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Draghi Fails To Deliver. Will Yellen Be Next? – Ep. 123

  • Mario Draghi of the ECB sent shockwaves through the foreign exchange and currency markets today
  • He didn’t deliver the stimulus traders expected
  • The big question is, will Janet Yellen surprise the market by failing to raise rates?
  • The ECB did slightly lower interest rates, and extended QE if it will be needed
  • Draghi’s goal is inflation
  • He equates 2% inflation to “price stability”, when prices in Europe are stable now
  • The big divergence that everybody is trading on a tightening in the U.S. at the same time Europe continues to ease
  • The reality is more likely to be the reverse
  • If anything, the European recovery is just getting started, and the U.S. recession is just getting started
  • As a result of Draghi’s decision to hold off on stimulus, the euro was up more than 3% on the day
  • The dollar was weak across the board
  • The stock market, including the DAX, fell accordingly
  • Both U.S. stocks and bonds experienced a selloff
  • Cheap money has been fueling rallies all over the world and when the ECB did not deliver it triggered a selloff in the U.S. assets
  • The Dow rallied over 2000 points off its September low based on rate hike expectations that did not materialize
  • We also got a key reversal in gold
  • Overnight it made a new low, but closed substantially above that level
  • The euro is still weak, it is just not as weak as the market expected
  • The best environment for gold when the weakest currency is the dollar
  • I wanted to address Janet Yellen’s testimony today responding to questions
  • Yesterday, Yellen referred to Q4 GDP forecast consensus as 2-1/2%
  • She did not even realize that on that same day the Atlanta Fed reduced their forecast down to 1.4%
  • I think the real shocker will be that the Europea Q4 GDP will realize greater growth than the U.S.
  • Yellen was asked about Citibank’s recent projection that the U.S. will experience a recession in 2016
  • Obviously, she can’t agree with the projection, as this runs contrary to the Fed’s rhetoric
  • Asked as a followup, what tools the Fed would use in the event we did experience a recession in 2016, Yellen responded that the Fed would all the tools it has always had
  • She said, if we did raise rates, then we would lower them
  • Plus, she said it could use the asset purchase program (QE) that “has worked so well in the past
  • If QE worked so well in the past, we would not experience a recession in 2016
  • You can’t call QE a success until rates are normalized and the balance sheet shrinks back down to pre-crash levels
  • If the Fed finds that it has to launch QE4 in 2016 because it failed to reach “escape velocity”
  • How many QE’s does the Fed have to initiate before it admits that it doesn’t work, and is actually impossible to end without a great deal of pain?
  • This loss of credibility in the Fed will precipitate a dollar crisis
  • Anther thing that was ignored by Janet Yellen and the press was the six-year low in the ISM number
  • The market is focusing on the service sector, yet the most important jobs are the goods producing jobs
  • Lat month, we got a higher than expected jump in the non-manufacturing number:59.1
  • This month we wend all the way down to 55.9, which is dangerously close to contraction
  • If we get the service and the manufacturing sectors both in contraction, that will be a total recession, supporting Citibank’s 65% probability forecast may look optimistic
  • Since 2016 is an election year, a recession will not bode well for the Democrats’ economic success narrative