Will Yellen Kill “Trumpflation”?

Posted On Dec 15, 2016 By Dave Gonigam

  • Will Yellen give Trump nightmares for the next four years?
  • The Fed chair loves “fiscal stimulus”… but not The Donald’s kind
  • Rickards on what to do in all the major asset classes now
  • Why are homebuilders so giddy when mortgage rates are leaping higher?
  • Our favorite Trump line from his meeting with Silicon Valley bigwigs… 1.7 million Americans who literally voted for “none of the above”… why Americans pay so much for drugs… and more!

When the president nominated Janet Yellen as Federal Reserve chair in October 2013, we introduced her to readers by way of three photos highlighting three distinct Janet Yellen countenances. The last of the three was this…

The caption we gave it at the time was “Eat your heart out, Larry Summers.” Summers, the insufferable ex-Treasury secretary and Harvard president, was the other leading contender for the job.

The new caption we’ll give it today is, “I’m not going anywhere, Donald.”

We’ll get to the nuts and bolts of yesterday’s Fed meeting, and the market fallout, soon enough. But in a note from Berlin, Jim Rickards tells us the story that flew under the mainstream’s radar: “Yellen threw down the gauntlet at Donald Trump by indicating she might remain on the Board of Governors even if she is not reappointed as chairman this time next year.

“This is possible because a chair has a four-year term, while a governor has a fourteen-year term. Yellen’s term as chairman expires in February 2018, but her term as governor does not expire until 2024. She could remain a thorn in Trump’s side for the remainder of Trump’s term as president.

“While rare, such a move is not unprecedented. Legendary Fed Chair Marriner Eccles remained on the board several years after his term as chair expired in 1948.

“Yellen was also implicitly critical of Trump’s tax and fiscal policy proposals,” Jim says.

Well, that’s rich. Nearly every time Yellen has trudged over to Capitol Hill to speak to Congress these last three years, she’s implored Congress to come up with a Big Spending Plan. If zero interest rate policy can’t create a rip-roaring economy, the thinking goes, zero interest rate policy combined with “fiscal stimulus” would do the trick.

But along comes Trump with all manner of fiscal stimulus plans — “Trumpflation,” some people took to calling it — and suddenly, Yellen’s a cold fish. What gives?

Jim again: “She favors use of fiscal policy that expands productive capacity and productivity in general (such as expenditures for education, training and certain infrastructure) but implicitly disfavors across-the-board tax cuts that help the wealthy (who have a low marginal propensity to consume) without doing much to expand capacity. Yellen said she would reserve judgment on Trump’s infrastructure spending plans.”

Now let’s have Jim put two and two together: “This combination of implicit willingness to remain on the board after 2018, and her disfavor of tax cuts for the rich sets up a confrontation between the Fed chair and the president-elect that could prove unsettling to markets in the months ahead.”

As it happens, markets are plenty unsettled by the Fed already.

So now to the nuts and bolts of the meeting yesterday: The part about raising the fed funds rate a quarter-percentage point was no surprise to traders. But the “hawkish” tone of the Fed’s statement was. And so was the Fed’s stated intention to jack up the rate three more times next year instead of two. (Of course, this time a year ago, the Fed said it would raise rates four times in 2016 and did so only once — heh…)

The market reacted in slow motion as traders absorbed the statement, and then Yellen’s press conference. Essentially, there was nowhere to hide…

  • The major U.S. stock indexes took a spill of at least half a percent, although those losses have reversed themselves this morning
  • Bond prices tumbled further, pushing yields higher still: This morning, the 10-year is up to 2.59%, a 27-month high
  • Gold broke below $1,160 and at last check this morning is down to $1,130 — territory last seen in early February.

The only thing rallying is the greenback. The dollar index is up to another 14-year high this morning, at 103.1.

Back to the future: Jim says beyond any Yellen-Trump differences, “the larger problem is that the Fed is bent on a rate hike path at the worst possible time.

“Yesterday’s data on retail sales and industrial production were both weak. The super-strong dollar is deflationary at a time when the Fed is still failing to meet its inflation goals. The strong dollar also hurts U.S. corporate earnings because overseas earnings are translated into fewer dollars.”

And so “Trumpflation” might fizzle on the launchpad before it ever takes off: “The Trump trade based on reflation may soon run into a brick wall of congressional opposition to bigger deficits, and an insistence that tax cuts be revenue-neutral, thus diluting their stimulative effect.

“The rally in stocks and the dollar and the head winds for bonds and gold all seem overdone. The Trump trade may continue for a few more weeks, but by early 2017, reality will set in and a sharp reversal of recent trends in stocks, bonds, gold and the dollar will be in the cards. Right now could be an opportune time to take profits in stocks, increase cash allocations and begin accumulating positions in bonds and gold.”

[Ed. note: And if you want to really juice the possibilities of a gold comeback, there’s no better way than Jim’s “Third Prophecy” — which you can review right here.]

Another day, another flurry of economic data… and they would appear to reinforce the Fed’s professed 2017 path.

The consumer price index jumped 0.2% in November — gently nudging the year-over-year increase from 1.6% to 1.7%. As far as the Fed’s concerned, inflation is moving in the right direction. (As always, any resemblance to your own cost of living is purely coincidental: Shadow Government Statistics, running the same raw data as the feds, says inflation is 9.4%, the highest in more than two years.)

But that’s last month. Most of the morning’s numbers provide a snapshot of the economy so far in December…

  • Mid-Atlantic manufacturing: Robust growth, says the Philly Fed survey. The number was far stronger than expected, and it’s shown five straight months of growth
  • New York State manufacturing: Decent growth, according to the Empire State survey. Again it was way stronger than expected. But the number’s been on the plus side for only two months running
  • Homebuilder sentiment: Silly optimistic, according to the National Association of Homebuilders’ housing market index. It’s now at the highest level since July 2005.

