Janet Yellen Testimony Economy Strong Enough For Rate Hikes

The US economy is healthy enough to absorb gradual rate increases and the reduction of the Federal Reserve’s balance sheet, Fed Chair Janet Yellen testimony before Congress on July 12, 2017.

Federal Reserve Chair Janet Yellen told Congress on Wednesday that the bank hopes to keep raising a key interest rate and also intends to begin this year, the reduction of its bond holdings.

Yellen took note of several factors, such as household wealth and job gains that she said should fuel growth.

In what could be one of her last appearances on Capitol Hill, Yellen portrayed a market that, while growing gradually, continued to add jobs, gained from continuous household consumption and a recent leap in business investment, and was currently being supported too by stronger economic conditions overseas.

She blamed the economic slowdown in the first half of 2017 on inflation. She said Fed officials are watching developments closely to be certain price gains go back toward the 2 percent inflation target of the Fed.

Janet Yellen Testimony Freak Out Over Inflation

Janet Yellen seemed a little freaked out over the big drop in inflation over the last few months.

I take Yellen’s comments on inflation to mean that the economy should not have the CPI plunging in this part of the economic cycle. In fact, just the opposite should be occurring. But she added that it was considered by officials as an anomaly; inflation is predicted by the Fed next year.

Many economists believe the Fed, which has raised rates three times, will increase rates yet another time this year.

The Fed continues to anticipate that the development of the market economy will justify gradual increases in the federal funds rate over time while reductions in the Fed’s holdings of more than $4 trillion in securities will probably start “this year”.

In her prepared testimony before the House Financial Services Committee, Janet Yellen testimony repeated the message she’s been sending: the market has improved enough that it no longer requires the support the central bank began providing in 2008 in the aftermath of a serious financial crisis and the deepest recession since the 1930s.

In light of the continuing expansion, the Fed plans to keep raising its benchmark rate of interest and to lower its investment holdings, Ms. Yellen said in prepared testimony. She did not offer details concerning the time of the next actions of the Fed. Analysts expect the Fed to begin shaving its bond portfolio before the end of 2017.

The economy began the year with a slow growth rate of just 1.4 percent, it has regained momentum in recent months, aided by strong job gains, a revival of business investment and a strengthening of international markets.

Bottom line: the market is at full employment and the Fed is moving rates. As the Fed reinvests some of the bond holdings which mature monthly, they will decrease that reinvestment to reduce their balance sheet which will mark the beginning of QT (quantitative tightening). Many believe that QT began this year when the Fed did a series of rate hikes.

The Fed needs to keep policy accommodative to keep on supporting the recovery, but may hit a “neutral” rate quicker than anticipated. Estimates are that inflation has been dropping so fast that we could be near zero right now. Yellen has said the Fed expects estimates of the inflation rate to grow over time.

Yellen said in her testimony that as it stands rates “might not need to rise all that much farther” to reach neutral.

Yellen said growth remains moderate with business investment and consumer spending picking up, and the US economy is benefiting from growth in other countries too.

A strengthening in economic development abroad has provided significant support for U.S. manufacturing production and exports, Yellen said.

The Fed slashed its key policy rate to near zero to fight the worst economic recession since the 1930s, and kept it there for seven years before nudging it higher in December 2015. It left the rate unchanged before increasing it again in December 2016, March 2017, and June 2017 of this year.

At its June meeting, the Fed indicated that it expected to start decreasing its $4.5 trillion balance sheet after this year, a measure that could put slow upward pressure on longer-term prices for such things as home mortgages.

Yellen said, the market seemed to be in a virtuous loop of hiring, investment and spending which should increase resource usage somewhat further, thereby fostering a quicker rate of wage growth and price increases.

The Janet Yellen testimony was fairly uneventful except for her comments on falling inflation which seemed to baffle the Fed as to why this was happening at this point during the economic cycle.

