2016/03/31 TrendView VIDEO: Global View (early)
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TrendView VIDEO ANALYSIS & OUTLOOK: Thursday, March 31, 2016
Global View: All Markets
As noted in Wednesday’s Concise Highlights post, Janet Yellen’s Tuesday speech put a generally dovish end to reversals by the Fed’s more hawkish minions since the FOMC meeting two weeks ago indicated there was a more dovish view. Basically the ‘Big Dog’ told the mutts yelping about how rates should still be headed higher sooner than not that they should stand down. This was not just rank-pulling, as Chair Yellen was very articulate on the economic reasons for not getting too aggressive about signaling future rate hikes. For one thing, this is how the Fed managed to talk itself into its less than useful ‘normalcy bias’ into the December meeting. For another, it would have been better back then to remain more ‘data dependent’, as it seems to have reverted to at present.
Last but not least, most amazingly, in that regard she suggested total flexibility on the potential for the next moves in Federal Funds to be down instead of up if the economic data warranted, and even opened the door to the possibility that Fed Quantitative Easing could be resumed if necessary!! That is consistent with our (and quite a few other folks) previous views that the December FOMC rate hike was merely the full extension of the Fed’s ‘normalcy bias’. She has now constructively left any of the Fed minions who would presume to tell the economy what it is doing instead of listening for the real message from the economy looking pretty foolish. Good for her. The key passages reinforcing her views on this can be accessed in our mildly marked-up version of her speech. We especially suggest the “Risks to the Inflation Outlook” section on page 10, and the “Monetary Policy Implications” paragraph from the bottom of page 12. [Also see the interesting video panel discussion near the end of this opening section.]
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Video Timeline: It begins with macro (i.e. fundamental influences) discussion on the economic data turning just a bit stronger today. That included Japan Housing Starts, Australian credit figures, annualized German Retail Sales, UK GDP and Chicago PMI. Along with that the more dovish Fed reinstates the ‘Goldilocks’ equities psychology.
It moves on to S&P 500 FUTURE short-term at 02:30 and intermediate term view at 04:45, with OTHER equities from 06:30, GOVVIES beginning at 09:15 (with the BUND FUTURE at 11:30 including implications of the early month expiration rollover) and SHORT MONEY FORWARDS from 13:15. FOREIGN EXCHANGE covers the US DOLLAR INDEX at 16:00 EUROPE at 17:30 and ASIA at 19:45, followed by the CROSS RATES at 22:00 and a return to S&P 500 FUTURE short term view at 25:00. We suggest using the timeline cursor to access the analysis most relevant for you.
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Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion and TrendView Video Analysis and General Update. Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December that in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize in 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
▪ This all indicates a major volte face on the FOMC meeting projections of only two rate hikes in 2016 instead of the previously signaled four. Yet last week into Monday evening (the San Francisco Fed’s Williams) there were countervailing hawkish opinions. Those indicated the April FOMC meeting is ‘live’ as a potential rate hike horizon. We suppose if not two but three hikes are still likely this year, the April meeting would need to be ‘live’. Yet this all creates more confusion on not just the most likely action by the Fed, but also…
…whether it actually has any idea what it is doing? While Ms. Yellen has provided some dovish leadership for now, all of this and more is covered in last Wednesday’s major Fed’s ‘Normalcy Bias’ Crumbles post. It begins with the observation “The Fed has no Cred!!” Whatever we are hearing from these folks between actual decisions at FOMC meetings, does it really mean anything anymore?
And that is more important for another, very good reason: The US equities current activity is becoming a very close analog for how the major top evolved between August and November of 2007. All of that is also covered at length in that major Fed’s ‘Normalcy Bias’ Crumbles post.
▪ And on that topic of the US equities current activity becoming a very close analog for how the major top evolved between August and November of 2007, there is much in our recent Commentary posts going back to Equities’ Goldilocks Psychology (March 5th) and Equities Still a Major Bear (March 16th …in spite of the current rally) that indicates the fundamental weakness in the global and US economies as well as still bloated earnings estimates which in combination are likely a major negative for equities.
▪ Yet also covered at length in last Wednesday’s Fed’s ‘Normalcy Bias’ Crumbles post is the full picture is necessary to appreciate how all of those factors fit together. There is even an annotated weekly S&P 500 chart from April 2007 to April 2008 to illustrate the way in which this year’s Evolutionary Trend View (ETV) is indeed developing as an analog for that last gasp ‘Rally of the Damned’ into November 2007 before the bear trend took hold.
In fact, the central banks having much less firing power than they did back then is another troubling factor. Part of the rationale for that last rally to the minor new US equities high was a surprisingly large September 18, 2007 FOMC 50 basis point rate cut to… 4.75%! This is the prima facie example of how central bank encouragement can spur equities for a while, yet cannot overcome overall weakening economic conditions.
And other global economic developments and important natural seasonal tendencies mean that the equities topping into a significant bear trend sometime soon is more compelling than summer-fall 2007. As it is so important to share this, it is also available via the open source “The Fed has no Cred!!” link in the sidebar, and we strongly recommend a read for anyone who has not already done so.
▪ As a further sign of how the hawks at the Fed were merely trying to promote their own ‘normalcy bias’ in a vain attempt to get the rest of us to believe things are actually returning to ‘normal’, note how the latest batch of weak data has driven down the expectations for US Q1 GDP. There is actually a very good CNBC Shocker cuts to Q1 growth pace show faltering economy article and Steve Liesman video clip explaining how this has evolved from hopes for a 2.00% annualized figure to somewhat less than 1.00%! (You’ll need to suffer through the advert to view the video, but it’s worth it.)
As the estimable Diane Swonk of DS Economics notes in the article, "It's not a polar vortex winter. You can't blame the weather this year. It's the consumer. I think there's a problem with the measurement but at the end of the day if the world were as good as we'd hoped, people would feel better and it's not showing up."
