Lost Faith

  • Cheap money doesn’t buy prosperity? Say it ain’t so!
  • After the Fed punts, now what? Jim Rickards and Chuck Butler weigh in
  • The small-cap silver lining to the market’s correction cloud
  • When doctors don’t get paid… real real interest rates… more incoming flak for “piggybacking” the Canada Pension Plan… and more!

2015: The year faith was lost in central bankers. That’s what we forecast at the start of this year.
Unless you live under a rock, you’re aware by now the Federal Reserve stood pat yesterday on interest rates. (If you do live under a rock, we’re sort of envious.) The fed funds rate remains near zero, as it has ever since the Panic of ’08.
This morning, we see affirmation of our forecast from many quarters — starting with the establishment financial media.
“Central bankers injected roughly $8 trillion into the global economy since the financial crisis,” says this morning’s Wall Street Journal, which then declares the big lesson of the last seven years is, “Cheap money alone can’t solve the world’s economic ills.”
Gee, ya think?
Of course, it’s not only clueless central bankers who are only now figuring this out — as their precious 2% inflation can’t materialize. There’s also the usual lineup of “contrarian” pundits who predicted cheap money would set off hyperinflation.
“To have inflation, you need two things,” Jim Rickards explained to me last year.“ You need money supply, but you also need velocity. Velocity’s the turnover of money.
“So if I go out tonight and I buy a drink at the bar, and I tip the bartender, and the bartender takes a taxicab home, and the taxicab driver puts some gas in his car, that money has a velocity of 3. You’ve got the bartender, the taxicab and the gas station. But if I stay home and watch TV, that money has a velocity of zero.
“You need both money supply and velocity to cause inflation. The Fed has taken the money supply to the moon, but the velocity’s collapsing.”
We see that in soft retail sales numbers, and especially in the government’s monthly income-and-spend report: For more than a year, consumer spending has been growing more slowly than personal incomes… and personal incomes are growing at a glacial pace.
“What would cause inflation,” says Jim, “is not more money printing. What would cause inflation now is the change in velocity, which is behavioral. It’s the change in the psychology.”
We also see affirmation of our faith-lost forecast in a more immediate, visceral way…

The Market's Vote of Confidence in the Fed

That’s the picture of traders parsing every word of the Fed’s statement, hanging on every word during Janet Yellen’s news conference, and then throwing a tantrum over “uncertainty”.
But as Jim tweeted yesterday before jetting off to Brazil, “uncertainty” is an excuse only for those who weren’t paying attention. “Yellen told us exactly what we need to know on May 22.”
On that day, she delivered a speech in Providence, Rhode Island. “The speech was widely followed by the press and pundits,” Jim wrote his premium subscribers the following week. “News outlets pounced on her statement that ‘I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate.’
“Those who took the time to read the actual speech instead of relying on reporters saw that Yellen’s headline quote started with the phrase, ‘If the economy continues to improve as I expect…’”
But it didn’t. Sure, the unemployment rate is only a tad above 5%, but even she knows that’s because legions of Americans have given up looking for work. Meanwhile, GDP is anemic and inflation as the Fed defines it is all but nonexistent.
[Ed. note: In the months since Jim wrote those words, readers of Currency Wars Alert have racked up gains of 20% in three weeks… 100% in six weeks… and 111% in three months.
Now that the Fed has decided not to decide, you can count on more volatility as seen in the chart above. And you can play it to your advantage… as Jim explains in this brief video message.]
If, as Shakespeare said, the past is prologue… now what?
Jim’s been on record since late last year — no increase in the fed funds rate during 2015. Not in March, not in June, not in September. And no, not in December either, Janet Yellen’s protestations to the contrary yesterday notwithstanding.
Our friend Chuck Butler at EverBank Global Markets made the same prescient call late last year. After suffering through Yellen’s news conference yesterday, he writes: “The Fed chair said that the goings-on in China, the market gyrations, the lack of inflation are their concerns.
“But there’s something there that she didn’t say, and I keep going back and I swear I can read it between the lines, and that is that the Fed members are concerned with the unevenness of the economy, and therefore they do not yet feel that the economy is prepared for the first rate hike in nearly a decade. That’s my story and I’m sticking to it!”
Nor is Chuck in the December camp. “I would have to go back and look at the history of when rate hikes were made on the calendar. But I suspect that a December rate hike would be a rare occurrence, if one existed at all! But don’t let that get in the way of the rate hike campers calling for a December rate hike.”
And with that, we turn to the markets. All the major U.S. stock indexes are in the red. The Dow is taking it worst, off more than 1% and now below 16,500.
Gold picked up momentum after the Fed announcement yesterday, and it’s adding to those gains today. At last check, the bid was $1,137. Chalk up most of that strength to dollar weakness — the dollar index tumbled yesterday and is now stabilizing at 94.7.
Treasuries are rallying, the yield on the 10-year now 2.16%.
“This recent correction is actually a positive for small-cap investors,” says our Jonas Elmerraji.
“If you’d asked me my biggest gripe about the markets over the last couple of years, I’d have told you that it’s been the lack of small-cap opportunities. Put simply, we’ve had to fight harder to wring money out of this market. Bargains had evaporated, and value has taken much longer to materialize.
“Not only does a correction give us an opportunity to get into new positions at lower prices, but it also gets more eyes on the positions that we bought in previous months only to watch them do nothing. Corrections also give bigger companies more incentive to acquire attractive smaller businesses — in the last three years, 93% of all merger deals have involved companies worth $1 billion or less in market capitalization.”

