Month: March 2014

As we noted earlier this week, the Fed is growing increasingly concerned of a bubble forming in the financial markets. Previously we noted that Janet Yellen was concerned about another bubble forming.

Now St Louis Fed President James Bullard is saying the same thing.

St. Louis Federal Reserve Bank President James Bullard said Thursday that the key risk for U.S. economy would be a bubble forming as the central bank removes monetary-policy accommodations, while he also raised concerns about financial stability in the U.S. economy.

“I don’t see a major bubble right now, but one will form as we are trying to remove the accommodation in the years ahead, because that’s what exactly had happened in the 2004-2006 period,” Bullard told the Credit Suisse Asian Investment Conference in Hong Kong. “I do think that’s a key risk going forward,” he said.

Bullard related the risk to the situation in 2006, the housing prices had already started to peak at the same time as the central bank was in a tightening cycle. “Just because you are moving away accomodation doesn’t mean the risk of bubble forming is going away,” he said.

Bullard also emphasized that financial stability concerns are “looming large,” as policy makers are thinking about how to accommodate those concerns. He said macroprudential tools, which have been strengthened, can be used to address emerging bubbles. Bullard is a non-voting member of Federal Open Market Committee this year.

http://www.marketwatch.com/story/feds-bullard-financial-stability-concerns-loom-large-2014-03-26?mod=BreakingNewsMain&link=sfmw

Granted Bullard is a non-voting member, but his sentiments are beginning to echo throughout the Fed in general.

To whit, Bill Dudley, who is Fed President of the NY Fed and possibly the single biggest dove at the Fed, made a speech yesterday. Instead of issuing the usual “the Fed should print more money mantra,” he actually commented:

In my view, the fact that our large scale asset purchase programs affect the size of term risk premia globally is important.  This set of monetary policies affects financial asset prices in a different way compared to changes in short-term interest rates, and we should be humble about what we claim about understanding the importance of this distinction…  There is, of course, the argument that Fed policy has been too accommodative for too long, creating risks for financial stability worldwide.

http://www.newyorkfed.org/newsevents/speeches/2014/dud140327.html

Bill Dudley is never going to say that the Fed has made mistakes or created bubbles. So the fact that his comments indicate that he is thinking about financial stability is highly significant.

These kinds of changes in Fed policy are never blatant. You have to dig deep to find the hints that are being dropped. We’re doing that, and we’re already aligning our investors’ portfolios to accommodate the coming changes.

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Phoenix Capital Research

 

Many commentators witnessed the first Q&A session with Janet Yellen as a disaster.

We don’t see it that way at all.

Yellen is widely believed to be a super dove at the Fed. This is largely due to her being a firm advocate for QE in the past few years.

However, Yellen is at least intelligent enough to know when the markets are out of control (something neither Bernanke nor Greenspan could do). To whit, Yellen publicly stated that housing was in a bubble in 2005. At the time she suggested deflating it (but was concerned about the deflation being too intense).

So, regardless of her various flaws as a forecaster and economist, Yellen has shown herself capable of:

1)   Identify bubbles.
2)   Calling for action for rein them in.

With that in mind, Yellen’s decision to continue tapering QE indicates that she is aware of the fact the markets are getting out of control again or are approaching a bubble.

This is further confirmed this by her decision to drop the 6.5% unemployment threshold as well as her suggestion that interest rate hikes could come as soon as six months after QE ends this coming December.

In simple terms, Yellen is alerting Wall Street that she will not be the second coming of Bernanke (at least for now) and that she is going to be removing the punchbowl.

The markets typically take a while to register this. The fact that last week was a quadruple witching options expiration helped hold things together. But now that options expiration is over, we’re running out of reasons for the markets to hold up.

Moreover, we’ve recently seen a number of high profile investors (Icahn, Grantham) warn that the markets are overvalued and primed for a sharp drop.

Thus we find the following:

1)   Yellen is moving to rein in the markets.
2)   Investment legends are warning of a potential drop in asset prices.
3)   Corporate profits falling.

This environment is ripe for a market pullback. Smart investors should take this opportunity to prepare for it.

On that note, if you’re seeking investment recommendations along with laser pinpointed investment research, you should check out our paid monthly newsletter Private Wealth Advisory.

