“Volatile and Trending Down”

  • More Fed rate-raising chatter…
  • … and the chart that shows it’s all a bluff
  • If the Fed stays put, then what? Rickards looks ahead
  • Why precious metals might have pushed VW to cheat
  • No going back: Byron King on Boeing’s China deal
  • Small caps signal more stock trouble… revisiting Medicare’s 52% premium increase… reader appreciation of the 5-style word cloud… and more!

So the presidents of the United States and Russia are meeting formally today for the first time in two years.
You might not remember how the last meeting went… but we do.

Sorta makes you long for the days when Bush the Younger said he could peer into Putin’s soul…

The buzz from the annual United Nations shindig in New York this morning is that the two leaders might figure out a plan of action on the Syrian civil war — which has killed at least 220,000 people and driven 11 million more from their homes.
Assuming they come to terms today, we’ll tease out some implications tomorrow. In the meantime, we cast our gaze toward the machinations and miscalculations of America’s central bankers.
This morning, it was the turn of New York Fed chief Bill Dudley to say the Federal Reserve will likely raise interest rates before year-end.
He took the baton from Fed Chair Janet Yellen — who said the same thing Thursday night during a big speech. On Friday, we likened Yellen to a hostage-taker waving a gun whose heart isn’t really in it: “We’re gonna raise rates! We mean it — you just watch! We swear, we’re gonna do it! Any day now, we’re pulling the trigger!”
Oh, yeah? Not based on this chart, you’re not…

No Inflation Here

This is “core PCE” — far and away the Fed’s favorite measure of inflation. The Commerce Department came out with the August number this morning — a year-over-year increase of 1.3%. That’s nowhere near the 2% target the Fed sets for itself.
“The Fed’s biggest policy problem now,” says Jim Rickards, “is their inability to achieve sustained inflation at their 2% target level, despite eight years of trying. The Fed has used $4 trillion of money printing, forward guidance, currency wars, nominal GDP targets and Operation Twist. All of these policies have failed to achieve target inflation.”
As you might recall from Friday’s episode, Yellen expressed confidence inflation pressures will start to rebuild. She backed up her analysis with 35 footnotes, four pages of academic citations and nine detailed charts.
“One hardly knows where to begin in describing the flaws in Yellen’s analysis,” says Jim. “Her model is entirely theoretical, with no substantial empirical proof. The ‘forecasts’ she relies on have been erroneous by orders of magnitude for years.
“If you want to know where inflation is going, don’t look at Yellen’s models. Look around the world,” Jim goes on.
“Canada, Brazil, Russia and Japan are already in recession. Chinese growth is collapsing, although still positive because it starts from a higher level. The strong U.S. dollar has made the U.S. a sponge for all of the deflation in the world.
“Given a choice between obsolete academic models and real-world data, I’ll take the real world. Inflation is falling and deflationary forces are gaining momentum. The Fed will be no closer to raising interest rates in October or December than they were in September.
“Markets should expect more of the same behavior we’ve seen since last summer. Stocks will be volatile and trending down. Treasury bonds and gold will rally. Corporate bond defaults will rise. Commodities will remain weak. The currency wars will rage on, with other countries cheapening their currencies against the dollar. This is the best case. The worst case would involve contagion from emerging markets and a global liquidity crisis of the kind we saw in 1997 and 1998.”
[Ed. note: Jim’s premium subscribers are prepared for either the best or worst case — with carefully planned speculations that aim to turn the global currency wars into profit opportunities. Jim gives you a two-minute thumbnail sketch of his current strategy when you follow this link.]
Speaking of “volatile and trending down”… that’s today’s stock market action.
The Dow is down nearly 1% as we write, and it’s looking best among the major U.S. indexes. The S&P 500? Down more than 1%.
Nothing can stanch the selling — not the news Alcoa plans to split into two publicly traded companies, nor the news that Apple has sold a record 13 million new iPhones, nor the news that NASA has detected liquid water on Mars.
As of this morning, biotech has formally entered a bear market — down 20% from its recent peak — and thus the Nasdaq is down nearly 1.5% today. And the small-cap Russell 2000 has slid nearly 2%.
“Earlier this year, we were impressed when small-cap stocks finally started to outperform their bigger cousins,” says Greg Guenthner of our trading desk. “That’s because it’s bullish when smaller, more speculative names outperform the blue chips. That means investors are more willing to lay down their hard-earned dough on riskier bets.
“But since June, these small stocks have started to lose momentum. Now they’re going backward.
 Small, but not strong...
“When speculative stocks like biotechs and small caps begin to sharply underperform an already-weak market,” Greg goes on, “the investing herd will only grow more anxious. And you guessed it — that anxiety snowballs into more selling.
“From our vantage point, it looks like there’s more trouble around the bend for stocks.”
Americans spent out of an empty pocket in August. The monthly “income and spend” figures from the Commerce Department show personal incomes grew 0.3%, but consumer spending grew faster — up 0.4%.
That’s a reversal of the trend that’s been in place for more than a year now. But one month never tells the whole story…
Gold is not benefiting from the risk-off trade today. It’s now down $20 over the last two trading days, at $1,134.
Even palladium, last week’s standout performer in the precious metals complex, is in retreat — down 2% today, at $648 an ounce.
Do precious metals figure into the emissions-cheating scandal at Volkswagen? That’s Byron King’s thesis.
As you’re almost surely aware, the feds have caught VW gaming the emissions readings on its diesel fleet. Basically, pollution-control devices would engage when built-in software detected a state emissions test was underway… and then disengage when the test was over so the cars would have more pickup and better fuel economy. VW shares are down 34% since the news broke 10 days ago.
“Here’s why I think VW did this,” says Byron: “To save money on platinum and palladium (platinum group metals — PGM) used in emissions control systems. VW managers thought they were saving money on scarce, valuable PGM materials, and the cost savings were ‘worth it’ over the long haul.”