Corporate Tax Revenue By Year Is Down Suggesting Economy Is Weakening

If the economy is booming tax revenues rise as companies generate greater revenue, resulting in them paying more in taxes. If the market is rolling over, the effectiveness of corporate taxation drops as companies close up shop and stop paying taxes.

Corporate Tax Revenue By Year Shows Economy is Rolling Over

In 2014 tax revenues were about $55 billion. In 2015 tax revenues were about $57 billion. In 2016 tax revenues were about $60 billion. In 2017, tax revenues have plunged to about $50 billion.

The last time we saw local and state tax revenues roll over like this was in late 2007 and early 2008.

Source: WSJ Daily Shot

Corporate tax revenue by year has turned down prior to every post-WWII recession. It suggests that America’s corporations are experiencing a deterioration in earnings.

With financial indicators flashing warnings signs, it seems like the US market is heading toward big trouble rather than revival.

Corporate tax revenues by year are difficult to fake. The money either came in the door, or it didn’t.

Despite a surge in optimism after the election of President Trump, nominal GDP growth in 2016 was just 2.95% making it the second-worst year on record since 1959.

Each time corporate tax revenue by year declines, the stock market sells off.

Source: Graham Summers, Chief Market Strategist, Phoenix Capital Research

In its latest report, the Congressional Budget Office said the tax income of the government is currently currently running -3% below projections within the previous eight months, which works out to a shortfall of as much as $70 billion.

United States Economy Teetering On Collapse

The United States economy is teetering, despite what the stock and job markets are saying. The US economy is consumption-centric. Growth in the current recovery has focused on three sectors that have fed through to consumption in its various forms: autos, energy, and financial services.

The scariest set of financial indicators to emerge in decades reveals what is crushing the dreams of record numbers of young, middle-class and older Americans.

While nationwide unemployment is down to 4.3 percent, policy experts and economists are warning of disturbing signals in the economy.

As any industry veteran can tell you, those on the sell-side are the second-to-last to surrender to a downturn in economic activity. A 401K Advisor or money manager will not produce negative forecasts when their most important objective is keeping its customers completely invested in risky assets.

United States Economy

The Citi Surprise Index shows a big disconnect between the economy and Wall Street.

The disconnect will not last for long as the chart above shows. Either the economy improves a lot over a short period of time, else the stock market comes plunging down to earth. It’s easier for the stock market to come down than it is for the Federal Reserve and republicans to somehow get this economy going, a feat that has remained elusive for the last 8 years.

Debt is what has kept the United States economy going for the last 8 years. Debt placed a floor under and then helped commercial property reach for the skies. Debt kept dying retailers alive. Debt also caused back-to-back years of record car sales.

Salaries for the typical American worker have hardly grown for decades, well-paid middle-class jobs are disappearing, and lots of the new jobs are from the low-wage service sector.

Consumers are being crushed by high healthcare costs and it partially explains why the American population grew at a small 0.7 percent this past year, the lowest rise since the Great Depression. As Russ Zalatimo of HudsonPoint Capital said, the tendency around recessionary times is that the birth date really drops like we are now seeing.

Bank of America Merrill Lynch stated autos are headed for a “decisive downturn” that will trough in 2021 at about a 13-million-unit annualized rate, down from last year’s blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers aren’t quite as grim, also reduced its revenue forecast, recognizing that the best days of this cycle have come and gone.

With the Trump White House scrambling to advance different measures to fuel economic growth – tax reform, infrastructure spending, maintaining jobs from fleeing abroad, some analysts say more radical steps are desperately needed.

Manufacturing isn’t just dead, say analysts. But it’s no longer dominated by smokestacks and rudimentary assembly. There are about 360,000 jobs in US manufacturing that are vacant and not being filled and companies are saying, “We need people to fill them.”

Meanwhile, retailers are currently choking on their debt as profit margins implode. Restaurants today employ 10.6 million individuals.

