Janet Yellen Wants a Magic Pony

Posted On Mar 30, 2016 By Dave Gonigam

  • Hey, stock market — Janet’s got your back (and your fix)
  • But beware “Yellen’s Conundrum” — reality’s about to bite hard
  • “Something has to give,” says Rickards… and he knows what it is
  • The biggest beneficiary from Yellen’s speech
  • Disaster CEO collects $3.17 million bonus
  • Shades of 1999?… the next best thing to cash, courtesy of the U.S. government… reader defense of credit cards… and more!

Risk on, baby! Kindly Dr. Yellen is promising Wall Street’s heroin addicts she won’t dial back the methadone drip just yet.

When we left you yesterday, the major U.S. stock indexes were treading water — traders awaiting a Very Important Speech by Fed chair Janet Yellen. She said the Federal Reserve should “proceed cautiously” before raising its benchmark fed funds rate again.

The speech keyed in on inflation. As we’ve pointed out regularly in recent weeks, the Fed’s favorite measure of inflation is perking up, now 1.7% — not far from the Fed’s 2% target. But yesterday, she repeated a point she made two weeks ago — she’s not sure the increase is for real. Or as she put it, “It is too early to tell if this recent faster pace will prove durable.”

Upshot: By day’s end, the Dow and the S&P 500 had reached new highs for the year. The rally is stretching into this morning too.

The dollar, on the other hand, took a hit relative to the globe’s other major currencies. The dollar index is back near its lows for the year at 94.8.

The dollar is approaching a major turning point this year, thanks to what Jim Rickards labels “Yellen’s Conundrum.”

On the one hand, Ms. Yellen wants higher inflation — as we’ve seen, she’s not altogether convinced inflation is taking off yet.

On the other hand, she also wants higher interest rates. When the Fed finally moved the fed funds rate above near-zero last December, Fed pooh-bahs projected they’d raise the rate three percentage points over the following three years.

That amounts to a quarter percentage-point increase every three months. With the pooh-bahs having passed up the chance to raise in March, they’re already behind schedule.

“The conundrum is that raising interest rates makes the dollar stronger, which is deflationary,” says Jim. “When your stated policy is inflationary, how can you pursue a path that is deflationary? You can’t.”

In other words, Janet Yellen wants a magic pony.

“The Fed’s contradictory policies make no sense. Something has to give.

“The chart below shows the Fed’s conundrum in one graphic,” says Jim:

The Yellen Conundrum

This is the trade-weighted dollar index. As Jim’s explained to us before, it’s the Fed’s favorite gauge of the dollar, because it measures the greenback against a large basket of global currencies, including the emerging markets.

It started taking off in earnest in May 2013 — the first time Yellen’s predecessor Ben Bernanke began jawboning about “tapering” the Fed’s quantitative easing/money printing program. The modest move up accelerated into a radical move up starting in the summer of 2014.

Here’s the point: “The entire cycle from low to high represents a 33% increase in the index value of the dollar in 52 months,” says Jim. “Gains of 33% are not unusual in stocks, but they are highly unusual in currencies. Even in a world of floating exchange rates, major trading partners are supposed to maintain some stability in their cross-rates.”

But that’s the consequence of the Fed’s desire to “normalize” interest rates. Result: falling inflation rates, bordering on deflation. “The strong dollar hurts U.S. corporate earnings (and stock prices) two ways,” Jim reminds us: “by crimping exports and hurting U.S. overseas earnings that are translated back into dollars.

“The Fed does not understand this conundrum of higher rates, stronger dollar and more deflation because they are using obsolete models.”

But at some point, reality will set in. The question is when. Or as Jim puts it, “How long will the Fed persist on its tightening trajectory? At what point will the Fed lose faith in its models and try to get inflation the old-fashioned way with more ease and a cheaper dollar?”

Answer: “Sooner than later, the weakness in the U.S. economy and stock markets will become obvious even to the Fed. At that point (late in 2016), a major turning point in the currency wars will be upon us.

“Look for the Fed to reverse course, take easing steps (forward guidance, rate cuts, ‘helicopter money,’ QE4 or even negative interest rates) and trash the dollar. When the dollar goes down, the Fed will finally get the inflation it wants.”

But again, that’s later in the year. “The turning point is growing near but is not quite here yet,” Jim emphasizes.

“We look for the Fed to raise rates in June… and continue to make hawkish statements about future rate hikes. This will keep the upward pressure on the dollar for now.”

This short-term phenomenon yields a high-potential trading opportunity. Readers of Currency Wars Alert got the recommendation just yesterday. It could be good for 200% gains by next January… and that’s a conservative estimate. The potential could be as high as 445%. For access to all of Jim’s Currency Wars Alert trades, look here.

As noted above, traders are still feeling mellow this morning now that the Fed has signaled it will keep the easy money flowing through the market’s veins.

Chicago Fed President Charles Evans is giving a speech today, saying he’d be surprised if the economy perked up to a point that would justify a rate increase at the next Fed meeting in late April.

With that, the S&P 500 has tacked on another 16 points. It’s now at 2,070. Hmmm… That’s still 60 points below its all-time high in May of last year.

Gold has given up some of yesterday’s gains, the bid $1,234 at last check.

Crude has recovered most of yesterday’s losses — up more than 3.5%, to $39.65, after the latest weekly inventory numbers from the Energy Department.

