Fed Up with Yellen
A cura di Walter Snyder, Swiss Financial Consulting
The latest FOMC meeting did not result in a change of interest rates but it is now clear that the Fed will insist on starting to reduce its swollen balance “soon”. It is also evident that the Fed will be able to do little in the event of a stock market downturn and a recession. There is the possibility that the Fed or other central banks could intervene in the stock market to prevent a crash, but when a recession starts, the basic interest rate of 1.00% to 1.25% is so low that even if the Fed took interest rates back to zero, that would not be enough to combat even a mild recession, much less a severe one. US GDP growth of 2.6% in Q2 does not change this scenario.
Meanwhile Amazon stock has hit $1.046 even as profits disappoint, and Jeff Bezos has become the richest man in the world. It is symptomatic of the madness of the times that an online retailer has unreal stock prices and a P/E ratio of 193, which would make Benjamin Graham turn over in his grave. Tesla has a P/E ratio of -76 and its capitalization is higher than that of Ford. Expectations of future earnings are the prime movers of stock prices in the modern world. In other words speculation has become the basis of investment.
It is no wonder that this has happened after the Fed and other central banks experimented with ZIRP and NIRP in the belief that the economy would be stimulated by extreme measures. It has not escaped the notice of attentive observers that the intention of the Fed to reduce its balance will have the same effect as an interest rate rise. Tightening the bond market will result in a rise in yields, which will mean that it will be more expensive for companies to obtain credit. So if the Fed starts reducing its balance in September and goes for an interest rise in December, which is what the market is expecting, 2018 will most probably mark the beginning of a severe recession if matters do not precipitate in October 2017.
Equity prices are so high presently that most commentators agree that stocks are overvalued. Under such conditions it makes sense to take profits while the taking is still good. With the example of Amazon noted above in mind, it is time to make for the exits before the stampede starts. The US dollar should then be changed into other currencies because the warning signs for the decline of the greenback, a development predicted by this Newsletter, have been unequivocal. The euro is not overvalued but may suffer because of the probable extraterritorial implementation of US sanctions on Russia. The Swiss franc has weakened slightly but is still considered a safe-haven currency. The renminbi, Aussie and Kiwi are good bets to gain in value.