Tag Archives: Fed rate hike

The Economy Is Tanking

The FOMC can raise interest rates any time it desires, without prior approval from anyone outside the Fed. Accordingly, the ncreased hype primarily has to be aimed at manipulating the various markets, such as propping the U.S. dollar. Separately, it remains highly unusual, and it is not politic, for the FederalReserve to change monetary policy immediately before a presidential election. – John Williams, Shadowstats.com

The March non-farm employment report originally reported that 215,000 jobs were created (ignore the number of workers who left the labor force).  But five months later the BLS released “benchmark” revisions which took that original number down by 150,000.  However, the BLS reports a 74,000 upward revision to Government payrolls, which means that non-Government payrolls were down 240,000 in March.  So much for the strong jobs recovery…

A report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out two weeks ago that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.   Heavy trucking is one of the “heart monitors” of economic activity.

Another datapoint that you might not have seen because it was not reported in the mainstream financial media: the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the 5th month in a row in July. The rise attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.

Again, I believe that evidence supporting the view that housing and autos are starting to tank is overwhelming. Last week Zerohedge featured an article with data that showed that prices in NYC’s lower price tiers are starting to fall, following the same path as the high-end market there LINK. I want to reiterate that I’m seeing the exact same occurrence in Denver in the mid/upper-mid price segment. Furthermore, I’m seeing “for sale” and “for rent” signs pile up all over Denver proper and I’m seeing “for sale” signs in suburban areas where, up until July, homes were sold as soon as a broker got the listing. NYC, Denver and some other hot areas in the last bubble began to fall ahead of the rest of the country.  I don’t care what the National Association of Realtors claims about the level of existing home inventory, their numbers are highly flawed and the inventory of homes on the market is ballooning – quickly.

I like to describe housing as “chunky,” low liquidity assets. It takes a lot of “energy” to get directional momentum started. Once it starts, it eventually turns into a “runaway freight train.” We saw the upside of this dynamic culminate over the last 6-9 months. But now that freight train is slowly cresting and will soon be headed “downhill.” I don’t think this dynamic can be reversed without extraordinary interventionary measures, even larger than 2008, from the Fed and the Government.

As for autos, I detailed the case that auto sales are heading south in previous blog posts. However, Ford disclosed in its 10-Q filing that charges for credit losses on its loan portfolio increased 34% in the first half of 2016 vs. 2015. GM’s credit loss allowances increased 14% vs. 2015. As credit losses pile up in auto-lender portfolios and in auto loan-backed securities, lenders will begin to constrict their auto sales lending activities. It will be an ugly downward spiral that will send negative shock-waves throughout the entire economy.

I find it highly improbable that the stock market will not continue lower unless the Fed steps in to prevent it.  The Fed is playing “good cop/bad cap” with its rate hike theatrics.  As John Williams points out, it does not require a formal FOMC meeting for the Fed to raise or lower interest rates.  In fact, there’s precedence for inter-FOMC pow wow interest rate changes.   This entire Kabuki theater is designed to support the dollar ahead of yet another meeting in which Fed stands still on rates.   Honestly, even a quarter point hike could act like dynamite on the financial weapons of mass destruction hidden on and off bank balance sheets.  The fraud at Wells Fargo is just the tip of the ice-berg.

The short-sell ideas I present in IRD’s Short Seller’s Journal have worked out of the gate four weeks in a row.  The last time SSJ had a streak like this was during the early 2016 sell-off.  Although my ideas are meant to be long-term fundamental shorts based on flawed business models and deteriorating business conditions, a couple of those ideas are down over 10% in less than a month.  I’m also sharing my strategies with the homebuilders, all of which will be trading under $10 within the next 18-24 months (except maybe NVR.

You can access the Short Seller’s Journal here:   SSJ Subscription.  This is a weekly report in which I present my view of the markets, supported with economic data and analysis you might not find readily in the alternative media and never in the mainstream media.  It’s a monthly recurring subscription you can cancel anytime.   Subscribers can access IRD’s Mining Stock Journal for half-price.