According to the Tax Policy Center, Trump’s tax reform could cause overall tax cuts of $6.2 trillion over the next ten years.

Losses on securities backed by automobile loans are piling up even as the unemployment rate has hit 4.3 percent, the lowest since 2001.

Additional evidence that the United States economy is teetering is becoming more and more apparent in credit card delinquencies. Experian reported that the domestic bank card default rate climbed to 3.53 percent in May, a four-year high. There are even nascent signs that families have started to struggle to make their mortgage payments.

Interest Rate Policy May Be Too Tight As Evidenced By Inflation

The Federal Reserve shouldn’t be tightening policy with the evidence so clear that it’s falling well short of its inflation mandate. The interest rate policy is wrong because their math is wrong.

Right now the Fed’s inflation goal is 2 percent. Why so low? Fed rate hikes are keeping inflation too low and possibly will lead to the next recession.

Central bank officials are being too vigilant against an inflation problem that doesn’t currently exist.

When the next downturn hits, there will not be much of an inflation safety margin against deflation.

The US has had interest rates at near zero for nearly seven years. When the next recession hits, rates will fall back to zero again like they do during almost every recession. Is the central bank’s interest rate policy meant to keep rates stuck near zero for 7 years? No. So the logic behind a 2 percent target is wrong. If a 2 percent target doesn’t get rates high enough to keep them away from zero, then maybe a 4 percent one will.

Capital expenditures are very low, so most of the increase in debt was returned to shareholders, either in the form of M&A or stock buybacks. The increase in debt suggests that companies find borrowing cheap because interest rates are low. So money is easy, but demand is not very strong. Demand for products will continue to fall as the Fed hikes rates and makes borrowing more expensive.

Interest Rate Policy Is Too Tight at 2 Percent Inflation Target

Credit-card users, home-equity borrowers and homeowners with adjustable-rate mortgages, auto loans, all will likely see their monthly payments rise as the Federal Reserve’s interest rate hikes ripple on the other side of the economy.

The flattening yield curve seems to be saying rates are nearing a peak. The decelerating inflation rate as well as the slowing loan origination markets are signaling that Fed policy is a bit too tight. If policy is already too tight now, when the Fed begins reducing its balance sheet in a few months things will get even tighter.

You can think of the yield curve as a gauge for how far away the Fed is from completing its rate hike cycle. The fed funds rate is currently around 1.16%. The two-year is 1.35%. This suggests the market thinks there is one more rate hike coming. But the five-year is at 1.77%, which suggests the market doesn’t think interest rate policy will reverse in the coming years.

Hong Kong Stock Exchange Now Has Competition For China Mainland Stocks

The Hong Kong Stock Exchange will now have have competition for China mainland stocks after the MSCI approved plans to add China’s mainland A shares to its index. According to a report in the WSJ (link above) this will bring billions of investment dollars into China stocks.

MSCI’s decision Tuesday to add China A-shares, stocks denominated in yuan and listed in either Shanghai or Shenzhen, to its MSCI Emerging Markets Index stands to boost demand for Chinese stocks by billions of dollars over time.

MSCI announced earlier Tuesday a long-awaited decision in favor of adding stocks, known as A shares, to the firm’s emerging markets index, which is tracked through an estimated $1.6 trillion. As a consequence, non-Chinese investors that follow the MSCI Emerging Markets Index must buy Chinese A shares to match the updated version of the index.

MSCI said 222 companies would be eligible for inclusion, increasing China’s weighting in the emerging-market index by 0.73 percentage point from its current 28%. The change will also be reflected in other indexes, including the MSCI All Country World Index.

But U.S. asset managers have been eager to push into the local market. China has the largest weighting in the MSCI Emerging Market Index, at 27.66 percent, although that only includes Hong Kong and U.S.-listed shares of Chinese companies.

Because of limited access to the mainland Chinese stocks, foreign investors own less than 1.5 percent of that market, Chin Ping Chia, head of research for Asia Pacific at MSCI, said on a conference call with journalists after the inclusion decision was announced. He estimated $17 billion to $18 billion could flow into Chinese A shares.