Platinum and palladium go into every catalytic converter — rhodium too, another PGM. “I suspect,” says Byron, “that VW managers believed they could stretch their cars’ emission systems by using less PGM and working the issue by gaming software; thus, cars would pass emission tests.
“As the dust settles I foresee automakers will lean against gaming emission software and go more in the direction of using whatever amounts of PGM are required to make catalytic systems work well and last a long time… Well-run PGM producers will move ahead of the rest of the mining market.”
Boeing just crossed the Rubicon — or the Pacific Ocean, as the case may be.
The first leg of Chinese President Xi Jinping’s U.S. visit took him to Seattle — where he visited the Boeing factory that builds wide-body aircraft like the B-747-8. “During Mr. Xi’s visit, Chinese officials and Boeing confirmed orders for 300 new Boeing airliners, valued at about $38 billion,” says Byron King — donning his military-tech hat and taking notice of any development affecting a defense contractor like Boeing.
“The 300-aircraft order was accompanied by news that Boeing and Chinese aerospace company Comac will create a joint facility in which to complete B-737 aircraft in China. While Boeing has many foreign vendors and component suppliers, the company never sited a true ‘production’ facility outside the U.S., nor delivered a plane to an airline customer from outside the U.S.
“Thus with this new Boeing-Comac deal, we’re seeing a seemingly small step that may set a major new precedent in the battle to obtain future business. Kowtow, in other words.”
Boeing’s union workforce is unhappy, but management is promising no 737-related layoffs in Washington state. “Whoever wins the market in China will be the global market leader,” promises CEO Ray Conner.
“I understand where Conner is coming from, to be sure,” says Byron. “Then again, I have a strong hunch that many Chinese believe that China will ‘win the market in China.’ It’s only a question of time, and Chinese are patient people.”
“In the Sept. 9 issue of The 5, you cover a Medicare issue that affects me directly,” a reader writes of the massive Part B premium increase facing about 30% of Medicare participants.
“I just turned 68 and am on Medicare and waiting to file for Social Security. I have a few questions, which might be good follow-up material for your publication:

  1. Would this increase be a permanent ‘hit’ on my Medicare fees (a ratchet up) or only run until I file for Social Security (a year or two)?
  2. Are there any actions in place to avoid/resolve this problem?
  3. Would filing for SS benefits now with intention or doing a payback and reset in a year or two be a way to avoid the discrimination/penalty?

