October 4, 2017, 4:00 pm EST
The media is giving more attention today to the potential change in power at the Fed. We talked about this on Monday. Remember, the President said last week that he expected an announcement to be made in the next two or three weeks on the future Fed Chair.
Along with any advancement on the fiscal stimulus front, the appointment of the next Fed Chair will be the most important news for markets and economy this year (though Yellen isn’t officially done until January of 2018).
Back in March I made the case for Trump ousting Yellen and hiring the Fed newbie, Neel Kashkari. Admittedly, I didn’t think Yellen would last this long. While Bernanke (the former Fed Chair) can be credited for averting a global apocalypse and keeping the patient alive, for as long as it took to bridge the gap to a real recovery. Under Yellen’s leadership, the Fed has been doing it’s best to kill the patient, at precisely the time the real recovery could be taking shape, with the assistance of fiscal stimulus finally in the works.
If the Fed continues on its path, borrowing costs (or, as importantly, the perception of where they may go) may strangle the economy before fiscal stimulus gets out of the gate. This is why I’ve said Kashkari should be the President’s best friend at the Fed. He’s the lone dissenter on the rate hiking path, and he’s been vocal about leaving monetary policy alone until the inflation data warrants a move.
Kashkari released an essay on Monday where he blames the Fed for creating its own low inflation surprise by tightening money and forecasting a tighter path for monetary policy, therefore creating a contractionary effect on the economy as consumers/businesses anticipated the negative effects of higher rates on the economy.
Guess who made this same case? Bernanke. He did so in a blog post last year, around this time. It was just as the world was spiraling into negative rates. He said the Fed shot itself in the foot by publishing an overly optimistic trajectory and timeline for normalizing rates. And that the communication alone resulted in an effective tightening.
This is why the ten year yield (still at just 2.34% after four rate hikes) is pricing in something that looks a lot more like recession than a hot economy.
With the above in mind, there has been a roster of candidates for Fed Chair floated today, which did not include Neel Kashkari. That was until word began to circulate that Jeff Gundlach, manager of the world’s biggest bond fund, said yesterday that he thinks Kashkari will get the nod, because he’s the most easy money guy. Still, it was refuted in the media that he was even a candidate.
October 2, 2017, 4:00 pm EST
Stocks open the week with another record high. The dollar continues to do better. And as we open the new month, yields are now up 32 basis points from the lows of early last month.
That’s a dramatic shift in the interest rate environment. And in recent days, underpinning that strength, is the idea that a hawk could be taking over for Janet Yellen when her term ends at the end of January.
Over the past few days the President has met with candidates for the Fed Chair job, and has said he will be announcing his decision in the next two to three weeks. That’s a big deal for markets and the economy — something to keep a close eye on.
His interview last Thursday was with a known hawk, former Fed governor Kevin Warsh – who has publicly criticized the Fed for keeping rates too low. He was also a hawk through some of the darkest days of the recovery – he’s been proven wrong for that view. As for Yellen: She has been among the most dovish Fed members throughout the crisis but has been leading the rate normalization phase (i.e. higher rates), which has proven to be questionable judgment, with missteps along the way resulting from the Fed’s overly optimistic and hawkish outlook.
Interestingly, though Trump criticized the Fed for keeping rates too low throughout the recovery, it’s higher rates, now, that are a significant threat to his growth policies. So he needs the Fed to step out of the way, and do no harm to the hand-off from a monetary policy-driven recovery, to a fiscal policy driven-recovery. Higher rates can choke off the positive effects of tax cuts and government spending.
On that note, his friend on monetary policy should be (and I think will be) Neel Kashkari (a new Fed member). Kashkari has been the lone dissenter on the Fed’s tightening path, arguing along the way to let the economy run hot, to ensure a robust recovery, before moving on rates.
Over the past two years, Yellen has blamed their pauses in their tightening program to the lack of evidence that the economy is overheating. It’s safe to say that the economy is not overheating (nor has it been), with both growth and inflation still undershooting long run averages.
March 21, 2017, 4:00pm EST Invest Alongside Billionaires For $297/Qtr
Over the past week, I’ve talked about the potential for disruption in what has been very smooth sailing for financial markets (led by stocks). While the picture has grown increasingly murkier, markets had been pricing in the exact opposite – which makes things even more vulnerable to a shakeout of the weak hands.
With that, it looked like we are indeed working on a correction in stocks. But it’s not just because stocks are down. It’s because we have some very important technical developments across key markets. The Trump trend has been broken.
Let’s take a look at the charts …
The above chart is the S&P 500. We looked at a break in the futures market last week. Today we get a big break in the cash market. This trendline represents the nice 45 degree climb in stocks since election night on November 8th. We have a clean break today.
Stocks ran up on the prospects that Trumponomics can end the decade long malaise in, not just the U.S. economy, but the global economy too. With that, the money that has been parked in U.S. Treasuries begins to leave. Moreover, any speculators that were betting the U.S. would follow the world into negative rate territory run for the exit doors. That sends Treasury bond prices lower and yields higher (as you can see in the chart above). So today, we also get a break of this “Trump trend” in rates as well (the yellow line). Remember, this is after the Fed’s rate hike last week — rates are moving lower, not higher.
Next up, gold …
I talked about gold yesterday — as being the clearest trade (higher) in an increasingly murkier picture for global financial markets. You can see in the chart above, gold is now knocking on the door of a break in this post-election Trump trend.
Remember, we’ve talked about the buy-the-rumor sell-the-fact phenomenon in markets. The beginning of the Trump trend in stocks started on election night (buying “the rumor” in anticipation of pro-growth policies). The top in stocks came the day following the President’s speech to the joint sessions of Congress (selling “the fact”, entering the “show me” phase).
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March 17, 2017, 4:00pm EST Invest Alongside Billionaires For $297/Qtr
With the Fed’s third rate hike this week in the post-financial crisis era, let’s take a look at how market rates have reponded.
Here’s a chart of the U.S. 10 year government bond yield.
On December 16, 2015, the Fed moved for the first time. The 10-year traded up to 2.33% that day and didn’t see that level again for 11-months. Despite the fact that the Fed forecasted four hikes over the next twelve months, the bond market wasn’t buying it. A month later, the fall in oil prices turned into a crash. And the 10 year yield printed a new record low at 1.32%, just under the crisis lows.
On December 14, 2016, the Fed made the second move. This was after they had spent the better part of the last nine months walking back on what they thought would be their 2016 hiking campaign. The difference? Trump was elected the new President and he was already fueling confidence from talk of big, bold fiscal stimulus. The Fed’s big hiking campaign was placed back on the table. The high in yields the day the Fed made hike #2 was 2.58%. The next day it put in a top at 2.64% that we have not seen since.
And, of course, this past week, we’ve had hike #3. The 10 year yield traded up to 2.60% that day (Wednesday) and we haven’t seen it since, despite the fact that the Fed has continued to tell us another couple of hikes this year, and that the economy is doing well, expect about three hikes a year through 2018. Yields go out at 2.50% today.
So why aren’t market rates screaming? The 10 year yield should be 3.5%+ by now. And consumer rates should be surging. Is it the Bank of Japan, the European Central Bank and China buying our Treasuries, keeping a cap on yields? Is it that the market doesn’t believe it and thus the yield curve is flattening (which would project recession)? Probably a bit of both. The important point is that the Fed absolutely cannot do what they are doing if they think they will push the 10 year yield up to 3.5%+, and fast.
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