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Fed Funds Rate Hike: Another Empty Threat?

What are these Fed officials doing?  They’re putting into question the credibility of the institution because they sound like idiots.  – a good friend/colleague of Investment Research Dynamics

It’s becoming a farce of epic proportions, especially when there’s an entire month between FOMC meetings.  Starting this past Tuesday the typical Fed officials began their monthly cyclical cant of rate hike threats.  For some reason the stock and paper derivative unnamedprecious metals markets always take a beating when the “threat” of a rate hike at the next meeting is floated.

On Tuesday one official stated that June was a meeting at which action could be taken but that it was too early based on Q2 data “to draw a conclusion.”  Another official, SF Fed Prez, John Williams, threatened that “June was a live meeting.”  Both officials gave themselves an “out” by saying that a rate hike depends on the data.

Today Bill Dudley, the ex-Goldman Sachs criminal who’s in charge of the NY Fed, also used the phrase, “June is a live meeting.”  Can anyone tell me what this means?  Does this mean that all the other FOMC meetings prior to June’s were fake?  Is the term “live” going to become “Fed-speak” for “a rate hike will be discussed at the next meeting but we may or may not raise rates?….I’m telling you, people, this next meeting is going to be a live one so you better watch out…”

Here’s an interesting question that no one has thought of to ask:   The Fed has Untitled1implemented interest rate changes between meetings.  It’s rare but it’s happened.  If these Fed officials are serious about raising rates, why not do it now?   Why torture the market with series of empty threats?   If unemployment is really only 5% and inflation is at the Fed’s target rate – see this speech Stanley Fisher today:  LINK – then raise rates now.   At 25 basis points per hike,  it would take 13 rate hikes to raise the Fed Funds up to China’s overnight bank lending rate.

If the Fed raises rates even just 25 basis points, it risks derailing the smoldering level of economic activity that remains from the QE/money printing program.   Currently there’s still a pool of renters out there who can buy a low-priced home or apartment with a monthly mortgage nut including real estate taxes that is about the same as their rent payments.

What’s not being fully disclosed by the banks/Fannie Mae/Freddie Mac etc is that many of the mortgages these people receive are being underwritten with no cash-out-pocket down payment.  True debt to income ratios are exploding and the ratio of the monthly mortgage payment to monthly after-tax income is well over 50%.   These are extreme sub-prime mortgages with a heavy application of cosmetics on the facade.  Even a 25 basis point increase in the Fed funds rate would translate into an increase in mortgage rates that would disrupt this portion of the current housing bubble.

While the Fed might be able to prevent the stock market from plummeting, if it follows through on its rate hike threats, it would be unable to prevent the plunge in economic activity that is dependent on near-zero bank funding rates.

“Gold Thrives On Rate-Hike Cycles”

Several of my Mining Stock Journal subscribers have asked what I think will happen if the Fed raises rates.   It may seem counter-intuitive, but there have been several periods in which gold moved higher during rate-hike cycles by the Fed.  Rather than spend time re-inventing the wheel of evidence,  I found a detailed statistical analysis by Adam Hamilton (Zeal Speculation and Investment Newsletter) which proves this point.  Hamilton tends to be quite verbose, so here’s the Cliff Notes to his findings:

On average during the exact spans of all 11 of the Fed’s rate-hike cycles of the modern era, gold rallied 26.9% higher! That’s a serious gain during events that are supposed to slaughter gold. If I was a futures speculator heavily short gold with extreme leverage, this would terrify me.

Digging deeper, the hard historical data proves Fed-rate-hike cycles are even more bullish for gold. The majority 6 of these 11 cycles have seen gold gains averaging a staggering 61.0%! Gold is more likely to rally big during a Fed-rate-hike cycle than fall, contrary to speculators’ self-fueled delusion today.  You can read the entire here:  Gold Thrives On Rate Hike Cycles.

The bottom line for me is, if the Fed wants to raise interest rates, I say “Bring It On.”