“I enjoy your publication. Keep up the good work.”
The 5: We recognize that deciding when to file for Social Security can have ramifications for literally the rest of your life. But for the same legal reasons we can’t dispense personalized advice on investments, we can’t venture into financial-planning questions either.
Back to your first question: No, your Medicare Part B premium would not fall after the proposed 52% increase kicks in next year. (The exact percentage will be announced sometime next month, unless a “partial government shutdown” gets in the way.) Likewise, someone who’s filing for Medicare for the first time next year would pay the higher rate going forward.
Avoiding or resolving the problem? Wish we could tell you something hopeful. Call your congressman? As we said three weeks ago, the number of middle-income people getting whacked by this increase isn’t big enough to make a difference politically.
That said, pressure might come from state governments. They’re the ones who’ll have to pick up the higher premiums for the 9 million lower-income people who are on both Medicare and Medicaid. At an extra $54.40 a month each, that’s nearly $5.9 billion state governments will have to find under the sofa cushions next year. We’ll keep you posted…
“You want velocity? You don’t get it with trickle-down Fed interest rates,” writes a reader as our velocity discussion drifts into another week.
“You have a clog in the plumbing of the current interest rate system and it’s right at the start. The banks and brokers are taking all the low rates and not passing them on to the biggest engine for our economy — the citizen and business consumer.
“If I were the next president, I would give the Fed another tool: the right to make tax recommendations to Congress for implementation of a special time-sensitive tax break on 10% of any taxpayer’s adjusted gross income for purchases costing more than 1% of AGI.
“Example: An individual whose AGI is $100,000 wants to buy a new car for $10,000. The Fed has set a 5% tax rate saving at the time of this purchase. The individual buys the car for an effective price of $9,500.
“By allowing the Fed to set the deal, you instill the sense of urgency needed to spur the purchase
By insisting that Congress has only five or 10 days to say no, you further make this purchase urgent
The Fed meets often enough to keep this lively, i.e., no committee meetings and filibusters to slow it down.
“The goal should be a $20 trillion economy by 2020. The increase in tax base should more than compensate for the effective lower rate. The key is creating the sense of urgency to buy now before the price changes, just like a retail store.”
The 5: The Fed has proven itself clueless when it comes to monetary policy… and so you propose to give them authority over fiscal policy too? The mind boggles…
“The 5-er who sent in the word cloud Friday — totally AWESOME!” enthuses our final correspondent. “Would love to see the derogatory terms graph when compiled. Please don’t let him/her down.
“To begin the compilation, I agree that the term ‘wonks’ is appropriate for the BLS. The endearing term I miss? ‘Ol’ Yeller.’ Keep up the word search; you guys are SO good at it!
“BTW, ‘heh’ is my all-time fav 5-er term, and remember, if it ain’t broke, don’t fix it.”
The 5: “Heh” has a storied history here, going back to when our fearless leader Addison Wiggin penned these daily missives.
A search reveals its first appearance on May 14, 2007 — about three weeks after The 5 made its debut. That’s when ethanol was a hot topic and a reader surmised that even if all U.S. farmland were turned over to corn for ethanol production, it still wouldn’t meet the nation’s transportation needs and the nation would then be 100% dependent on imports for food.
“Heh! Wouldn’t that be fun?” said Addison.
We’d better nip it with the misty-eyed nostalgia and call it a day…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Have you heard about the one-of-a-kind guarantee that comes with our premium income advisory?
It works like this: “Try my strategy just once,” says editor Zach Scheidt,” and if you somehow lose money, I’ll write you a check to cover the loss.”
Intrigued? Check this out — no long video to watch.

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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