- Everybody exhale: Aftermath of the Fed decision
- If seven years of low rates can’t generate inflation, what can?
- “Honey, I blew up the deficit!” Paul Ryan’s inflationary gambit
- Jamming Wi-Fi and cell towers: A new domain of warfare
- Intrigue at the IMF: Who wants to take out Lagarde?
- “Pharma bro” gets perp-walked: Why him and not Corzine?
And so the Federal Reserve has preserved what little credibility it still has. For now, anyway.
The momentous moment has now passed. America’s seven-year monetary state of emergency was indeed lifted yesterday at 2:00 p.m. EST.
Instead of a “near zero” fed funds rate with a target range of 0.00-0.25%… we now have a “next to near zero” fed funds rate, with a target range of 0.25-0.50%.
As seen today in our sister e-letter The Rude Awakening…
The vote of the Fed’s Open Market Committee was unanimous. Which is a little curious: As Jim Rickards pointed out in yesterday’s Daily Reckoning, Chicago Fed chief Charles Evans — who has a vote on the committee this year — has routinely expressed cold feet.
Here’s what Evans said on CNBC Dec. 1, barely two weeks before yesterday’s vote: “Before raising rates, I would prefer to have more confidence than I do today that inflation is indeed beginning to head higher.”
What the hell? Did Evans awake yesterday morning with a severed horse’s head in his bed?
But again, it was all about credibility. Since the September FOMC meeting, Fed chair Janet Yellen talked up a rate increase so many times, it was impossible not to follow through yesterday.
Of course, that’s not how she explained it during her press conference after the announcement. Instead, she resorted to the old “bullets in the chamber” argument. “We’ve worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks,” she said at a news conference.
In other words, we have to raise rates now so we can lower them again in the future — heh.
“The Fed should have raised rates in 2010,” says Jim Rickards. “If it had done so then, it would be in a position to cut rates today when the economy needs a boost. Instead, the Fed missed an entire interest rate cycle.
“In prior rate hike episodes, the economy was growing strongly and was in the early stage of the growth cycle. The Fed was playing catch-up, as it usually does.
“This time, the Fed is not playing catch-up but is trying to lead. The Fed is tightening into an already weak economy.”
Affirmation of that weakness shows up this morning in the December “Philly Fed” survey — a gauge of manufacturing in the mid-Atlantic.
It registered minus 5.9 — worse than the lowest guess among dozens of economists polled by Bloomberg. That’s a negative number for three of the last four months. New orders are weak. Expectations of future orders are weaker.
As mentioned here Tuesday, the Fed’s factory gauge for New York state this month is also negative.
And the weakness is global. “The situation around the world is even more dire,” says Jim.
“Russia, Japan and Brazil are already in recession. Canada and Korea are close to one. China is slowing down rapidly and taking a large bite out of global GDP growth.
“Commodity producers such as Australia and South Africa are slowing down also because of reduced demand from China. Capital is flowing out of the BRICS and other emerging markets at an unprecedented rate. An interest rate hike by the U.S. now will exacerbate these trends and tip even more countries into recession.
“Behind this global slowdown is the dreaded specter of deflation,” Jim goes on.
“This is the outcome central banks fear most. Deflation increases the real value of debt and accelerates defaults. We’re already seeing this in energy and other junk debt. The defaults will soon spread to more highly rated corporate debt. Ultimately, these losses fall on the banks.
“Deflation also destroys tax collections. Taxes are imposed on nominal dollar returns, not real returns. When deflation causes prices and incomes to drop, less tax is collected, pure and simple.
“The combination of bank losses, higher real debt burdens and diminished tax collections is a government’s worst nightmare. For these reasons, central banks and governments will do whatever it takes to stop deflation.”
But if seven years of near-zero rates haven’t generated the inflation the Fed wants… and the Fed has begun a rate-raising cycle now… how the heck can inflation develop?
