Fed Decision ?
The market looks to be holding at these support levels, but with some precarious topics on the near-term horizon it’s unknown whether we will bounce or continue to fall. Earnings, Fed policy, emerging markets and European debt, US debt, and economic stagnation are all here and we just can’t ignore them. There are some great economic stories out there and some great business stories, but one must be selective.
Band-Aids are temporary!
The problems in Europe and some of the debt ridden emerging markets continue to rear their ugly heads. I’ve made the point that rather than solving the problem, they just print some more money and bail them out. This sends the story to the back burner for a while, but it doesn’t change the fact that the problems still linger. The can-kicking routine is just delaying the inevitable and, I would argue, just making the problem bigger as these Band-Aids only amount to increasing the debt and deficit. Hidden inflation is just building and we are foolishly ignoring it.
Japan use to be the world’s free money center because their interest rates were at zero. Their cheap/free money spawned the world’s largest “Carry Trade” (borrowing from Japan to lend in a higher rate currency). These went on for decades and, to some extent, helped float Japan through the lost decades. Meanwhile, the rest of the Western world just ramped up their deficit spending and debt. When the credit crisis came and the West (US, UK, and Europe) lowered their rates to zero and started their own money printing and lending operations, it flushed the world with more free money, trillions more. One can’t argue the fact that it did help stop the possible collapse of the Western world and financial centers, but what many continue to ignore is the cost of such as massive bailout. The governments of these nations ramped up their own deficit spending and debt, but what is not accounted for is the trillions of debt that the central banks have added to their own balance sheet. Every time the US borrows a trillion dollars that is printed by the Fed, the US is actually adding $2 trillion of debt, not $1 trillion that is reported. We must add the debt of the Fed as well, or do we just ignore it? One hand is just lending to the other hand, in essence. Many Keynesian economists that support such policies say the Fed is not adding debt, but rather adding assets. I would argue this is just semantics because what they are calling assets is just US treasuries that they bought with printed money and they will have to print more money to buy more US treasuries to pay back the ones they previously bought.
Just a few days ago we saw inflation pressure pop up out of nowhere in some of the debt ridden emerging markets. As I argued, the inflation was always there, we just weren’t measuring it. It is liked a coiled spring in which we can’t actually SEE the energy load. I call this hidden inflation. When the policies of money printing, lending, bailouts, and “adjusted’ economic data can no longer keep it hidden and hold back the pressure, it unloads and usually violently.
Turkey just saw their hidden inflation coil unload and inflation ramped up fast, almost at hyperinflation levels. Their central bank took radical action and raised over-night interest rates to 12.5% to help stop the flow. This is reminiscent of what our own Federal Reserve Chairman, Volcker, did in the 1970′s to stem the tide of hyperinflation as we came off the gold standard. He took rates to over 20% to try to make the dollar and US dollar investments (like treasuries) attractive, hoping to strengthen the currency.
Turkey is just the first nation and I suspect we will see more radical moves in some of the debt ridden emerging markets. Please remember that NOT all emerging markets are the same. The nations that are running similar monetary policies as that of the US and the rest of the West are fine. These nations are also borrowing huge amounts of the free money that the US and Western nations are printing, which is just adding massive debt and encouraging deficit spending. China and cash rich countries are not facing this problem, but they are being impacted because it does impact their exports. They must raise prices to offset the inflation in these nations they export to.
So what does the Fed do with all of these problems? Well, if you have been following the market preview and reading my views, you are aware that the Fed has been slowly changed to a very Dovish and Keynesian operation. President Obama has now appointed and stacked the bench of the board of governors with Keynesians. They believe in stimulus, money printing, zero interest rates, and government intervention. In fact, Yellen was initially opposed to any taper and she argued for MORE money printing and stimulus. She even supported Japan’s radical money printing operation. I thought that any taper that came in December would have had more to do with Bernanke trying to end his legacy through bringing an end to the QE monster he created and that the only room they had to taper was based on the Sequester and GSE accounting. However, it was NOT what Yellen wanted to do, nor her Keynesians counterparts. Additionally, Bernanke had a falling out with the President and the Democrats because he was openly critical of government spending. In testimony to Congress he stated that Congress MUST reduce the deficit and embrace fiscal policies. Yet it was Senator Schumer that summed it up well when he asked Bernanke to continue with QE and stated that he and the Democrats relied on the QE money printing operation because fiscal policies were not coming. Bernanke was moving towards the center, becoming less dovish, and this didn’t sit well with the current administration’s policies.
My belief is that Yellen is looking for any reason to reverse the taper and ramp up the QE money printing and asset purchase operation. Her lectures and papers have all championed that we needed to do MORE to help increase jobs and build infrastructure. There were no words of taper or raising interest rates. The weak economic data and mixed earnings certainly gave her some justification, but now with a tittering currency crisis on the horizon, she has all the justification she needs.
