What a surprise! The Fed did nothing. It’s looking more and more like central banks are running out of monetary policy tools. When you run out of tools you can use to manage things the way you had in mind, what do you do next?
We have been studying demographic trends when I became Master Certified and a Charter Member with Dent Research in 1999. The information has helped us warn investors that every developed nation is facing a demographic pandemic for which there is no good solution. If things seem to be different, it is for good reason. We have never been here before. Over the long term each country has to figure out how to maintain its population, if not grow.
Unfortunately, the data suggests that more people are dying than there are babies being born. When there are no children, countries lose the major spending driver to its economy, as well as the working population of the next generation. In the late 1980’s I remember how Americans were worried that Japan would replace the USA in the GDP number 1 spot. On March 17, 2016, Rodney Johnson with Dent Research reports. “In Japan, the problem is so bad that by age 34, 26.1% of men and 23.8% of women have no sexual experience. And the problem doesn’t go away once a couple gets hitched. 44.6% of married couples say they’re in sexless relationships. And of course, without sex, there are no kids.” You might like to refer to my Ventura County Star article on April 17, 2014, “No Future No Sex.” In many ways, the USA is following Japan. According to www.economyandmarkets.com, there has been a 9% drop in US birthrate from 2007-2014.
Thanks to Dent Research, here is our weekly information roundup ending the week on March 18, 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.
Federal Reserve Keeps Interest Rates Steady… As was widely expected, the Fed didn’t raise rates at its scheduled meeting this week. However, the Fed’s statement lowered the expected overnight rate by year’s end from 1.4% to 0.90%.
What it means – The markets didn’t zoom one direction or the other because the announcements weren’t surprising. The drop in the expected rate by the end of the year implies two rate hikes this year instead of the previous expectation of four. I don’t even think they’ll do that much.
What really caught my attention was Chair Yellen’s answer to a question on the Fed’s disappearing credibility as the central bank changes its position at every meeting. She made clear that the Fed makes no plans, no promises, and has no preset action from meeting to meeting.
How idiotic is that? The most influential central bank on the planet has no long-range plans, and can’t set out monetary policy longer than six weeks? The built-in uncertainty leaves markets, lenders, and other central banks twisting in the wind. Clearly, we can do better than this.
Retail Sales Down 0.1% in February, Revised down 0.4% in January… Lower gas prices were a big part of falling sales. Excluding autos and gas, retail sales were up 0.3% on the month, and 4.8% on the year.
What it means – Falling energy prices are generally a good thing, so there’s no reason to sweat that part of the report. The problem is that after adjusting for inflation, retail sales are rising less than 3%. That pace doesn’t scream “breakout recovery,” which leaves the U.S. in the same economic mixed bag that it’s been in for years.
The Fed confirmed the slow pace of growth with their diminished forecast of GDP expansion this year and next, which now stand at 2.2% and 2.1%. What makes this worse is the Fed’s history of being too optimistic.
Consumer Prices Fell 0.2% in February, and Rose a Modest 1.0% Over Last Year… Excluding food and energy, prices rose 0.3% last month and increased 2.3% for the year.
What it means – Energy is still the main story when it comes to inflation, but that’s about to change. After stripping away the drop in oil, rising prices in other areas take center stage. Shelter was up 3.3% over last year, and health insurance rose an average of 6%. College tuition jumped 4.0%, while childcare costs increased 3.9%.
None of this is a surprise to consumers, who keep biting the bullet of higher costs while wondering when they’ll receive higher pay.
I expect the rise in energy prices to push next month’s index higher, masking higher prices in these other sectors.
Housing Starts up 5.2% in February, Permits Fall 3.1%... The gain in housing starts was almost entirely in single-family units, while the drop in permits was all in multifamily units.
What it means – Positive news in single-family units for both starts and permits is a good thing, since this is where housing creates the most middle-class jobs. It looks like new housing remains on a very slow but steady climb, even as the market breaks down between higher-priced home sales, which appear to be stagnating, and entry level, which are still moving at a fast clip.
Oil Inventory Rose 1.3 million Barrels to a New Record of 523 million… Analysts expected four million more barrels, so prices rose on the news.
What it means – While slightly higher U.S. inventory on a slightly lower than expected build is worth mentioning, the big news in oil is the possibility of a meeting among OPEC and non-OPEC producers next month to discuss production cuts. The combination of these two tidbits sent the price of oil up more than 15% this week. But don’t let the volatility fool you.
The world still produces about two million more barrels of oil per day than it needs. All the talk in the world won’t change that. If some combination of supply and demand doesn’t change soon, oil will take another dive.
Bank of Japan (BoJ) Leaves Monetary Policy Unchanged, Notes that Rates Might Not Drop… Negative interest rates didn’t have the desired effect, so the BoJ hinted it might not move rates even further into negative territory.
What it means – Well, they’ve got to do something. Just a few months ago, the yen traded at 121 per U.S. dollar, and then it strengthened. The BoJ instituted negative rates and jawboned about their resolve to push it back down, but the reverse happened. Now the yen trades around 110 and BoJ officials are nervous.
A stronger yen hurts exports, which curbs corporate profits and dents wages. That won’t help their economy grow. Look for the Japanese to institute a weird new monetary policy aimed at driving the yen back above 120.
Chinese Property Market Based in Part on Peer-To-Peer Lending… Contrary to laws forbidding borrowed down payments, Chinese property owners routinely borrow funds from other consumers in the shadow banking economy.
What it means – In January Chinese property buyers borrowed roughly $153 billion for down payments. As long as prices go up, there’s no problem. But when prices roll over, just as we experienced in the U.S. in 2008, highly leveraged homeowners quickly default, which leads to greater price declines and even more defaults. It sounds like a death spiral waiting to happen.
Next Week – The shortened week of March 21 in observance of Good Friday is light on economic news. Two notable reports are new home sales and U.S. durable goods. We will publish the Digest on Thursday morning.
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