This shortened week surprised many with the quick turnaround in stocks and bonds. Markets never go straight up or down, of course. So you have to ask what has really changed?
Here’s my best answer: Absolutely nothing.
Sure, oil prices rose on rumors of a cut in production. Investors keep hoping for more central bank intervention, or "crack," as Harry Dent at Dent Research calls it. And short-covering stock seemed to “squeeze” the market higher.
Remember, in a bear market, it’s quite normal to experience violent moves higher. If you’re positioned correctly, which is what we’re here to help you with, then don’t panic. As you do when planning your vacation, take the time necessary to create your course, so you can avoid panic and stay on your course! Stay focused on your goals and resist the temptation to make emotional decisions.
Thanks to Dent Research, here is our weekly information roundup ending the week on February 19, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
Consumer Prices Up 2.2% over Last Year… January CPI increased 2.2% over the same period last year. Excluding food and energy, only home furnishings dipped, and that was by a paltry 0.1%.
What it means – With unemployment hovering at 5% and core inflation around 2%, it would seem like the Fed made the right move by raising rates in December. Unfortunately, everything else looks pretty grim. Wages aren’t jumping, corporate earnings remain weak, and as Walmart noted a few days ago, the outlook is cloudy at best.
This puts the Fed in quite a pickle. They could rely on inflation and unemployment to raise rates, but they would have to ignore every other indicator on the planet. It’s hard to imagine that their bubble is that well insulated.
According to the minutes of their last meeting (discussed below), maybe they realized there’s a big world out there, and things aren’t going so well.
Federal Reserve Officials Cite Headwinds in Global Markets… The global economic slowdown and its potential impact on the U.S. economy concern Fed officials, according to the minutes of the central bank's January meeting.
What it means – Board minutes are typically dry and mostly recap conversations instead of reporting what was said word-for-word. You have to wonder if anyone at that meeting said: “Wow, we really screwed up in December by raising rates! How do we fix this mess?” I’m guessing that was part of the conversation at the bar later. But at least they officially noted the difficulties out there in the real world.
The markets put the chance of a rate increase in March at just 6%, and the possibility of a rate hike this year at only 50%. That’s a long way from the view in December, when the Fed was expected to raise rates at four of their six meetings this year.
As for following Switzerland, Sweden, the European Central Bank (ECB), and now the Bank of Japan into negative rate territory, I don’t see that happening anytime soon. As I explained to Boom & Bust members in their monthly
Insight video, the Fed would first have to stop paying interest on the $2.4 trillion in excess bank reserves on its books. In addition to slicing into bank profits, no one knows what that would do to credit creation. Would we get an explosion in loans, or nothing? Would it lead to another real estate price boom and bust? The Fed would be taking huge risk.
Housing Starts Fall 3.8% in January… Starts for both single-family and multifamily units fell last month.
What it means – Like December, January is typically a slow month for building because of weather. Small changes in the number of homes started are extrapolated to arrive at the larger annualized figures, so I don’t rely on these numbers too much.
We’re still in a soft real estate market that most likely has a gentle upward bias. However, that could change this spring as the U.S. economy slows down to match the other economies around the world, and as our energy producing states deal with the fallout of cheap oil.
Industrial Production up 0.9% in January after Falling in November and December… The jump in January was mostly due to auto manufacturing and greater utility use because of cold weather.
What it means – The gain last month doesn’t make up for the total drop in November and December, and overall production remains down 0.7% for the year. Analysts quickly noted that while production (which includes energy) dipped, manufacturing rose 1.2% for the year.
That’s cold comfort to those who work in the energy sector. The fallout from falling oil and gas exploration and development will last through at least 2016, if not longer.
Asian Exports in Free Fall… Singapore’s non-oil domestic exports fell 9.9% in January compared with the same period last year, while Indonesia’s exports dropped 20.7%. Exports fell 12.9% in Japan and 18.8% in South Korea. It all stems from China, where exports dropped 6.6% and imports slipped 14.4%.
What it means – That giant sucking sound you hear is government officials across Asia holding their breath. The slowdown in China is rippling out across the region, just as we’ve talked about for years.
As the Middle Kingdom tries to change its focus from exports to domestic consumption, it orders less stuff from suppliers in neighboring countries. No one knows how big the supply overhang is in China, so suppliers can only guess when orders will come back, if ever. This isn’t a good sign for the global economy.
The Euro and Yen Hold Gains Against the Buck… The euro held steady at just under $1.11, while the yen held below 114 per dollar.
What it means – What now? Do their central banks go… negative-er? Or is it more negative? Or is it just stupid? If negative rates were the silver bullet that motivated savers to spend and goosed exports, then every central bank in the developed world would do it. But that’s clearly not the case, since none of the countries that currently charge interest to depositors are paragons of growth.
Negative rates punish banks and, more importantly, savers.
Our current economic situation is based on years of cheap credit to corporations and state-sponsored growth in China. Those bubbles have to work out of the system. Forcing the pain onto the most financially responsible citizens is not only idiotic, but also counterproductive.
Don’t expect this to stop the central bankers. They’ll take more steps to diminish their currencies, probably with some sort of massive money-printing scheme. The result should be a much stronger dollar, which will hold down U.S. exports.
ECB Wants to Scrap the 500 Euro bill… The central bank supports removing the bill from circulation in an effort to curb elicit activities.
What it means – It’s true, the 500 euro note has also been called the drug dealer’s note because so much value can be physically carried in so little space. Smaller denominations make it harder to hide cash.
European countries have already taken steps to push consumers to digital transactions so they can capture more tax receipts. But the timing of this initiative is questionable at best, since it comes when central banks are pursuing negative interest rates.
It used to be that people thought the lower bound for interest rates was zero because if they went lower, depositors would just withdraw the cash and sit on it. Now, bankers recognize that the hassle and cost of managing cash means that interest rates can fall below zero, but how far?
As the ECB eyes negative 0.50%, they recognize that at some point people will hoard cash, taking the power out of their negative rate policy. To make sure depositors feel the pain, they want as much money as possible in the system. So, scrap the big bills.
Before you scoff at those Europeans, the same thing has been suggested here in the States. While there has been mention of illicit activity, the real goal is to make all of your dollars subject to central bank control.
Saudi Arabia, Russia, and Venezuela Agree to Limits on Oil Production… Along with a few smaller producers, these big oil countries agreed to hold production at January levels. Iran and Iraq did not agree to the limits.
What it means – It’s easy to agree to freeze production when you’re pumping oil at a record pace. The Iranians cried foul because their production is way down due to recent sanctions. The Iraqis pump a lot of oil, but they need to grow production to fund the war against ISIS.
The bigger question is who in their right mind believes anything the Russians or Venezuelans say? If they can produce and sell even one more barrel of oil, I think they will. The only reason they agreed to a freeze is to try to move prices higher without having to do anything. It worked, but I don’t think it will hold. Any move up in prices will attract producers in the U.S. and elsewhere back to the market. Oil will remain under pressure.
The United Arab Emirates Trades India Oil for Storage… The U.A.E. ships 10 million barrels of oil to India for storage, and will allow India to keep four million barrels for their troubles.
What it means – Oil storage is at a premium. In the U.S., we have 504 million barrels of oil in storage, another near-term record. If inventories continue to grow, the cost of storage could zoom higher, putting more pressure on the price of crude.
Next Week – The week of February 22 is almost all about housing in the U.S. We get reports on the S&P/Case- Shiller Home Price Index, new home sales, and existing home sales. We also get a report on durable goods.
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