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Fed Bankers Bark But Won’t Bite – Ep. 154

  • The markets are closed on Good Friday, the markets are closed, but I did want to take time to record this podcast
  • Some people were wondering why I didn’t do a podcast on Wednesday, the day we had a big drop in the price of gold
  • Believe me, I love doing podcasts, when the price of gold goes down, because I know a lot of people who are interested in gold want to know what my thoughts are on a day that it happens to go down
  • As it turns out, I did have an interview on CNBC Fast Money, and my comments are available on that interview, posted on my YouTube channel
  • Gold was down about $30 on that day and declined further yesterday
  • Silver was down as well
  • Gold is still holding above $1200 and gold is still positive on the year, not so for the U.S. Stock Market, which slipped back into negative territory this week
  • Not only was gold weaker but the dollar was considerably stronger, and commodities in general, like crude oil, copper – also went down
  • So what was the catalyst?
  • You might say maybe it was because gold failed to rally on the news of the terrorist attack in Belgium
  • News of this kind often triggers a knee-jerk reaction to buy gold, but the rally really wasn’t that big, and when a market doesn’t rally on good news, it generally means it is over bought, or  it’s ready to go down
  • To me, however, that was a non-event, as far as gold is concerned
  • I don’t buy gold because of geopolitical instability – that has nothing to do with my strategy
  • The real reason to buy gold has to do with inflation, and the central banks creating it, artificially low interest rates, negative interest rates and Quantitative Easing
  • It has nothing to do with terrorism, except to the extent that terrorist attacks lead to more government spending that is not supported by taxes which means more money printing, more inflation and bigger deficits
  • In the long run, it is good for gold, but in the short run, it is just a bunch of noise, but traders can certainly jump on these events as a reason to buy or sell and read things into a lack of movement, assuming there is a fundamental reason in the gold market, when there’s not
  • The more significant factors that hurt gold were comments by several Federal Reserve officials, to the extent that April is now considered a “live” meeting, meaning that they still might raise interest rates
  • These comments are coming less than 2 weeks after the official March meeting, where the Fed could have raised interest rates, but didn’t
  • Not only did they not raise interest rates, they went out of their way to diminish the markets’ expectations of future rate hikes
  • So that after the March meeting, people who thought the Fed was going to raise rates 3 more times, revised expectations to at most 2, but a lot of people are starting to expect no interest rate hikes at all
  • It was a very dovish press conference following the release of their statement
  • So now, a week later some of the same guys on the FOMC saying, “We might raise rates in April”
  • If you’re thinking about raising rates in April, why were you so dovish last week?
  • And if you are going to raise them in April, why not raise them in March
  • None of this makes any sense, especially looking at the economic released since the Fed decided not to raise rates in March, and in general, it’s been weaker expected
  • So if the Fed is being given weaker than expected economic news, after they said they wouldn’t raise rates, why would they now be raising the spectre of a rate hike coming up next month
  • Is this some kind of trial balloon?
  • I think the Fed is losing even more credibility when they’re so schizophrenic: they’ll raise rates – they’re not going to raise rates, they’re going to raise rates…
  • They know the markets will react to everything they say, because they are so preoccupied with central bankers
  • We have a market of a few individuals, rather than fundamentals or valuations
  • Everything teeters on the words that come out of the mouths of a few key bankers who are extremely biased and have an agenda
  • For some reason, what they say means so much, yet they came out and talked about raising rates
  •  I think it’s more bluff, the same kind of strategy they had all last year: talk about raising rates, talk about how strong the economy is and how it’s strong enough to withstand rate hikes, but then, you don’t actually deliver the rate hikes hinted about
  • Remember, the Fed talked about raising rated for all of 2015 and it wasn’t until December, with 2 weeks lift in the year that they finally raised rates by the least they possibly could: a quarter point.