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Phoenix Capital Research

A growing concern for the global economy is inflation.

We’ve recently detailed this issue for the US economy earlier this week.

Global Central Banks, concerned with a potential deflationary collapse, have allowed inflation to seep into the financial system. In developed nations like the US, this puts a squeeze on consumers. But in emerging markets like China, inflation is outright disastrous.

Nearly 40% of China lives off of $2 a day. Your average college graduate in China makes just $2,500 per year. In an economy such as this, a rise in prices in costs of living can be devastating for the population.

Why are we not seeing this in the Chinese stock market?

In China, the banking monetary mechanism tends to funnel cash directly into the economy, rather than stocks (note that bank lending remains anemic in the US, while the stock market roars higher).

Indeed, China’s shadow banking (financial transactions outside of formal banks) has expanded to over 200% of China’s GDP or well north of $18 trillion in dollar terms.

This situation favors the well-connected Chinese political elite and lends itself to corruption on an epic scale.

Consider the following:

1)   In 2010 alone, 146,000 cases of corruption were launched in China (that’s 400 PER DAY).

2)   Between 1995 and 2008, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991.

3)   It’s believed that $100 billion in corrupt money fled China through Government officials in 2012 alone.

Corrupt officials favor real estate as a means of acquiring assets because they can put properties in relatives’ names. Between this and the fact that stock investing has yet to become a cultural phenomenon in China as it is in the US, China’s stock market has languished while its real estate market has boomed.

However, the fact that so much “funny money” has moved into the Chinese economy via so many shadowy conduits makes the Chinese economy a potential inflationary nightmare.

The “official” Chinese inflation data won’t show this, but you can see the clear signs:

1)   Wage protests have become commonplace in China (a clear sign that the cost of living has outpaced wage growth).

2)   Wage increases have grown to the point than numerous US factories have begun moving their manufacturing bases back to the US (the profit differential is no longer big enough that it’s worth the expenses in shipping).

3)   China’s Government has made an official show of clamping down on inflation.

Inflation is already present in the financial system. The signs are there if you know where to look. The question now is how the markets will adjust as it spreads.

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Phoenix Capital Research

 

 

The US today is facing a serious issue of stagflation.

Stagflation is an economic term for a weak economy with higher than usual inflation. This is what crippled the 1970s. And it looks like we might be in for another similar period.

Let’s first consider the economic weakness, the “stag” in the stagflation term.

The US economy is weaker than most know, largely because the official economic data is massaged to make things look better than they really are.

How do you massage economic data?

Let’s take jobs for instance.

According to the “official numbers” the US economy added 113,000 jobs in January and another 175,000 in February. So, one could argue the US has added nearly 300,000 new jobs to its economy in the first two months of 2014.

The problem with this is that other metrics negate this alleged growth. The Wall Street Journal notes that the average hours worked in the US economy FELL by 3/10ths of an hour in the last six months.

When you account for this, you will find that in actual terms, the US has effectively LOST the equivalent of 100,000 jobs since September 2013.

Put another way, the US seems to be adding jobs to its economy, but given that on average workers are working less, the economic output in the US has been that of LOSING 100,000 jobs in the last six months.

One can find other similar issues with the US’s GDP numbers, alleged manufacturing renaissance and other key economic metrics.  And all of these issues point to our economy being WEAKER than the headline numbers claim.

Indeed, perhaps the most glaring issues in our GDP numbers relates the CPI or Consumer Price Index, which measures the official inflation numbers in the US (the “flation” portion of stagflation).

The official CPI measure for the US claims that inflation has risen 1.6% in the last 12 months.

This is rather extraordinary given that food, energy, housing, and just about every other item consumers need has risen in price significantly more than this Indeed, if you remove the accounting hocus pocus from the “official” inflation measures, you’d find that inflation today is over 5%.

So we have an economy that is weaker than the headline numbers claim with inflation that is higher than the headline numbers claim.

That is STAGFLATION. And given that the Fed is behind the curve on it, it’s only going to get worse before it gets better.

Best Regards

Phoenix Capital Research

 

Yesterday, we warned that the Fed was playing a dangerous game with inflation.