This is thoroughly consistent with everything we (among others) have been saying about the sustained weak Hourly Earnings in spite of all of those serial Nonfarm Payrolls gains in US Employment reports. The Obama administration’s minions can coo all they want about making up all of the jobs lost in the 2008-2009 crisis, but they aren’t the same jobs.
The weakening of Personal Spending figures also speaks to that hollowing out of the US middle class that is the ultimate driver behind the overall weaker-than-expected US Retail Sales. For a more extensive review of all that please refer back to the December 8th Extended Perspective Commentary: Will 2016 be 2007 Redux? highlighted above.
▪ For a dissection of how the Fed has still left mixed signals we suggest a view of the CNBC panel discussion shortly after Fed Chair Yellen completed her Tuesday speech and Q&A session. It is interesting for the diversity of topics briefly touched upon as well as the views of some previous Federal Reserve fans among the participants. CNBC Senior Contributor Larry Kudlow (previously with the Cato Institute) is generally a fan of the Fed, yet has felt the December rate hike was misguided. He noted something that we (among others) have said since even prior to that hike:
If you want to know if any FOMC rate hike is well-warranted, just watch the yield curve. If the FOMC hike is the right path, the long dated high grade bond yields should rise as well. Yet in moves there in both January-February in a major way and even on last week’s hawkish pronouncements from some Fed officials long-dated yields fell. This is a clear sign the Fed moved too soon in December, and Chair Yellen’s caution is the right path.
Then there were the comments from previous Obama administration official and University of Chicago Booth School of Business professor, Austan Goolsbee. He was another individual who questioned the December FOMC rate hike based on the US Employment statistics. Even prior to the hike he noted the 2016 jobs created and Unemployment Rate below 6.00% were not the same as pre-Crisis US employment.
From approximately 01:30 into the video segment he finishes his discussion of how the internal discussions at the Fed had completed its process of painting itself into a corner in December with the ‘need’ to hike to instill confidence in others. The basic conclusion is that they had ‘talked themselves into’ the December hike. This is very much akin to the ‘normalcy bias’ phrase we coined to describe this propensity to believe the rate hike could lead the psychology rather than being well-founded.
Last but not least, one of the biggest fans of the Fed and a previous supporter of their drive to hike rates as a sign of health in the overall US economic progress is none other than CNBC Senior Economics Reporter Steve Liesman. And even he had a very interesting perspective on how the Fed is now leaving itself with less credibility in the wake of the recent relatively rapid position shifts, and especially uncertain future actions. (All of which could have been avoided had it not talked itself into that December hike.)
His particular concern is what now happens to all of the Fed’s sustained talk of economic and interest rate ‘normalization’. From approximately 03:15 into the discussion he notes that Chair Yellen’s far more dovish stance was now leaving the Fed’s with a renewed ‘data dependent’ psychology. That is potentially delaying any further rate hikes indefinitely.
As he further observes, how long can it now wait to raise rates again without the Fed tacitly implying that the economic situation is not really ‘normalizing’ at all. In the context of their previous attempt to provide confidence through the degree to which higher rates were necessary due to anticipation of future inflation pressures, this would actually be a de facto negative viewpoint on the US (and global) economy. Yet this should not actually be very surprising. Once the recent more hawkish pronouncements from some the Fed’s minions are dismissed, that is reasonable.
As we noted in our Fed’s ‘Normalcy Bias’ Crumbles post, the recent FOMC projections revision from four 2016 rate hikes to just two was a de facto forward looking anticipatory 50 basis point rate cut. And this is part of the full picture is necessary to appreciate how all of the 2016 to 2007 comparison factors fit together. There is even an annotated weekly S&P 500 chart from April 2007 to April 2008 in that post to illustrate the way in which this year’s Evolutionary Trend View (ETV) is indeed developing as an analog for that last gasp ‘Rally of the Damned’ into November 2007 before the bear trend took hold.
In fact, the central banks having much less firing power than they did back then is another troubling factor. Part of the rationale for that last rally 2007 to the minor new US equities high was a surprisingly large September 18th FOMC 50 basis point rate cut to… 4.75%!
If indeed there is no ‘normalization’ taking hold to a degree that will further strengthen the global and US economy at present, why wouldn’t the Fed abandon its ‘normalization’ message if instead it might go back to easing instead of tightening?
In that regard Janet Yellen’s reversal on the need for more tightening sooner that not may at least assist the Fed avoid further loss of credibility… whether or not it can actually revive the economy and continue to encourage the equity markets.
▪ The bigger problem indeed remains what happens if the US and global economy weaken as many of the forward looking factors suggest they will. In that regard we noted in last Wednesday’s Fed’s ‘Normalcy Bias’ Crumbles post that some of the other major central banks are already into negative interest rates.
And as noted in the ‘Limits of Central Bank Powers’ section in that post, “Negative rates are the end of the (very distended) line.” If things weaken further from here, what indeed can the central banks do that will actually inspire confidence? And as we have noted on so many occasions since January of 2015, it is not really the central bankers fault. It is the political class refusing to make the effort to bring in challenging structural reforms that has neutralized a lot of what the central banks have tried to accomplish and left economic growth so much weaker than would normally be expected after a deep contraction.
Yet with no real chance the highly partisan US political class (along with those elsewhere) will indeed pursue those reforms now, we repeat our previous admonition…
(From Fear & Loathing in Marketland on February 9th):
The next financial crisis will occur when the investment and portfolio management community (and ultimately the investing public) realizes that the central banks alone cannot restore the robust growth from prior to the 2008-2009 financial crisis.
The TrendView VIDEO ANALYSIS & OUTLOOK is accessible below.
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