This Week in Barrons – 12-20-2015:
FED hikes rates by 25 Basis Points…
Dear Ms. Yellen:
In 1971, when President Nixon closed the ‘gold window’, the world changed forever as we passed total control of the price and value of money over to the Central Banks. During the past 20 years (with our ‘free money’ policy) we have been witness to the single, largest credit expansion in history. During this time the world’s Central Banks have increased their balance sheets by an insane 900%. But even the wildest of credit binges reaches a saturation point. That point is when the simple, bare minimum credit card payment – takes every penny of income that comes into a household. Even though that same household has perfect credit, it cannot take on any more debt without increasing its income. That is the situation that the entire world is in today. Our world is saturated with debt to the point that the world cannot take on one more payment without increasing its income.
This happened because over the past 25 years, incomes have remained stagnant while prices for goods and services have continued to rise. For example, the median household income in 1989 was $56k per year – exactly the same as it is today. However, in 1989 housing was over 50% cheaper than it is today. In 1989 the average cost of a car was $16,000, versus the $33,560 that it costs today. Consumers and nations are ‘tapped out’. China has over-built for decades trying to meet demand projections that were based upon a never-ending debt cycle. With ‘tapped out’ consumers and nations – those same Chinese plants are now idle, their mines are closed, and their warehouses are stuffed to the rafters with rotting inventory.
So Ms. Yellen, after keeping rates at zero for 78 months, adding trillions to our nation’s balance sheet, and NOT delivering a viable recovery – your economic remedy ‘this week’ was to RAISE RATES. Really? You continue tell us that your decision was ‘data dependent’, but the data stinks. This week the Baltic Dry Index (a measure of global shipping) hit another record low, while the Philly Fed report came in at a -5.9% showing ‘contraction’. So if your decision was NOT data dependent, then what is it? Was it this: “Wells Fargo Bank increased its prime lending rate today. That will affect: all Credit Card APRs, Home Equity lines, etc. But Wells Fargo will NOT increase the interest rate that it pays out on any of its deposits.” Ah-hah, so this rate hike will allow banks to charge more for credit, but won't force them to pay out any more on deposits. So this rate hike is all about taking care of your criminal banksters.
But Ms. Yellen, how are you going to protect your banksters when the world moves to a new ‘global reserve’ currency? Over the next several years (I think) the U.S. dollar will be replaced as the ‘global reserve currency’ by a basket of currencies called SDRs. Just two weeks ago the Chinese Yuan was included in that same SDR basket. When the U.S. dollar is removed from its ‘global reserve’ status, there will be a ‘reset’. There will still be U.S. dollars, but other nations will not be forced to acquire them in order to trade for each other’s goods and services. Instead, nations will work through exchanging their Rubles and Lira for SDRs.
Ms. Yellen, in your statement following the rate increase, you said that you expect to raise rates to 1.5% by the end of 2016, to 2.5% by late 2017, and to historical averages of 3.5% or so by 2018. You also said that it rarely makes sense to raise interest rates when inflation is as weak as it is. Well, with Europe (at best) treading water, China slowing, and the Emerging markets really feeling the pressures of a stronger dollar – how will those rate increases ever happen under what can only be described as deflationary conditions?
And I must assume that you’re ok with a weakening housing market, and (with fewer stock buybacks) a weaker stock market over the coming year. Additionally over the next year, with all Central Banks taking a more active role in the markets - I expect you’re ok with a higher frequency of market corrections and downside volatility than we’ve seen in the past 3 to 4 years.
Ms. Yellen, here’s hoping that a lot of our mothers haven’t rented out their son’s and daughter’s old rooms.
On Wednesday, the FED announced their first rate hike in a decade. The market originally appeared to rejoice over it, and sent the DOW up over 200 points. But when reviewing the early part of the week, that Monday through Wednesday romp higher seemed to be manufactured. It felt more like Central Bankers trying to lift the markets ahead of the rate hike, and create 'headroom’ for any negative reaction. And sure enough, on Thursday we gave back every penny of Wednesday's big move higher plus a bit more. And on Friday a horrific bout of selling hit that sent the DOW down 370 points, and the S&P coughing up 36 points to the downside.
What happened to the Santa Claus Rally? Wasn't everyone told that Santa would show up, and bring a big yearend rally? Who didn’t get the memo? Did Santa get smacked in the head with too much economic reality such as: lower retail sales, all time lows in the Baltic Dry Shipping index, month after month of negative regional FED reports, and a RATE HIKE – for starters?
So with only 8 trading days left in the year, where does this leave things? I said months ago that without some new form of ‘stimulus' we would NOT get over the May highs, and now that is certain. But, that's not to say that the banksters might not manufacture another snap back rally – they might. But all in all, there's zero fundamental reason for the markets to go higher. If they do, it's the Central Banks themselves making it happen.
Now if the S&P loses 2000 – that’s a bad sign. If the S&P then loses 1993, it's a fair bet we will be visiting the August (1860) lows in the near future. Granted that would be unusual for this time of the year, but that's what I see. If they hold the line at 2000, we could see a bounce higher. But for those of you wishing for a shot at the all time highs – you’re out of luck for 2015.
Please be careful out there. It's a very strange time in the markets, in politics, and in the world. Try and be safe.
I am looking for:
- SPX (@ 2,005) to test 1950 and then the 1900 level. If we break that, we could retest the 1,860 August lows,
- NDX (@ 4,514) to test 4500 and then the 4400 level.
- Apple (AAPL) and Costco (COST) – I would like to do ‘Iron Condors’ on them because I fear the selling is over. But right now I’m unwilling to catch a falling knife as their prices continue to fall,
- SalesForce (CRM) – I would like to do a ‘Calendar Spread’ as volatility continues to rise into earnings.
- Disney (DIS @ 107.72), I’m looking to do a January, 105 / 100 Put Credit Spread – especially after Disney fell 4 points on Friday.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF, and
- Long an oil supplier: REN @ $0.56
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.