Today, we want to take note that the Fed is in fact just one of the Central Banks doing this.

Indeed, in Japan inflation has already begun to take off, driven by the Bank of Japan’s $1.4 trillion QE program.

Bloomberg notes that inflation has weakened the yen by 6.8% in the past 12 months… and the cost of living in Japan is now at a five year high.

We’ve highlighted the critical parts in the below article for your review.

The misery index, which adds the jobless rate to the level of inflation, will climb to 7 percentage points in the three months starting April 1 when Japan raises its sales levy to 8 percent from 5 percent, based on the median estimates of economists in Bloomberg News surveys of unemployment and consumer prices. That would be the highest level for the measure since June 1981 when Japan was emerging out of depression after the oil shocks in the 1970s.

Bank of Japan monetary stimulus designed to spur economic growth and achieve 2 percent inflation has weakened the yen by 6.8 percent in the past 12 months, eroding the value of wages to a record low. Abe, the son of an ex-foreign minister who grew up in a house with servants, is under fire from the opposition party after the cost of living surged to a five-year high.

http://www.bloomberg.com/news/2014-03-11/misery-index-rising-to-33-year-high-on-abenomics-japan-credit.html

Japan’s Prime Minister ran on a platform of creating inflation to drive growth. He’s now finding out that inflation and growth do not go hand in hand (inflation actually eats into growth by debasing the currency).

This is a real problem for Japan… and the rest of the world. Global Central Banks have printed over $10 trillion in the last five years. This money is seeping into the financial system, pushing up the cost of living everywhere.

In Japan, it’s pushed the misery index to a 33 year high. Who knows what it will do for the rest of us.

Phoenix Capital Research

The Fed is Playing a Dangerous Game With Inflation

In the last few months, something major has begun.

That something is inflation.

Regardless of what the CPI inflation measure tells you, the core items that affect most consumers’ pockets are healthcare, housing (rental or home prices), and food.

All of these are rising in price.

Take a stroll down the food aisles at the grocery store…Turkey has risen 34% year over year from its January 2013 price. Boneless chicken breasts are up 11%. Grapefruits are up 13%. Strawberries are up 39%. Spaghetti and macaronic is up 8.4%.

As far as housing goes, prices are beginning to move sharply upwards. The homeowners equivalent rent index rose 2.5% from its January 2013 levels. This is a sharper increase from the 2% year over year changes of 2011 and 2012.

Healthcare costs are rising sharply as well.

And yet, despite this, the Fed believes that inflation is too low.

Fed optimistic on growth, wary of bubbles
Yellen and her supporters are optimistic, but believe the economy has a long way to go

New Fed Chairwoman Janet Yellen and her core supporters on the Fed’s policy committee “are optimistic the economy is on the mend, but believe it has a long way to go,” said Jim Glassman, economist at J.P. Morgan Chase.

This core majority on the Fed don’t think the unemployment rate is telling the whole story on the economy.

They see inflation as running too low, signaling “the economy is not there,” Glassman said.

http://www.marketwatch.com/story/fed-optimistic-on-growth-wary-of-bubbles-2014-02-28?mod=latestnewssocialflow&link=sfmw

Fed’s Evans Is Willing to Risk Higher Inflation to Boost Hiring
Federal Reserve Bank of Chicago President Charles Evans said Friday the central bank should be willing to allow inflation to go over its 2% target if that will help the economy get back on track more quickly.

“We need to repeatedly state clearly that our 2% objective is not a ceiling for inflation,” Mr. Evans said in the text of a speech.

http://blogs.wsj.com/economics/2014/02/28/feds-evans-is-willing-to-risk-higher-inflation-to-boost-hiring/

The Fed is playing a very dangerous game here.

It was way behind the curve on deflation and economic weakness going into the crash of 2008. Today, it continues to worry about deflation when the clear signs show that inflation is already on the rise.

As anyone who remembers the 1970s can tell you, once inflation hits, it has a bad tendency to become a REAL problem before the Fed acts.

Investors should take note now. Inflation began to appear in early 2014. Given that the Fed is proclaiming that inflation is too low, it’s only going to get worse.

Be warned!

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Best Regards
Phoenix Capital Research