Yellen’s speech has had its biggest impact on the Nasdaq — up 1.7% yesterday, up nearly 1% as we write this morning.

“Compared against the Dow and the S&P 500, the Nazzy hit the stratosphere,” says Greg Guenthner of our trading desk. “And boy, did it need the boost.”

Since the February lows, “the Nasdaq has lagged behind the other major averages. The S&P 500 and the Dow Jones industrial average cleared their respective 200-day moving averages a couple of weeks ago, while the Nasdaq Composite just couldn’t make the jump.”

This morning, it did…

Fighting Back

“The bigger tech stocks are already on the move,” Greg goes on. “In fact, the most recognizable Nasdaq names are getting pretty darn close to erasing their 2016 losses. Microsoft is just below its highs after a 2% rally yesterday. And Facebook shares actually posted all-time closing highs.

“The Nasdaq may have lagged its peers as the market bottomed out in February and started rallying. But it looks ready to make up lost ground as we close out the trading month.”

The CEO whose company is to blame for an enormous methane gas leak in Southern California has been docked 0.8% of her pay.

We took note of this crony capitalist outrage late last year — a geyser of methane spewing from a natural gas storage cavern, 110,000 pounds every hour, starting back on October. Thousands of families were chased from their homes. The leak wasn’t capped until last month.

The cavern is owned by SoCalGas, whose parent company is Sempra Energy. According to Sempra’s latest SEC filings, CEO Debra Reed’s compensation for 2015 totals $16.1 million — including a $3.17 million bonus. For the methane fiasco, she’s been penalized $130,000.

Debra Reed: Nice work if you can get it…

Sempra’s board justifies the paltry penalty in part because the disaster is a “safety [and] customer satisfaction” issue of only passing relevance to management performance. Besides, Reed’s compensation goals were set in 2014 and the leak started nine months into 2015.

“How does this happen?” asks Michael Hiltzik in the Los Angeles Times. “It’s the result of a daisy-chain culture among corporate executives who sit on each others’ boards and judge each others’ performance in a near-vacuum.

“Among the five members of the Sempra board’s compensation committee are three ex-corporate CEOs; Reed herself is a board member of Caterpillar Inc., where she’s a member of the compensation committee, and of Halliburton Co.”

We pointed out last year another Sempra board member is Kathleen Brown — attorney, ex-Goldman Sachs, ex-California state treasurer and sister of Gov. Jerry Brown. She’s not on the compensation committee, but she is on the “environmental, health, safety and technology” committee.

Well, that experience should prove invaluable as SoCalGas contends with 83 lawsuits… so far.

“Time to party like it’s 1999,” writes a reader harking back to the dot-com bust.

“I would like to believe that some semblance of sanity had returned to the market. But as you stated yesterday, who would have thought we would be waiting for the Fed chairman to give us direction? Guess again.

“As a subscriber to many of the Agora Financial publications, I have really taken it in the ‘shorts’ for the past six weeks. The good news is that rather than the slow drip of Fed ‘jawboning,’ we finally received the all-clear from Janet Yellen.

“I know it will be hard for many readers to comprehend, however, but the trend is up, the financial ‘avalanche’ melted on the way down and the dead cat has a new nine lives courtesy of the savers and American taxpayers. Happy trading. I am counting my profits from selling Obamacare plans and taking my family on a 10-day Caribbean cruise. I will let you know if we pass any black swans headed your way.”

The 5: Uh… OK.

“I also use money orders if I want to buy something that I would rather keep private,” reads an entry in our ongoing war-on-cash thread.

“The only difference is I buy mine at the local post office. Same $1,000 max, no questions, no IDs.”

The 5: And from a government agency, no less. Will wonders never cease…

“The contra is here! I love credit cards,” writes one of our regulars.

“I have traveled for years on frequent flyer miles, saving many, many thousands of dollars. I get ‘loans’ at interest rates that rival the Fed overnight rate and make a good investment return on that money (with some help from The 5, thanks!). I never pay interest on balances that might accrue interest and don’t care if the NSA knows about my 42-cent charge at the local rippy mart.

“I’m a regular ‘5-er,’ so there has to be a BUT. No way I’m gonna tell you how it works. It’s all legal, and anybody willing to make the (not-insignificant) effort can do it also. I really hope that most people continue doing what they are doing, moaning and groaning about the biblical end of the world, conspiracy theories that are probably true, etc., so that I can continue doing what I am doing and laugh all the way to my bank alternative.”

“Never miss a day reading The 5,” says our third complimentary note this week that’s not accompanied by the inevitable “but.”

“Best move I made was going for real with Rickards’ Strategic Intelligence and Rickards’ Intelligence Triggers.”

The 5: At least you didn’t say we’re the best part of your day. We still worry a bit about that fellow…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Speaking of Jim Rickards, our exclusive offer for his latest book, The New Case for Gold, remains open for six more days.

Amazon is charging $16.66. But if you pay us only $4.95 to cover shipping and handling, you’ll get a signed hardcover copy… plus a no-obligation trial to Rickards’ Strategic Intelligence… plus access to an exclusive online workshop in which you’ll be clued into a huge near-term catalyst for the gold price — something Jim learned from his extensive network of contacts.

However… this offer comes off the table next Monday, because the book will be released to the general public on Tuesday. Act now while you still can.


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