I Called the Fed’s Latest Fumble Back In January… Here’s What’s Next

Last Wednesday, something miraculous happened.

Janet Yellen finally told the world that she has no clue what she is doing.

Of course, this comes as no surprise to readers of Sure Money. We’ve known forever that Janet and her Confederacy of Dunces at the Federal Reserve have no idea how to do their jobs. Having been given a dual mandate by Congress to maintain low inflation and low unemployment, they told the world that the prices of goods and services weren’t rising enough when (with the exception of oil and commodities) they were actually increasing at double digit rates and that the jobs market had recovered while 95 million Americans couldn’t find work.

And somehow, they expected to find the wherewithal to raise rates four times this year.

That’s manifestly impossible, and back in January I wrote in The Credit Strategist, “Here is where things stand from where I sit: The Fed will not raise rates by more than 25 basis points in 2016 (if at all).”

And sure enough, on Wednesday, we found out that the Fed seriously downgraded its expectations of future growth, and that Janet Yellen essentially has no idea what’s coming next.

Here’s the thing: We know exactly what’s going on – and it isn’t good.

I called it when the Fed backtracked on their plans for a rate hike, and I’m about to make another call today.

Here’s what’s about to happen – and how to formulate a plan to deal with it…

Yellen Fesses Up (In 261 Words)

The Fed consistently issues optimistic economic forecasts that are so inaccurate that they make weathermen (and women) look good. It’s now been forced to lower those forecasts (which we expected) because the economy it imagines exists has no relationship to the one on Planet Earth.

Of course, President Obama tells those of us who tell the truth about the bad economy that we are “peddling fiction.” Coming from the man who lied to the American people about their healthcare and then doubled down by lying about the Iran nuclear deal, I consider his criticism a badge of honor. The only ones peddling fiction are Mr. Obama, his advisers, and the central bankers in the government’s employ. And all of them should be fired for inflicting untold damage on this country from which it will take decades to recover (if we can recover at all).

You have to give them credit – such gross incompetence is a rare thing yet miraculously it is admired by the mainstream media and Fed sycophants everywhere.

Elsewhere – including my new book – I call central bankers “The Committee to Destroy the World.” But that is really too polite. They are a bunch of blooming idiots that will end economic life as we know it if they are not stopped.

And even they are starting to admit that their policies are not working and have no chance of working.

This was made clear when Steve Liesman, one of the few real journalists at CNBC, asked Mrs. Yellen the following after last week’s Fed’s meeting:

“Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn’t end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?”

Translating that question into politically incorrect straight-talk, Mr. Liesman was basically asking Mrs. Yellen why anybody should ever believe a word she says because the Fed consistently refuses to live up to earlier promises to raise interest rates.

Her answer was one for the ages (it’s a little long but it’s important because it is your money she and her colleagues are destroying):

Well, let me start — let me start with the question of the Fed’s credibility. And you used the word “promises” in connection with that. And as I tried to emphasize in my opening statement, the paths that the participants project for the federal funds rate and how it will evolve are not a pre-set plan or commitment or promise of the committee. Indeed, they are not even — the median should not be interpreted as a committee-endorsed forecast. And there’s a lot of uncertainty around each participant’s projection. And they will evolve. Those assessments of appropriate policy are completely contingent on each participant’s forecasts of the economy and how economic events will unfold. And they are, of course, uncertain. And you should fully expect that forecasts for the appropriate path of policy on the part of all participants will evolve over time as shocks, positive or negative, hit the economy that alter those forecasts. So, you have seen a shift this time in most participants’ assessments of the appropriate path for policy. And as I tried to indicate, I think that largely reflects a somewhat slower projected path for global growth — for growth in the global economy outside the United States, and for some tightening in credit conditions in the form of an increase in spreads. And those changes in financial conditions and in the path of the global economy have induced changes in the assessment of individual participants in what path is appropriate to achieve our objectives. So that’s what you see — that’s what you see now.

If you boil this 261-word gobbledygook down to simple English, what she said is that the members of the Federal Reserve Open Market Committee (i.e. a bunch of former and hopefully never-to-be-again economics professors) have no idea what they are doing when they make economic forecasts. Those forecasts are, in her words, “uncertain” and subject to change at any time. In other words, they are totally useless as a guide to future policy. But maybe that’s good news because the forecasts are consistently wrong, so using them to guide policy would be even more of a disaster than we already have on our hands.

The Fed May Not Know What’s About to Happen… But We Do

The idiotic dot-plot produced by the Fed on Wednesday to show a Romper Room version of the various Fed governors’ economic projections significantly downgraded their expectations of economic growth. This means that rates are more likely to fall than rise in the foreseeable future.  Again, none of this should surprise readers of Sure Money. In January, I wrote the following about what the Fed would do in The Credit Strategist:

“And a Federal Reserve that creates bubble after bubble while issuing forecasts that make weathermen look like Nostradamus tells us the economy is so strong that it plans to raise interest rates four more times in 2016 while commodity prices plunge, 96 million people can’t find work, and it could barely bring itself to squeeze a 25 basis point hike out of its tightly clenched loins after seven years… Here is where things stand from where I sit: The Fed will not raise rates by more than 25 basis points in 2016 (if at all).”

Human beings are fascinating creatures. We find it hard to look honestly at ourselves. That is particularly true of public figures.  But we may have seen the first sign of psychological insight on Janet Yellen’s part last Wednesday. She admitted that she and her colleagues have no idea what is going on in the U.S. economy. While that is hardly comforting, it might at least give investors a chance to plan for what is coming.