There is just one problem, it is NOT Yellen’s meeting yet – it is still Bernanke’s. This meeting, many hoped, was just to be a handing over of the reigns to Yellen. The expectation was that the Fed would just continue with their taper operation and that nothing would be going on in the beginning of year to cause any concern. The Fed never saw hidden inflation and most of them don’t even believe in it, as they use the CPI as their gauge of inflation. Yet the CPI measures the Cost of Living, not inflation – but it seems the Fed believes that cost of living and inflation are synonyms, yet they are clearly not.
The pre-market futures are down sharply. Turkey and South Africa are taking radical action and hiking rates to stem the hyper-inflation as their hidden inflation spring uncoils. There are concerns in Europe that the mounting hidden inflation there, from Greece, Spain, Italy, and the rest of the Club Med countries will bring the euro under hyper-inflation attack. Germany is beyond upset with what transpired and if we see the euro under attack, we could see Germany exit or become more aggressive in their oversight in the euro.
Meanwhile, Obama’s State of the Union is ramping up the class warfare rhetoric, which is just feeding the populist stance and also clearly showing his hand that he supports a more Dovish Fed. Yellen is the right person for the job, if you want to print money and deficit spend – she has justified her Keynesian theories to a point of blind ideology. With no “Fresh Water” (classic economics) on the board of governors and only two voting Fed Presidents, the Fed is going to ram-rod their easy monetary policies through with no resistance.
If, as I suspect, they halt or limit the taper today, we could see a solid bounce in equities. I suspect if Yellen had her way she would reverse the taper all together and ramp up asset purchases and money printing. I guess it comes down to Bernanke, could he stick to his guns and go against the entire Dovish board and continue with the Taper? If he does I think the market will remain under pressure and I suspect that we could see Yellen step in before the next FOMC meeting to reverse it. The question I wonder this morning is whether Bernanke will be Yellen’s puppet or if he will stick to his own guns. Of course Bernanke could be sick and let Yellen make the announcement – but that’s not going to happen.
Expect volatility today. The futures are under huge pressure this morning and it looks like we could open down over 1%. It’s now up to the Fed.
Support & Resistance
This is fairly a critical point, either we don’t taper and we see a solid bounce or we taper and we crack 15,800 and head lower. It might even trigger some margin calls and fuel some panic selling. I still think we get a bounce and no taper or taper lite.
Apple’s earnings brought forth concern. Yahoo is also under fire this morning and with broader economic and inflation concerns, I would look at 3450 as support.
This is the general area I would be looking at for support. The VIX should pop to the 18 level today, just looking at the pre-market futures. Keep an eye out for a bounce after the Fed announcement or a big sell off.
The broader market has a 1100-1120 support area and now we wait. Today is not about earnings it is about the Fed and the looming currency crisis.
Problem is SO SIMPLE!
I am surprised we are seeing the currency and inflation crisis rear its head this early in 2014, I was suspecting it to come about by the end of the first quarter, mainly due to European loans coming due and bailout extensions and also after the FOMC meeting.
I don’t believe we will see accountability or responsibility from the central banks or government, but rather more Band-Aids, can-kicking bailouts, money printing type policies. It might be able to buy some more time and more reprieve, but again it will not solve the problem, only delay it and make it bigger.
The problem is so simple, but we prefer to make it complex with big economic words and complex and convoluted economic theories. It is just so simple and perhaps because it is so simple people just can’t fathom the simplicity or accept it.
It comes down to one simple formula that rules all households, businesses big and small, and governments. One only has to study history and economies to see it repeat itself over-and-over. We also experience it in real-time, as we see households and businesses collapse.
The formula is:
Revenue – Costs = Profit or Loss
If a household, business, or government does not manage their costs, but instead BORROW to supplement revenue, they add debt and in many cases make excuses to spend even more. The viscous cycle just continues, borrow more to spend more. Keynesians and people that fall into this rather silly trap do NOT care, ignore, or don’t believe it is important as to WHERE and HOW the revenue is generated. To them spending is all that matters and if revenue derives from borrowing more money, then so be it.
If one pays attention to the formula, they realize that an ever growing part of costs becomes the interest to borrow the money. General Motors failed because they began borrowing money just to pay the interest on their previously borrowed money (debt). The US government INTEREST on their debt in 2013 was $415 BILLION dollars. Think about that, if the US government borrows $1 trillion per year almost 50% of what they are borrowing is just to pay interest. What is even more shocking, our current short-term rates are ZERO and 10-year is paying 2.5%. Can you imagine the US government’s interest on roll-over debt if interest rates go up? How much will we have to borrow then?
Again, Keynesians don’t care about this and it is a problem for the future. I ask the questions; how far in the future and how much is too much?
It is something to think about and the problem is truly that simple. It’s called math and the government and Keynesians would rather use labels, fancy words, and complex theories to explain away the basic math.