  • Then they reduced our rate hike expectations from 4 in 2016 to 2 and now they are coming up again
  • This is the same Open Mouth Operations game we got last year
  • But let’s look at some of the economic data released since my last podcast
  • We got the February Durable Goods number – weaker than expected, but here is the real weakness:
  • Last month, January, there was a bounce in durable goods and that got people optimistic, but those numbers were revised down
  • The original bounce in January was 4.9 was revised down to 4.2
  • The consensus expected a 3% decline this time off of the original 4.9
  • We actually got a 2.8% decline, from a smaller increase – net still a decline
  • X transportation was even a larger decline
  • Last month was +1.8, which was revised down to +1.2
  • This month, the consensus was for a decline of .2
  • Instead we got a decline of 1%, almost completely wiping out previous gains
  • This number was very weak and it questions anyone who thought that last month represented a significant improvement – in fact it was a dead cat bounce
  • This is the 13th consecutive month that Durable Goods X transportation have declined on a year over year basis
  • That is the longest losing streak for Durable Goods in the 70-year history of this report when we are not in a recession
  • The only time you see this long a string of year-over-year declines is when the economy is in a recession
  • Either this is an extreme aberration, or we’re actually in a recession and we just haven’t admitted it yet.
  • Also, the PMI Services Index, which last month was was below 50 at 49.8
  • People were looking for a big bounce, and we got a bounce back to 51
  • Kansas City Manufacturing, was down 12 in February, down another 6 in March, so we’re printing negative number after negative number
  • Yesterday’s economic data was so weak that the Atlanta Fed reduced their Q1 GDP estimate down to 1.4%
  • If you remember on this podcast, I talked about it about a month ago that the Atlanta Fed was so excited about some positive news that they ratcheted up their estimate, which started out at 1%, all the way up to 2.7%
  • There was all kinds of fanfare and positive news about the upward revision.  Very little news yesterday as the estimate came all the way back down to 1.4%
  • Remember I said I thought some of the other Fed officials read the riot act to the Atlanta Fed encouraging them to join the positive narrative, but I said that that time, that as negative data continues to come in, the Atlanta Fed would have to start walking back that estimate
  • Now they’ve walked it all the way down to 1.4%
  • Now all Wall Street economists are moving down their Q1 GDP estimates and they’re all lower than they were a week and a half ago when the Fed declined to raise rates, implying the economy was not strong enough for a rate hike, although the data showed that core inflation was 2.3 and unemployment was 4.9
  • If the Fed was worried and didn’t raise rates in March, when expectations for Q1 GDP were higher than they are today, why would a data-dependent Fed be considering raising rates now that estimates for Q1 GDP are being revised down?
  • Maybe the Fed just wants to keep the market guessing
  • Earlier today, we actually got the release of the final revision for 2015 Q4 GDP
  • It was originally reported at .7 and they revised it last month to +1.
  • It was expected to remain at +1 but instead, it was revised to +1.4
  • Supposedly this will show that the economy was stronger that people thought
  • I had been saying maybe the economy slipped into recession at some point during the quarter
  • Again that number may still be revised and they are still assuming that the inflation rate was .9
  • I don’t buy that. I think inflation was quite a bit higher than that and the growth is being manufactured my the statisticians
  • Ironically, because that number was higher than estimated, it will probably cause people like the Atlanta Fed who thought Q1 to be 1.4, to take that down
  • If you look at why the number was 1.4, it was because of increased consumer spending on services, and potentially some of the services consumers spent money on in December, will not be repeated in January
  • Maybe some of that consumer spending was front-loaded
  • Also, it is disturbing to look at the breakdown of growth in consumer spending
  • By far, the biggest increase in consumer spending was for healthcare
  • Included in that healthcare spending is the Obamacare tax
  • If you look at the growth in healthcare and compare it to the growth of the next highest sector, which is recreational goods and vehicles, the increase in healthcare is twice as big
  • This is not a good thing – the fact that we’re spending more money on healthcare than on enjoyment does not speak well for our economy
  • The government makes healthcare so expensive, we hardly have money for anything else
  • At this rate, healthcare could eventually be the largest part of our budget
  • Additionally, job growth is going toward healthcare
  • If we had not had this huge increase in healthcare spending, what would our GDP have been then?