And what is coming precisely?

With the 2/10 Treasury yield curve (i.e. the difference between the yield on two year and ten year Treasuries) flattening by almost 200 basis points over the last two years, a move that coincided with the rise in the dollar, the collapse of commodities, a sharp slowing in China and junk bond market weakness, you do not have to look too hard to figure out what is coming – a recession. A flattening yield curve almost always indicates an oncoming recession; when it coincides with the other events outlined above that began in early 2014 and are continuing today, it raises the odds of a recession significantly.

The problem with a recession today is that it would occur when the Federal Reserve has little ammunition with which to stimulate the economy. Historically the Fed lowered interest rates by 300-500 basis points during recessions, but today it only has 25 basis points before it hits zero – so that tool is not available. That leaves more QE as the most likely policy reaction to a slower economy – and we already know that each successive bout of QE was less productive than the one before. QE might provide markets with a short-term boost but any rally will end in tears because it does not create sustainable economic growth.  Sadly, the Fed does not have the tools to stimulate the economy. That leaves fiscal policy as the only game in town, and unfortunately that game has been in a “time-out” period for years due to the corruption and incompetence of Congress and the Executive Branch.

In addition to having few promising policy responses to a recession, we have a highly leveraged economy that won’t respond well to lower growth. With Corporate America carrying at least 40% more net debt (debt net of cash) on its balance sheet today than in 2007 (plus another $1 trillion of goodwill incurred during an epic M&A bubble), many companies will find it hard to meet their obligations when recession strikes. We’ve already seen 87 corporate defaults around the world in 2016 according to Standard & Poor’s, with 60 in the US, 15 in emerging markets and 8 in other developed nations. Many but not all of these defaults came in the oil and commodities sectors, but we are still early in the default cycle. If we have a normal default cycle (i.e. no recession or financial crisis), total defaults from 2016-19 could reach $1.6 trillion according to Martin Fridson, dean of high yield credit analysts. But if we have a recession, the number will be higher and recoveries on defaulted bonds will be lower.

Remember that the only reason more highly leveraged companies that issued junk bonds haven’t defaulted is because they’ve been rescued by low interest rates.  Low rates disguised their perilous financial condition and allowed them to run on empty longer than they should.  The economy is littered with these zombie companies that generate little free cash flow and are just treading water.  But when I comes time to refinance their debt, they will default because the market won’t be willing to finance their overleveraged balance sheets.

A larger question is whether a recession can be limited or whether it will morph into a crisis. The risk factors suggesting that it could turn into something worse include the epic amount of global debt (over $200 trillion) weighing down government, corporate and consumer balance sheets and a lack of sufficient income to service and repay that debt.  In other words, the economy would be catching cold when its immunity system is compromised, creating the risk that a common cold could turn into pneumonia.

That leaves only three options – default (see Puerto Rico or the 87 defaults so far this year), inflation or currency devaluation. Central bankers have been trying to trigger inflation for years and despite their protests to the contrary, they succeeded in pushing up the prices of goods and services and financial assets in the U.S. Where they haven’t been successful enough (i.e. Europe and Japan), they are doubling down on policies to accomplish their goal of raising prices, which is another way of lowering the value of their currencies.

What does that mean for you? Do not despair.  There are definitely things you can do to protect yourself.  I will provide a survival plan in future issues.



16 Responses to “I Called the Fed’s Latest Fumble Back In January… Here’s What’s Next”

  1. You, Donald Trump and Porter Stansberry et al are the only ones anyone can trust to hear the truth about what is going on these days. Nothing but lies come from our politicians, our President and the other creatures purportedly representing us in Washington, DC.

  2. As a Canadian observer, I have wondered how long it would take for the public to realize how terribly they have been misled by almost every level of the administration, whether labor conditions, CPI, the actual deficit as measured by the growth of debt and so forth. Even the media and Republicans failed to disclose the lies. Lying has become the American weapon of choice.

  3. re R. Busch….what you call an ‘dishonest politician’ is not to far from a ‘skilled’ businessman a la D. Trump. He get’s into debt, sue’s his creditors and excapes having to pay them. Is that dishonest. Anyone he owe money to he sues and ties them up in court so they’ll settle on 30 cents on the dollar? is that dishonest. He lies about his tax’s, probably doesn’t pay much in tax’s relative to his so called earnings. Is that dishonest? He’s a slick businessman but he’s a loser in terms of integrity, empathy, social character and experience in social graces as in an ability to influence friends and enemy’s. (although Russia’s Putin thinks he’s very clever and supports his presidency. I think that’s only because Putin thinks he’s an easy mark as a Politician.)

  4. Mary Ann Sylvia

    We are beyond a recession but headed for a deep depression. Americans, myself included, have no idea how to exist during a depression. Most of those who survived the 30’s depression are no longer around to help us out. God help us all.

  5. Michael, again thank you for the analysis and update. I believe you said it best a few stories ago. Congress and the Prez passed the problem of the economy over to the Fed. They washed their hands of it to be re-elected time after time, while Yellen and company have no knowledge or clue what to do. Forget the numbers, it is a complete disaster and day after day we see the blind leading the blind. They taken those who can see info the dark as well. By following the bouncing ball, this is all contrived to fail us anyway. These so called leaders aren’t even trying to get us going again anyway. It’s all globals fault. Even though, your other reader’s want a update on when the next crisis occurs, if not now, it could come in mid August or early September. Thanks again for all of your knowledge and insight.

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