The lone “data point” of the morning hints at still more economic weakness going into year-end.
The Conference Board’s index of leading economic indicators inched up 0.1% during August. The weak areas include working hours and new factory orders.
It’s no longer just lottery winners getting IOUs from the state of Illinois.
Illinois has had no state budget since July 1. The governor and legislature can’t come to terms with how to fund the state’s towering pension obligations. As mentioned here two weeks ago, state lottery players who win more than $25,000 are waiting to get paid.
Now comes word from the Illinois Department of Central Management Services that “in the near future, we will no longer have the legal authority to continue to pay health care vendors for their services.”
In other words, no payments to doctors, hospitals and others furnishing health care to Illinois’ 360,000 state workers, university workers, retirees, etc. Already, payments to dentists have been cut off.
Even with this move, Illinois is set to rack up $8.5 billion in unpaid bills by year-end. Ouch.
“When Jim Rickards talks about nominal versus real [after inflation] interest rates,” a reader writes,“ he uses the government version of inflation.
“If you use the same method of calculating inflation today as was done in the 1970s, wouldn’t real interest rates actually be considered really low these days?”
The 5: We’ve covered this before, but it’s a messy issue, so we don’t mind covering it again.
When it comes to figuring out what the Fed will do next, forget about the fact the inflation numbers are bogus.
“Whether I buy into government statistics is irrelevant,” Jim said in this space last June. “The fact is Janet Yellen buys into them.
“I’m not sitting here, grabbing a megaphone and saying what Jim Rickards thinks. I’m trying to tell you what she thinks so you can figure out what’s next.
“I understand the flaws, I understand hedonics, I understand the changes, I understand what John Williams is doing. I talk to my mother. She complains about the price of milk every time she comes home from the store. I get all that.
“But so what? Janet Yellen is a 165 IQ egghead who only works with what she works with. So I try to get inside her head so we can be ahead of the curve.”
It’s for this reason Jim made a compelling case last May that real interest rates are, in fact, at all-time highs.
As noted above, the 10-year Treasury rate this morning is 2.16% — still not far from historical lows. “But recent inflation reports have shown negative inflation, technically deflation,” Jim goes on, “which puts the real rate at about 3.0%, extremely high by historical standards.
“Compare today’s real rate of 3.0% with the real rate in 1980. At that time, long-term bond rates were about 13%, but inflation was out of control at about 15%. When you subtract 15% from 13%, you get a real rate of negative 2%.
“Today’s real rate of 3.0% is five percentage points higher than the real rate in 1980! That’s what we mean when we say real rates are near all-time highs.
“Given the current high level of U.S. real interest rates, either a recession or a geopolitical flare-up would be enough to trigger a bond market rally,” Jim said. He won’t rule out the possibility of U.S. rates falling to levels seen in Japan and Germany — where 10-year government debt yields a paltry 0.3-0.7%.
That would add up to “one of the most dramatic bond market rallies in history,” in Jim’s words. No doubt…
“I am not surprised that you pulled this stunt,” a Canadian reader writes after reading our latest praises for piggybacking Canada’s version of Social Security. “Matter of fact, I’m pretty sure this isn’t your first rodeo.
“You are pirates, just like the rest of government. Shame on you. Do not renew my subscription, as I have no need for one more individual to steal my hard-earned money.
“How do you reconcile your effort to be taken seriously in financial matters when you accept such snake oil, deceptively designed promotions like the ‘piggyback on Canada’s SS’ ad? Make up your mind as to who you wish to be. Character or slime?”
The 5: Ouch.
In the first place, we must reinforce a point we’ve made since the idea first took off last spring: No Canadians’ retirement is being harmed in the process of Americans piggybacking the Canada Pension Plan. If anything, the piggyback technique should help bolster the value of the Canada Pension Plan’s assets.
In the second place, what’s “slimy” (or, for that matter, unserious) about showing how ordinary folks can collect extra income using a proven technique? We’re not making anything up when we introduce you to a woman who made $4,891 last year piggybacking the Canada Pension Plan.
Someone wrote in with a similar complaint back in May. We’ll say now what we said then: We’re not implying something for nothing, nor are we appealing to readers’ baser instincts.
The appeal is, in fact, a timeless one. A working stiff struggling to get ahead, looking for any angle that will help: Here’s a solution that hadn’t previously come to his attention, carrying the promise of a more secure retirement. It’s something that works for Canadians, and with modifications that can work for Americans too.
What’s not to like?
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. If you wish to evaluate our firm’s character or sliminess for yourself… we once again direct your attention to this link.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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