How that last figure squares with rising interest rates and thus rising mortgage rates, we’re not sure. 

Freddie Mac is out this morning with its weekly survey of what lenders are charging for a 30-year fixed-rate mortgage. The average is 4.16% — the highest since October 2014…

Well, as we said, the last time homebuilder sentiment was this giddy was July 2005. At that time, the Fed was already a year into a rate-raising cycle that ultimately helped choke off the housing bubble and trigger the Panic of 2008. Just sayin’…

The biggest government-worker pension fund is giving up the 8% illusion… and California taxpayers will feel the sting.

“The 8% illusion” is a term we gave in 2010 to an assumption by government pension managers that they’d get average 8% annual returns forever and ever — because that’s how it had worked out the previous 25 years.

Now comes word that CalPERS, the giant fund in California, plans to lower its targeted annual return — again. As recently as 2012, it was 7.75%. Now managers are looking to set their sights as low as 7%.

Because CalPERS is so big, it’s a trendsetter. The Wall Street Journal suggests other funds will have to follow suit “and concede that investment gains alone won’t be enough to fund hundreds of billions in liabilities.”

Guess who’s gonna have to make up the difference. Hint: Grab a mirror.

We have nothing to say about Trump’s meeting with Silicon Valley executives yesterday, except this: We were struck by his remark that he was “here to help you folks to do well.”

We hope someone in the room was chuckling to himself or herself — recalling Reagan’s line about the most terrifying words in the English language being, “I’m from the government and I’m here to help.”

Americans delivered an even bigger “dis” to the presidential candidates this fall than we thought.

A few days after the election, we noticed large numbers of voters in a handful of states either voted third party, or even left the top of their ballots blank.

Now The Washington Post (yeah, we know) has performed an analysis of the vote in 33 states and the District of Columbia… and found more than 1.7 million people who showed up at the polls and did not vote for a presidential candidate. That’s one out of every 50 people who voted. The “undervote” percentage rose compared with 2012 in 30 of the 33 states studied.

As we said last month, more people voted on marijuana referenda than the presidential race in California, Nevada and Arizona.

By the way, a couple more weeks remain in which you can get in on a select group of “penny pot stocks” before the next catalyst behind this sector cranks up on Jan. 1. If you’ve been thinking about it but haven’t acted, best get a jump before the holidays are on us.

“When your reader yesterday speaks of the same pill same regimen,” begins today’s mailbag, “are you suggesting that Gilead is selling the Harvoni pill for $11 in Egypt but $1,000 in the U.S.?”

The 5: The reader was right, and we wouldn’t have passed along such an eye-popping assertion if it weren’t true.

The figures emerged a year ago in a New York Times story describing “a complicated deal to sell hepatitis drugs at a fraction of their usual cost while imposing tight restrictions intended to protect lucrative markets in the West.”

Oy… We’re not sure where in the law it’s written that Americans are obligated to subsidize pharmaceutical research-and-development costs for the rest of the world.

On second thought, we do know: It’s by and large illegal to “reimport” cheap drugs from overseas. Every time someone in Congress changes the law, Big Pharma invents scare stories about “dangerous” drugs getting into the country and the legislation is shot down.

“I was disappointed,” writes a disappointed reader, “that you chose to devote space to the comments of Craig Murray and of some unnamed reader regarding who hacked — or leaked — embarrassing emails from the DNC’s servers.

“While it is difficult to follow the reasonings of these two sources, it appears that neither is able to tell the difference between Hillary Clinton’s secretary of state emails (government business, confidential) and DNC/John Podesta communications (Embarrassing? Yes. Distasteful? Yes. Government-classified? No. Relating to actual criminal behavior? Hardly). A leak of DNC communications is not a ‘crime’ and is not prosecutable. And if it was a hack, I have never heard of hackers being prosecuted in the absence of actual financial or physical damage. If it was a hack and was Russian-directed, well — lots of luck with that.

“Sadly, with the availability of instant, on-demand entertainment and our ‘news’ choices personalized to our preferences (i.e., biases), people have come to believe that anything that displeases us must be criminal. To quote our president-elect, ‘Sad.’”

The 5: Oh, c’mon: Federal prosecutors can indict the proverbial ham sandwich on the flimsiest of pretenses and 95% of the time they’ll get a conviction — often for some bogus, contrived charge like “mail fraud” or “making false statements.” And as Murray said, if the perps were Russians, it’s easy to slap sanctions on individuals in foreign countries.

We’re not examining the matter through “‘news’ choices personalized to our preferences.’” If Murray is willing to put his name and reputation behind his claims, that’s more than the “senior American officials” whose word is taken as gospel in establishment media have done.

The whole spectacle has descended into absolute farce. Now NBC News is citing such anonymous sources as saying Putin personally supervised the hack. (Bonus points: One of the bylines on the story is Ken Dilanian, who as a national-security reporter at the Los Angeles Times would run his stories past the CIA before publication. That’s kind of a journalism no-no. Or it used to be.)

But the most hilarious development of the last 24 hours has to be Sen. Lindsey Graham having a look-at-me moment, saying it wasn’t just Hillary: The Russians hacked into the emails from his presidential campaign.

Seriously? Graham never polled higher than 2%. If it were true, 21st-century Russian intel is at least as incompetent as Boris Badenov and Natasha Fatale…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Look beneath the “macro” uncertainty out there… and Trump’s victory is ushering in a new era of sensational stock market profits.

But you have to look carefully. We’ve uncovered a small group of penny stocks that could absolutely explode in the coming months. Click here for the full story.


Other Articles In 5 Min. Forecast