“The answer is debt monetization,” Jim wrote on Tuesday to readers of Rickards’ Intelligence Triggers. “This is also known as ‘helicopter money’ or ‘people’s QE.’ A more technical name for it is ‘fiscal dominance.’ It all amounts to the same thing. If the people won’t spend money, the government will.
“Governments will pick spending programs to stimulate growth and then incur huge deficits to support the spending. The deficits will be financed with government debt. Then the central banks will print money to buy the debt.
“The difference between debt monetization and quantitative easing is that the money does not just sit in the bank. It goes directly into whatever spending programs the government chooses. The spending is guaranteed to happen, and in theory, that will get the economy moving and produce the desired inflation.”
Again, Jim said this on Tuesday. And then, about 12 hours later, came word that House Speaker Paul Ryan and other congressional leaders had agreed to go on a $680 billion bender — or in the polite language of the Beltway, a “bipartisan budget agreement for fiscal 2016.”
Strictly speaking, it’s not new spending. It’s “targeted” tax breaks for special interests. “Tax breaks on everything from racehorses and film productions to NASCAR racetracks to college tuitions and teachers’ out-of-pocket classroom expenses are covered in the massive deal,” says The Washington Times.
We have nothing against tax breaks around here. But we’d prefer to see them accompanied by matching spending cuts. We’d also like a pony, while we’re at it.
The mood among people who consider themselves fiscal conservatives is captured in this morning’s masthead at The Drudge Report.
Can’t say we didn’t warn you. On the first business day after Mitt Romney chose Ryan as his running mate in 2012 and everyone gushed, we called out Ryan as a phony.
“It takes a special kind of politician to vote for the TARP bailouts in 2008… and for Medicare prescription drugs in 2003… and still successfully pass yourself off as the Foremost Fiscal Conservative of the 21st Century™,” we wrote.
The hate mail was overwhelming. Now everyone’s come around. It’s tough being in the vanguard, but someone’s gotta do it.
Bottom line: At some stage, deflation will flip to inflation… and most investors won’t see it coming, says Jim.
“They’ll be on the wrong side of the trade,” he wrote on Tuesday. “The result of this deflation-inflation paradox is potential whiplash for investors.
“It’s a little too early to jump into a pure inflation play (although some gold in a portfolio is always a good idea both for inflation protection and as catastrophe insurance).
“Yet those betting big on deflation may be caught on the wrong side of the trade if inflation kicks in sooner than expected.”
Which brings us to the newest “Kissinger Cross” recommendation in Rickards’ Intelligence Triggers. It follows from Jim’s deflation-inflation analysis we’ve been sharing today. The recommendation was issued Tuesday. It’s still a buy today. It has the potential for a 420% return by January 2017. Jim’s Kissinger Cross tutorial is still available at this link.
To the markets… where the buzz from yesterday’s Fed decision is rapidly wearing off.
The Dow ended yesterday up 224 points. As we write this morning, it’s already surrendered more than half that gain.
Gold? It’s tanking — off $20 at last check, to $1,052. Crude? Back below $35, where it was on Monday.
But Treasuries? They’re rallying, the 10-year yield now 2.25%. And the greenback’s looking sharp, the dollar index at 99.2.
Now there’s a sixth domain of warfare — in addition to land, sea, air, space and cyber.
“Pentagon officials are drafting new policy,” says the defense trade publication Breaking Defense, “that would officially recognize the electromagnetic spectrum as a ‘domain’ of warfare, joining land, sea, air, space and cyberspace…
“With jamming, spoofing, radio and radar all covered under the new concept, it could potentially bring new funding and clear focus to an area long afflicted by shortfalls and stovepipes.”
Wild. Our military-tech maven Byron King was onto the cybersecurity push in early 2013 — well before it started making near-daily headlines. That foresight turned into gains of up to 219% in the sector for his readers.
We’ll keep tabs on what unfolds in the electromagnetic space. We suspect it will be more complicated than the Russkies jamming Voice of America back in the day…
Someone wants International Monetary Fund chief Christine Lagarde gone. Or so it occurs to us as we see the news she’s been ordered to stand trial in France for “negligence by a person in position of public authority.”
