- 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
Podcast: Download