“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.” — John Maynard Keynes
The Fed has “5 arrows” as they look to ease: Forward Guidance, Helicopter Money, QE, Negative Rates, Currency Wars. Expect each and every one of these arrows to be flung as the Fed starts to panic. They are in the forward guidance stage, telling us they plan to raise interest rates when they really won’t
“It’s hard to take away any kind of bullish signal from anything the Fed did yesterday,” said Jack Ablin, chief investment officer at BMO Harris Bank. “I think the implication is the Fed is simply a spectator right now and that’s all they can do.”…
We always thought, if the Fed didn’t hike, the latter would occur. October’s meeting has no press conference, December’s meeting comes right before Christmas and the first quarter has routinely been very, very weak. By not hiking in September, the Fed increased the probability of still being at zero in April of next year.
The Federal Open Market Committee’s statement indicated they were concerned, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
On the face of it, continued low rates should have been good news for assets like stocks, according to Barron’s. However, any positive aspects to the news were mitigated by the fact everyone expects the Fed to begin raising rates soon. Investors are waiting for it to happen, and they’re uncertain how economies and markets will react when it does.
Heightened anxiety may be one of the reasons investors responded the way they did last week. On Friday, after mulling the Fed’s decision, national stock market indices around the world – in the United States, England, Germany, France, and Japan – fell significantly, according to Yahoo! Finance. Now, we’re back to waiting. If anxiety remains high, markets may be volatile.
Germany’s Five-Year Yields Drop Below Zero as Equities Tumble – Speculation of extended stimulus from the European Central Bank increased after Executive Board member Peter Praet said on Monday that policy makers would “forcefully react” to defend their inflation objective…
The week ended with the following statement by Janet Yellen. “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.” For the first time publicly, Chair Yellen has aligned herself with members of the FOMC who believe rates will rise in 2015.
If a critical mass of investors believes that the global economy is contracting and central banks will increase stimulus but it will not boost the real economy, they will eschew stocks. Eventually, investors will move to tangible assets out of fear of currency debasement. If the fear of economic contraction is high, investors will favor precious metals over industrial commodities and stocks. Over the past two weeks, gold has rallied sharply while copper and stocks have declined. This is a resumption of the asset allocation of selling stocks/buying gold that first appeared in early August. Central banks can tolerate and rationalize excess liquidity flowing into stocks (that can’t get into the real economy directly); but the central planners become checkmated when the excess liquidity flows into gold.
Ergo, if the burgeoning shift in preference for gold over stocks develops into a trend, Yellen, Draghi, Kuroda, etal will have a very serious problem – a late Seventies environment that will only be remedied by Volcker-like policies.
Commodities and Currencies
Agricultural markets, with a few exceptions, were steady to mostly lower last week. Harvest and slack export demand pressured grains, while falling beef prices weighed on the live and feeder cattle markets. December corn futures pulled back to near the midpoint of a two-month trading range from $3.60 to near $4.00/bu. Seasonal pressure and lagging export demand are holding prices in check while expectations for additional production cuts are price supportive. Corn harvest progress is expected to reach 10% to 12% as of September 20. December oat futures were fractionally higher for the week and remain in a sideways near-term trend. A late-week sell-off carried November soybeans lower for week with prices moving toward the recent lows from $8.53-$8.55.
The trade largely ignored Farm Service Agency compliance data indicating USDA’s current soybean acreage estimate may be overstated. Acreage revisions are expected with the October 9, Crop Production report. Soybean meal futures price action was similar to soybeans as December meal futures declined toward the recent lows and chart support near $305/ton. December soyoil renewed a lower near-term price trend closing the week at a nine-year low. Long-term chart support is near the 2005 low at 19.50c/lb.