The case goes back to her days as French finance minister. She authorized a payment of $438 million to businessman Bernard Tapie for a company he owned and sold.
Tapie “sued the Credit Lyonnais bank over its handling of the sale,” says the BBC by way of background, “alleging that the partly state-owned bank had defrauded him by deliberately undervaluing the company. “His case was later referred by Ms. Lagarde to a three-member arbitration panel which awarded the compensation, causing a public outcry.”
Huh? This was back in 2007. Why the “negligence” charge now?
Lagarde: The long knives are out
[World Economic Forum photo]
Recall Mme. Lagarde got the IMF gig in 2011 when her predecessor Dominique Strauss-Kahn had to resign after his arrest for sexual assault in New York — charges that were later dropped.
An IMF spokesman says the IMF “continues to express its confidence in the managing director’s ability to effectively carry out her duties.”
Of course it does. Right up till the moment it doesn’t. To be continued…
Also on the financial police blotter — the douche-tastic Martin Shkreli.
We told you about him back in September — how he gamed the stupid system of drug regulation in this country so his firm Turing Pharmaceuticals could acquire an off-patent drug and jack up the price 5,456%.
Kinda says it all, dontcha think?
Early this morning, the feds picked him up at home in Manhattan for securities fraud.
“The federal case against him has nothing to do with pharmaceutical costs,” Bloomberg reports. “Prosecutors in Brooklyn charged him with illegally taking stock from Retrophin Inc., a biotechnology firm he started in 2011, and using it to pay off debts from unrelated business dealings. He was later ousted from the company, where he’d been chief executive officer, and sued by its board.
“In the case that closely tracks that suit, federal prosecutors accused Shkreli of engaging in a complicated shell game after his defunct hedge fund, MSMB Capital Management, lost millions. He is alleged to have made secret payoffs and set up sham consulting arrangements.”
The U.S. attorney says Shkreli ran his companies “like a Ponzi scheme.”
OK, so the feds say Shkreli raided his company to pay off debts that had nothing to do with his company. That sounds really familiar. Isn’t there another similar case from recent history? It’s on the tip of our tongue…
Oh, yeah. Him…
Well, there’s one significant difference between the case of Shkreli and that of Jon Corzine: Corzine skated for pilfering the accounts of customers at MF Global so he could meet a margin call in the firm’s own trading account. Customers were out $1.6 billion when MF Global collapsed in October 2011. They weren’t repaid in full until 2013.
Yeah, the feds brought a civil suit. Big deal. He might well win it, considering he hasn’t tried to settle.
The lesson is if you’re going to commit raw financial plunder, you’d better make sure you first ingratiate yourself with the power elite — if not be a member of the power elite yourself. Near as we can tell, Shkreli didn’t even try. No cocktail parties, no campaign contributions, no super PACs. No wonder Shkreli got perp-walked this morning while Corzine hopes to set up a hedge fund.
In the vast universe of financial scalawags, Martin Shkreli is a pipsqueak. We almost feel sorry for him today. Almost…
“The gross margins from selling bags of clean air in Beijing must almost reach the stratospheric heights reached by popcorn at a football game or water from the French Alps,” a reader muses.
“My only concern is why didn’t I think of that?
“Every day, I enjoy The 5,” the reader adds, “and never complain about its length.”
The 5: We’re glad there’s someone…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “When the Fed started a rate hike cycle in 1994,” says Jim Rickards, “the losses on Wall Street were enormous. Several hedge funds and municipalities went bankrupt, including one of the largest municipal entities, Orange County, California.
“The losses this time could be even larger and more dangerous,” he says — for the reason he cited above. The Fed is “tightening into an already weak economy.”
The mainstream won’t acknowledge that. They’re buying the company line from Janet Yellen that the economy will “continue to strengthen.”
Jim’s “Kissinger Cross” tool has just identified a play that could make you five times your money over the next year as everyone discovers the truth. Access here.
