Fed Watchers Left Guessing After Yellen House Of Reps Testimony
A now dovish Yellen has done overnight what some are describing as “a complete 180” and the community, as usual, struggled to react.
Good morning Steemit. Please find below my article written today for www.ainsliebullion.com.au. See this post for context. Content hosted at
https://www.ainsliebullion.com.au/BullionNews.aspx
Guessing, it would seem, is not an inappropriate term to describe a situation where both gold and stocks rally simultaneously. That is precisely what we saw overnight after Federal Reserve chair Janet Yellen presented her now dovish remarks in prepared testimony to the US House of Representatives.
The gold price bounce was modest and possibly partly attributable to bargain-hunters and short-covering, but it was noticeable nonetheless. The reaction in equities however was much more conclusive.
About 5 hours ago, Gregory Mannarino of traderschoice.net remarked that “the markets are in full-blown rally mode”. With the DJIA up in the vicinity of 130 points at the time, Gregory stated that US equities will probably see “new records in the next several days”.
So what’s driving this and what can we learn from it? Two important takeaway points from Yellen’s comments were as follows. Firstly, Yellen said that interest rates do not need to move much higher and secondly, the Fed is almost at a neutral point.
Equities loved this new story of course as it means the Federal Reserve (at least until the next “180”) is going to keep doing what they’ve been doing; suppressing interest rates and punishing savers.
In the last weeks and months, Yellen had been sounding Hawkish, speaking of raising rates and shrinking their balance sheet; something we wrote about exactly one week ago today when discussing the release of the June FOMC minutes. With this most recent release, any shrinking of the balance sheet will likely be so gradual that it will probably be inconsequential.
In a concerted guidance effort, Lael Brainard also came out yesterday sounding somewhat dovish and some are suggesting that the Fed may be reacting to concern about action in the bond market; namely how bonds were selling off and interest rates were consequently rising.
Again we circle back to what the prudent investor can learn from this latest Federal Reserve sparked rally. Almost unarguable is the conclusion that these price actions are the result of the comments of a single individual and not the result of fundamental free-market operation. As such, they are without fundamental foundation and are hence firmly in the speculative rather than fundamental basket. Chasing gains here should be done with the knowledge that the profits can disappear as quickly as they appeared.
Almost unarguable too is the fact that the difficulties faced by savers in this new normal of suppressed returns is likely to remain. Given that cash allocations are typically the defence against deflationary warning signs such as those we discussed yesterday, this puts individuals in a catch-22.
By storing cash savings in real money and denominating these in ounces rather than dollars, a prudent investor stands a chance of balancing the conflicting need to be invested (so as to avoid the war on savings and currency risk) and to be cash rich (to mitigate deflation risks).
Thanks again for another great article @nolnocap One hedge against inflation/deflation that I am appreciating more and more is to simply live, take an item off of our bucket list and just do it. My family and I have recently travelled to both New Zealand and Japan, 2 remarkable countries with lovely people that we always wanted to visit. Central banks can't print away our experiences and living intentionally is its own reward.
That's an extremely mature and healthy approach @contemplate. We are so conditioned to our 9-5s that provide us with monopoly money that we then try desperately to safeguard that is very easy to lose perspective of what's really important in life. Just today for example I did two things that i cant recall doing on the same day every. First I went on another bicycle ride and then we saddled up one of our horses and went for a ride. Experiences are what life are made of and the time we have to experience life dwindles every day! Great comment mate, thank you.
Your comment on monopoly money and safeguarding is dead on. To relate to your article, it is good to have some gold in your hand but also to have 'gold' in your heart. I think it is important to prepare for rainy days and also to enjoy the sunny ones as well. I am so glad to hear about your bicycle and horse riding adventures, simple, yet wonderful experiences.
Thanks so much @contemplate. It's often a hard balance to strike isn't it. Putting enough away for unknown rainy days yet spending enough resources on the here and now to make sure you get a little something out of life. I'm still trying to figure life out but I think I'm getting better at it.
Thanks for your ongoing constructive input 😊
I am interested to see what happens when the Fed starts to draw down their balance sheet. The money supply is at an all-time high and even though banks have started taking money out of excess reserves to lend, there is still plenty in excess gaining interest from the Fed instead of being counted as part of the money supply. Will we see inflation or will the Fed have to reign the amount of money in the people's hands by trying to get them to keep it in the banks by raising interest rates? QE is very unconventional and I don't even think the Fed really knows what they are doing at this point.
I keep waiting for the student loan bubble to pop. Delinquency on car notes is rising. What is really interesting on car notes is the majority of loans are by the carmakers themselves. Additionally, the quality of many loan borrowers is subpar. Would be interesting if the car loan market and the student loan bubble burst at the same time. I keep wondering if this will be the black swan we are waiting for.
Salient points there. Subprime real estate has certainly been replaced with subprime auto loans and, the dealer channel stuffing trick is akin to sweeping the dust under the rug.
It's such a mammoth unprecedented experiment nobody knows how it will end. I wager that it wont be pretty, especially for main street.
QE has produced a time bomb. The fact that the currency is not circulating has staved off inflation for now. When the helicopter money comes, run don't walk to your bullion dealer and sell all the dollars you can!
My days of staying up all night to trade central bank chitchat are long gone so thanks for the easy to read wrap up.
No worries! Glad the summary is well received.
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