Adding China to the MSCI index will expose foreign investors to a market still plagued by limited transparency and frequent government intervention, were some of the concerns cited by the index provider in the past three years following rejections. Even as China aims to attract more global capital, authorities continue to intervene in domestic stock and currency markets, and take on speculators.

MSCI indexes already include Chinese companies shares listed in on the Hong Kong stock exchange and New York, but not those in mainland China.

Front Running the MSCI Decision In China Mobile

I like China Mobile as a way to front run the MSCI decision with the idea that a rising tide will raise all ships. China Mobile is a huge corporation that should benefit from an increase in investment inside China. The stock has really sold off over the last couple of months as well.

The stock has been a little too volatile recently for an entry. I would prefer a consolidation move and then a candle over candle reversal before entering.

The Effective Volume shows large players are buying up China Mobile into the downward move and the Twiggs Money Flow shows a positive divergence which suggests increased buying pressure as the stock drops.

GO HERE TO CHART LARGE PLAYERS AND THE TWIGGS MONEY FLOW LIKE THE CHART ABOVE… AWESOME TOOL!

You Haven’t Seen This Stock Market Correction Logic on Bloomberg

You will not see this stock market correction logic from AMTV (link above) in the mainstream financial media.

Christopher Greene thinks that a stock market crash of a lifetime is coming soon.

We are in a bubble today that is far worse than the technology bubble in 1999 and the real estate bubble in 2007. We are in the mother of all bubbles because of the Fed buying trillions of dollars worth of collateralized debt and the US government’s irresponsible spending of tax dollars during the Obama Administration that has taken the national debt to $20 trillion.

Every major asset class is in a bubble, including digital currencies now. Real estate is in a bubble. Automobiles are in a bubble. Oil is in a bubble (because Saudi Arabia is trying to control global production to prop it up). The stock market is in a bubble because of the Federal Reserve and QE and a $4.5 trillion balance sheet.

Stock Market Correction But Not Crash

I think Christopher Greene is overstating the magnitude of the coming stock market correction. Mr. Greene’s logical fallacy is that he is not figuring in what the Federal Reserve will do if the stock market does indeed start to crash. Mr. Greene’s logic assumes that the Fed will do nothing when markets begin crashing.

Remember, the Fed holds $4.5 trillion worth of collateralized debt. That gives the Fed major control over our economy and markets. For example, if the auto bubble pops and banks are stressed from a high level of defaulting car loans, the car loan debt will be collateralized and purchased by the Federal Reserve. Think about how much control the Fed has over our markets right now. We have a global holy war with radical Muslims murdering Americans and major terrorist attacks in the US and England but our markets keep going higher. We have the government Establishment trying to unseat a US President but markets keep going up. We have Qatar being financially attacked by Saudi Arabia and yet markets keep going up. We have President Trump bombing the sovereign country of Syria that is being protected by Russia and markets keep going up. We have North Korea testing nuclear bombs and long range missiles and markets keep going higher. We have China building man-made islands in the ocean and then claiming the area for miles around those islands in violation of international treaties and markets keep going higher. We have Mexico dumping criminals and drugs into our country and then threatening retaliation when we try and build a border wall yet markets keep going higher. We have a sitting President being sued for trying to restrict travel to this country from radical Muslim countries where people coming here are not properly vetted and markets keep going up. We have George Soros creating unrest using NGO’s around the world, including here at home but markets keep going higher.

Markets keep going higher because they are not based on economics and supply and demand. When everything can be securitized and propped up by the central bank, there are no major stock market crashes because the government won’t allow it. Christopher Greene is missing this logic by assuming that we still live and trade in a free market system. We have a government managed market much like the Chinese. If the market started to crash in a certain sector, the defaulting debt would be securitized, collateralized, and purchased by the central bank to prop up member banks. This is why I think we will see a deep stock market correction but not an actual stock market crash.

