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Weak Data Belies Fed’s Upbeat Narrative – Ep. 108

  • The U.S. stock market finished out this holiday-shortened week on an upnote with the Dow Jones up just over 100 points
  • This was the best week the market has had since March
  • The dollar was softer on the week; the euro ended solidly above 113
  • Gold was under pressure throughout the day but closed only off about $3.00
  • Gold stocks earlier this morning were at the lowest I’ve seen in this cycle but then had a sharp reversal finishing much stronger on the day
  • The markets are looking forward to no rate hike in September
  • Michigan Consumer Sentiment Numbers may have been the catalyst to turn the market
  • They were looking for 91 – slight below last month; instead we got 85.7 – a huge miss
  • This is the biggest miss in the history of the index
  • The bigger number was the Wholesale Trade Number, which was expected to reflect inventories to rise .3%
  • Instead, inventories declined by .1%
  • This will notch a little off of Q3 GDP
  • More importantly, inventories went down, but sales also declined by .3%
  • This means the inventory to sales ratio rose again
  • It is not at the highest it has been since the 2008 financial crisis
  • This level has only existed twice in the last 15 years and both of those times, the economy was in recession
  • Another interesting chart is inventory to sales in the Auto sector
  • Auto inventory to sales level has risen to 1.73% – the highest since 2009
  • Today’s inventory to sales ratio is even higher than the recession of 2001
  • This is a sign that the Auto bubble is bursting
  • If the Fed were going to raise interest rates in September, wouldn’t we already know by now?
  • The longer the Fed waits to raise rates, the less likely is is to do it
  • If the Fed does rates and then has to go back to zero, it will look like the Fed was wrong about the economy
  • It would be better now to keep rates at zero, indicating they understand the weakness in the economy
  • The other risk of raising rates, and weakening the economy is that it may become evident that the Fed can never raise rates
  • The driving force behind the dollar rally is expectation of normalization of rates
  • The Fed has severed the legs of the economy and higher rates will expose this
  • The Fed has plenty of excuses not to raise rates, but now that they started zero percent interest rates, they will not be able to stop
  • The balance sheet has not shrunk at all
  • There is no way out
  • How can people think that we can keep interest rates this low for this long and not have problems?
  • Artificially low interest rates causes mis-allocation of resources
  • Those mistakes are corrected when interest rates go up
  • The next economic downturn is going to leave the Fed with no other recourse than QE
  • Fiscal stimulus will roll out during the election year to cover the bigger deficits caused by Keynesian stimulus package
  • Also the emerging markets are just starting to unload U.S. Treasuries because they no longer need them to keep their currencies from rising
  • When they realize that the dollar has peaked and a new bear market has begun, the Fed will have to not only stimulate the economy and monetize the growing deficit, they will also have to monetize the treasuries that are being sold by foreign central banks
  • QE4 for will be bigger than QE1, QE2 or QE3
  • The question is, when are people going to figure this out?
  • When is the dialogue going to turn from when will the Fed raise rates to how big is the next stimulus package be and how soon will it be here?