; even when inside an Exchange Traded Fund (ETF) or a mutual fund.
Music of the Week: Halie Loren’s “After Dark”
The Economy: High jinx at the Circus on the Potomac highlighted this week. On Tuesday, Wells Fargo’s CEO was excoriated by Senator Elizabeth Warren. Her roasting included comments that the CEO should resign and that he should face criminal prosecution. She pointed out that he has made hundreds of millions as a result of the fraudulent account shenanigans at Wells. But if the 2007-2008 Financial Crisis is a guide, the Wells Fargo board will probably give their guy a raise and millions of additional stock options. Today saw the Fed report out of their latest 2-day meeting with no change in interest rates. This was the expected outcome. Asked if this was a political move inspired by the upcoming presidential election, Fed Chair Yellen denied that she leads a Clinton Fed. Lower for longer remains the name of the game.
Food for Thought: Financial markets usually lead the real economy both up and down. Here in San Diego, our ongoing street poll has begun to show weakness is some sectors of the San Diego economy. There is some evidence that the uncertainty in the financial markets is bleeding over into the real San Diego economy. What we’re hearing is that new money is slowing down. Business owners and executives appear to be taking more of a wait and see attitude towards new endeavors. Increasingly we’re hearing folks say, “I’m waiting for the other shoe to drop.” A recent San Diego Regional Chamber of Commerce poll shows San Diego business confidence at a 3-year low.
Music of the Week: Atlantic Five Jazz Band’s “Bar Music Moods – The Piano Edition Vol. 1”
The Economy: The schizoid global economy continues to make everyone happy … which could mean anything or nothing. If you don’t like the outlook you’re hearing, just flip the page, change the channel or try another URL. Somewhere there’s a data-pipe that will support your world view. These is confusin’ times! The Jackson Hole love fest was a perfect example. Once the self-adulation was done, the Bankers got down to the serious business of contradiction. The Fed took first place with Chair Janet’s dovish speech followed by Vice Chair Fischer’s hawkish comments. Hilarious! Watching their intellectual meanderings reminds me of Snagglepuss and herding cats. You can see these Fed Cats behind closed doors after a news conference, bent over in laughter like seasoned vaudevillian hucksters, “Har! Har! Boy did you see the look on those suckers faces! Har! Har! Yep, we put it to ‘em again. Har! Har! Those idiots actually think we know what we’re doing!!”
Food for Thought: From all of us at Higgins Capital, Have a Great Labor Day Holiday!
Bye-bye, so long, farewell
Bye-bye, so long
See you in September
See you when the summer’s through.
Music of the Week: Tina Turner’s “All The Best”
The Economy: No news is … no news. The Fed released their July minutes last week. It was met with a yawn. Lower Forever remains the mantra. Though Fed targets have been consistently met, Lower Forever is the only game in town for interest rates. Likewise stocks will go up forever or as Buzz Lightyear put it, “To infinity and beyond.” This week is the Central Bank Lovefest in Jackson Hole. Fed Chair The Janet caps the frenzy with a speech on Friday. Talking heads are blathering about a breakthrough policy speech. We disagree. The Fed is no more apolitical than The Supremes as witnessed by Justice Ginsberg’s inappropriate comments. The Janet is a partisan of The Hillary so no tightening will occur that might adversely affect financial markets. They will do nothing to upset markets until after her preordained ascension and the firm establishment of a hereditary American political dynasty. With 75 days till the Greatest Show on Earth closes, there’ll be no action on interest rates till at least December … if then. Further supporting our call is that The Donald has said that he’ll replace The Janet if he’s elected. So she’ll do nothing to increase his odds of a win.
Food for Thought: A MIRVed Chicxulub asteroid taking out the 100 largest cities on the planet wouldn’t change the complacency in global financial markets. The asteroid strike would elicit cheers from investors as Central Bankers opened the floodgates to eternal easy money. Negative interest rates would be expanded throughout the land and the disappearing middle class would be forced, by our militarized police, to pay the Too Big To Fail Banks on funds deposited. Absurd, yes; farfetched no. In Japan, sales of home safes are skyrocketing as depositors chose to stash money at home rather than pay banks to hold it. If this isn’t a grassroots revolt against centralized planning, then what is? Meanwhile, The Janet is said to have a proposal to double the Fed balance from $4 trillion to $8 trillion in the next round of Quantitative Easing. The message from on high: Debt is good, crushing debt is better, debt that impoverishes our great-great-grandchildren is best.
Music of the Week: Paul Taylor’s “Burnin'”
The Economy: The Fed released their minutes today. Nothing new. This week marks the beginning of earnings season. Alcoa kicked off with both a revenue and an earnings miss. We’ll see if Alcoa is the rule or the exception. This is the week before the Columbus Day Holiday and so is light on economic reports. We’ll devote a few lines to San Diego real estate since a recent report says that San Diego residential real estate has climbed 5.8% year over year. San Diego is one of the priciest markets in the U.S. It’s difficult to find much more than a chicken coop for less than $500,000. Around the corner from our office in La Jolla is a 1950’s vintage “cottage.” It’s unoccupied and has had a green construction fence around it for 3-years. Shoulder high weeds grow in the yard. Price: $3,500,000. A place nearby on the water is listed for $21,000,000. On Zillow, La Jolla is full of listings. Up the coast in Del Mar and Carmel Valley listings are even more prevalent. In Carmel Valley a home was listed last year for $2,2000,000. It was reduced to $1,999,000 before being taken off the market at the end of the summer. In other areas throughout these three communities prices have declined from 2-years ago. Real estate management people I’ve talked to say the top has passed. I don’t understand where this 5.8% appreciation number comes from.
Food for Thought: Acclaimed economist Gary Shilling recently gave an interview. The following are some of his comments, paraphrased:
The Fed is irrelevant at the present time. It’s impotent. They have exhausted Monetary Policy. 2% GDP growth is a joke after trillions in QE. It didn’t work. Lower interest rates have created a lot of distortion.
We are not in a traditional economy. We’re going through massive deleveraging. The present Age of Deleveraging must run its course before growth resumes. Deleveraging used to last about 10-years. We’re 8-years into it and it might take another 5-8 years to go. The old 10-year metrics don’t work. This time around might take 18 years. There may be political heat. There is no comparable economic period for what we are going through. This is a unique period in our history.
Increased Globalization is acting as a great equalizer on wages worldwide. American labor is no longer enjoying the isolation of the 1950s and 1960s. The wage gap with emerging markets continues to shrink. This cannot be legislated away with minimum wages.
Energy: $20 oil is on its way. OPEC is tired of the cheaters. So they’re on the warpath. The marginal cost is all that matters. In the Permian Basin or the Persian Gulf the marginal cost is $10-20/barrel.