Early in the week, December Chicago wheat futures cleared a downtrend resistance line drawn from late June high. Prices quickly pulled back, but closed 1¾ cents higher for the week. Overall, the price action was positive, signaling a possible turn higher. While the fundamentals of the wheat market are less positive, with US exports lagging, reports of possible frost damage to the Brazilian wheat crop and dryness in Australia could begin to support prices. December cotton futures plunged to a new contract low on Friday, closing down over 2.5 cents for the week. The price weakness turned the short and intermediate term trends lower. Nearby futures closed at the lowest level since late January.
Once December live cattle futures broke below support at 142.00 cents/lb., the price weakness accelerated, resulting in steep losses of 4 cents/lb for the week. The nearby October contract is already testing the May 2014 low at 135.40. December hogs challenged the early September high at 65.00 cents. While futures pulled back from that level, prices still closed 1.5 cents/lb. higher for the week. Milk futures drifted lower for the week. September futures closed just above the July low at $15.81. After the close on Friday, USDA’s monthly Milk Production report pegged August milk production for the 23 major states at 16.3 billion pounds, up 0.8% from a year ago. Milk production per cow was a record for August.
Further Commodities and Currencies Reading
Master Limited Partnership insider purchases at a record clip. Amidst the recent sector volatility, MLP management and directors have meaningfully increased open market purchases. On a cumulative trailing six-month basis as of 28 August 2015, we estimate MLP insiders have purchased more than $210mn in units/shares, up from $100mn at yearend 2014. We view insider purchases positively as signs of confidence and a particularly visible mean to support MLP unit prices. However, we note MLP insider purchases have been overwhelmingly executed at a handful of MLPs. With a benign long term interest rate forecast, MLPs are poised a snapback and levered to the rebound in oil prices.
With the long term U.S. interest rate environment expected to be relatively benign, MLP investor are picking their entry points and being very surgical in their approach to adding positions in their portfolios.
Further Infrastructure Reading
The Rent Crisis Is About to Get a Lot Worse. Millions of households could join the ranks of those spending more than half their income on rent. The number of U.S. households that spend at least half their income on rent—the “severely cost-burdened,” in the lingo of housing experts—could increase 25 percent to 14.8 million over the next decade. More than 1 million households headed by Hispanics and more than 1 million headed by the elderly could pass into those ranks. Households shouldn’t spend more than 30 percent of income on housing, by the general rule of thumb. Financial repression plus soaring housing costs compliments of the Fed.
Real Estate Further Reading
Weekly Wacky News
IT’S OFFICIAL. THE IGS ARE IN. Ignoble is a word rarely heard in everyday conversation. Merriam-Webster defines it as meaning, “of low birth or common origin, or characterized by baseness, lowness, or meanness.”
The 25th First Annual Ig Nobel Prize Ceremony was held last week at Harvard University. Improbable.com reported, “Winners traveled to the ceremony, at their own expense, from around the world to receive their prizes from a group of genuine, genuinely bemused Nobel Laureates…” Winners completed research that made people laugh and then caused them to think.
- The Management Prize went to Gennaro Bernile, Vineet Bhagwat, and P. Raghavendra Rau, authors of ‘What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior.’ They examined the link between CEOs’ early-life exposure to major fatal disasters and the financial and investment policies adopted by their companies. They found, “CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively.”
- The Economics Prize was awarded to the Bangkok Metropolitan Police, which implemented a new policy in an effort to reduce bribery. They pay a bonus to police officers who refuse to accept bribes, even though the officers are required by law not to accept bribes. (It’s a concept that may resonate with parents.)
- The Literature Prize went to Mark Dingemanse, Francisco Torreira, and Nick J. Enfield, who presented evidence and arguments supporting the idea that ‘huh?’ is a word, and that it “is found in roughly the same form and function in spoken languages across the globe.”
If you’re interested in learning about the ignoble undertakings of other winners (who documented chicken walking like dinosaurs, created bee sting pain indices, and completed other thought-provoking experiments), visit www.Improbable.com.
Weekly Video – Global Warming Debunked.