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Fed's Game-Changing Comments; Will They Last?

Thursday, June 18, 2015
Money and Markets
You can also access this issue on our website.
Fed Spurs "Worst to First" Moves in All Kinds of Markets ... Will They Persist?
Market Roundup
Dow +180.10 to 18,115.84
S&P +20.79 to 2,121.23
NASDAQ +68.07 to 5,132.95
10-YR Yield +0.045 to 2.351%
Gold +$25.60 to $1,201.40
Oil +$0.52 to $60.44

By Mike  Larson

You couldn’t give emerging stocks and bonds away in the past several weeks. In the 24 hours since the Federal Reserve meeting yesterday, they have surged.

You couldn’t persuade anyone on Wall Street to buy gold and silver stocks a few days ago. In the 24 hours since the Fed meeting, they’ve rallied sharply.

You couldn’t find a dollar seller over the past several days, nor a buyer of many foreign currencies, especially the lowly Japanese yen. In the 24 hours since the Fed meeting, those foreign currencies have jumped and the dollar has gotten clubbed.

Are you seeing a pattern here? We saw a major “worst to first” rally in all kinds of assets almost as soon as Chairman Janet Yellen opened her mouth.

Consumer prices rose 0.4%, slightly less than the 0.5% expected by economists.

Those moves only gathered steam this morning when the May Consumer Price Index rose 0.4%, less than the 0.5% economists expected. The “core” CPI, which excludes food and energy and which the Fed pays the most attention to, gained 0.1%. That was also below the 0.2% expected by the market.

The thinking behind these nascent moves goes like this:

First, Yellen is signaling she wants to be patient, regardless of what she should have done long ago (started raising short-term rates). That’s because she actually wants to raise inflation for all of us.

Second, she’s continuing the Fed’s recent “open mouth operation” campaign against the U.S. dollar. That’s a crucial thing to do, as I’ve noted, because the dollar surge in 2014 and early 2015 helped crater business for energy and manufacturing firms.

Third, she’s willing to keep underwriting the steepening of the yield curve. That’s when long-term yields rise faster than short-term ones, a sign of growing future inflation fears and skepticism about the long-term creditworthiness of sovereign debts.

These moves are in their infancy. They’re coming after a major, multi-week pummeling.

Most importantly, they’re vulnerable to fresh developments out of Europe. That's because a “Grexit” could cause massive chaos in the currency, stock, and foreign bond markets.

European and Greek negotiators couldn’t come up with a solution to the country’s debt problems at a euro-zone finance minister conference in Luxembourg today. So euro-zone leaders are going to gather for yet another summit Monday to try to forge a last-minute deal.

But still, these moves bear watching. I’ve said that the most beaten-down, hated assets are the ones to consider dabbling in simply because they’re so darn cheap as to be irresistible. You don’t want to go hog wild. But after recommending you sell or stay away from them literally for years, I’m taking a shine to some of them personally – and you may want to as well.

So what do you think? Too early to shop in the bargain bin? Or is this the right time to position yourself for a further “worst to first” rally? Is the Fed going to be a catalyst for these markets, or is the Greek risk just too high for your taste? What additional stocks, bonds, ETFs, or currencies – if any — are you selling (or buying) in the wake of the Fed news this week?

Hit up the website and share your thoughts when you have a minute.

Our Readers Speak

The Fed’s big meeting day has come and gone, but that doesn’t mean the debate is settled over what Janet Yellen & Co. will do next. Several of you weighed in on that topic.

Reader D. said there’s too much concentration of power these days with the Fed: “Why do we let one person (Janet Yellen) control the markets? The ideas may be a consensus, but what if she goes off script and says ‘higher interest rates’ or ‘never an increase in interest rates’? The markets react to whatever she says.”

Reader Bob R. said the Fed simply can’t raise rates given what it would do to Uncle Sam’s balance sheet. His take: “The Fed policy is the same it has been for the last five years – no meaningful rate hike. To raise interest would be to bankrupt the federal government, which would be paying interest on $20 trillion in debt. So, no rate hike.”

Reader Lee took issue with Yellen’s comments on tame inflation, saying: “Yellen thinks inflation is quite subdued and the unemployment rate is improving. She apparently has not been shopping lately as clothing, food, and fuel prices have surged this year and the true unemployment rate is really close to 10%. The government is ‘cooking the books.'”

Finally, Reader Guido M. noted the Fed’s forecasts aren’t worth the paper they’re printed on – and that they’re off-target with policy. His view: “The Fed does not have a clue: They should have raised rates long ago and they didn’t.

“Now with negative first quarter GDP and very low inflation and wage growth, rates hikes are a nightmare and the fear of repeating the infamous mistake of the mid ’30s is high. I guess they will decide on a couple of small hikes, only to have room to cut rates on the occasion of the next financial trouble in the U.S. or abroad.”

Thanks for all of the comments, and please do keep them coming. Given the very high degree of central bank manipulation in recent years, getting Fed policy right is more important than ever before when it comes to building and protecting your wealth.

I plan to focus quite a bit on the ramifications of the latest moves in my upcoming Safe Money Report -- which comes out in early July.  

Anything else I left out on this topic? Then here is where you can leave your comments.

Other Developments of the Day

BulletAuthorities have arrested a 21-year-old man suspected of killing nine people at an historic black church in Charleston, S.C. The shocking crime brought out an outpouring of grief and support to the community for what has been labeled as a hate crime. A white man attended a bible study group for an hour at the church, then allegedly opened fire on the crowd there, killing six women and three men.

BulletThe Chinese are coming … at least when it comes to our real estate market. The National Association of Realtors just reported that Chinese buyers shelled out $28.6 billion in the year through March to buy U.S. real estate, mostly homes and condos.

That’s a whopping 30% year-over-year rise, and it easily makes the Chinese the biggest group of foreign buyers here. The primary reason they’re coming here: They’re worried about their domestic economy and real estate markets, and see foreign assets like real estate as a better place to park capital or build wealth.

BulletThe $10 bill will soon be graced by a woman’s face, according to U.S. officials. We just don’t know who yet. The changeover from Alexander Hamilton will take place in 2020.

BulletIn the wake of yesterday’s Federal Reserve meeting, some commentators like Greg Ip at the Wall Street Journal are arguing the Fed should let the economy overheat and inflation to pick, rather than strike preemptively. The Fed itself seems deathly afraid of prompting another “Taper Tantrum” after the experience of 2013.

I’ve laid out my case for what the Fed should do. What do you think its next move should be, and when should it come? Let me know at the website, or about any other topic I have or haven’t covered here.

Until next time,

Mike Larson

(P.S. Did you miss the second video in Dr. Martin Weiss’ new series? Click here to view this landmark video where he lays out for you, step by step, the STRATEGY behind his ultimate portfolio!)   

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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