Here is the Christopher Greene video where he predicts the mother of all crashes:

Bear Market Coming If Trump Agenda Does Not Move Forward

A bear market is coming if President Trump’s agenda does not move forward quickly. I have been saying for months now that the Federal Reserve is hiking rates not because we are in a strong economy that needs cooling off but instead to save pension fund holders and others who depend on the income generated from bond yields.

The Trump rally ended back in March. That was the turning point when the markets started pricing in the reality that President Trump was being blocked even on a common-sense travel ban from radical Muslim countries that support terrorists and that generally dislike America. If a common-sense travel ban can’t even get put in place, how does Trump’s economic agenda have any hope?

Bear Market Coming As Economy Slows

We are six months into Trump’s presidency and we have no clear plan for raising the debt ceiling when the government runs out of money in August. We have no big comprehensive corporate tax reform yet. We have no tax cuts for working Americans yet. We have no repatriation of trillions of overseas dollars yet. We have no massive infrastructure plan to boost the economy yet. Meanwhile, the Federal Reserve continues to hike rates.

The chart below shows the effects of rate hikes on commercial and industrial loans.

The arrows mark the three rate hikes since the end of the Great Recession. When the Fed hikes rates next week, we could have commercial and industrial loans drop below the zero line and signal a contraction for the first time since the Great Recession.

Today, there’s a greater chance that a bear market will happen than not happen because of trend logic. Trend logic is the idea that a trend will continue until it actually ends. Assume continuation of the previous trend until proven otherwise. The Federal Reserve is on a rate hike up-trend. Commercial and industrial loans are in a downtrend. Assuming these trends continue, the yield curve will go flat or inverted within the next few months. The only thing that will stop this gloomy scenario from taking place is if one of those trends change.

The only thing capable of preventing the next bear market is if Trump’s economic agenda moves forward on tax cuts and infrastructure spending, or if the Federal Reserve does not raise rates in June. Since I see neither of these outcomes happening right now, rather than assume a magical trend change appearing from out of nowhere, it’s better to assume continuation of the previous trends until proven otherwise.

Peter Schiff gave an excellent speech at Cambridge House recently about the deteriorating US economy, check it out:

Emerging Markets ETFs Money Flows In, US Money Flows Out

emerging markets etfsEmerging markets ETFs made out big time for the month of May. A whopping $23 billion went into international equity ETFs while $1.6 billion was pulled out of US equity ETFs in May according to a report by ETF (link above).

The main reason investors are doing this is because of valuations. The U.S. equity markets are seen as being way overvalued, especially after the Trump hype wore off and reality set it that the President isn’t going to get much done in terms of tax cuts and health care in 2017.

Emerging Markets ETFs versus US Equity ETFs

The iShares MSCI EAFE ETF tracks a market-cap-weighted index of developed-market securities based in Europe, Australia and the Far East so it’s a good chart to measure emerging markets ETFs. SPY tracks the S&P 500 so it’s a good way to measure U.S. equity ETFs.

Tracking the performance of EFA to SPY over the last month, EFA is up +4.4% while SPY is up 2.2%. The incredible 100% out-performance by EFA over SPY means that a lot of investors are moving money into countries that have a more accommodating central bank policy (rates going down).

Stock Market Forecast For Week of December 19 2016

A weekly Saturday night financial show that attempts to predict market direction for the week ahead by looking at a variety of technical and fundamental indicators. This week’s show includes commentary on the Fed’s first and only rate hike in 2016, Eli Lilly’s long-acting Basal Insulin that’s now available in the US, takeover rumors circulating about Qorvo, Protalix Biotherapeutics $24 million order to treat Gaucher patients in Brazil, the FDA approval of Vericel’s Maci for the repair of cartilage defects of the knee, Silicon Motion’s supplying of SSD solutions to the Alibaba Group, and more.