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Fed 'Autopilot' Behavior: Nearing an End?

Monday, August 31, 2015
Money and Markets
You can also access this issue on our website.
Fed 'Autopilot' Behavior: Nearing an End?
Market Roundup
Dow -114.85 to 16,528.16
S&P -16.69 to 1,972.18
NASDAQ -51.82 to 4,776.51
10-YR Yield +0.014 to 2.20%
Gold +$0.80 to $1,134.80
Oil +$3.27 to $48.49

By Mike Larson

Darn the torpedoes – Full speed ahead!

That was the message coming out of key Federal Reserve officials at the just-completed confab in Jackson Hole, Wyoming. From Fed Vice Chairman Stanley Fischer on down, policymakers generally signaled they’re on track to raise short-term interest rates this year despite market turmoil and Chinese economic concerns.

Fischer said in his keynote speech that “there is good reason to believe inflation will move higher as the forces holding inflation down – oil prices and import prices, particularly – dissipate further.” One Fed-watcher said to Bloomberg in response: “It sounds to be as though in his heart of hearts, he would like to tighten in September.”

Meanwhile, extreme “doves” like Minneapolis Fed President Narayana Kocherlakota appear to be getting more marginalized. More Fed officials appear to be adopting the view of Cleveland Fed President Loretta Mester, who just said recent volatility “hasn’t so far changed my basic outlook that the U.S. economy is solid and it could support an increase in interest rates.”

Stanley Fischer: “There is good reason to believe inflation will move higher.”

Even foreign central bankers such as Bank of England Governor Mark Carney sounded sanguine about potential turmoil. Per the Wall Street Journal, he just said: “The dog that hasn’t barked in the wake of recent market turbulence has been any hint of distress at a major financial institution.”

The next Fed policy meeting is just over two weeks away, on Sept. 16-17. While many on Wall Street have been hoping the Fed will stay its hand, the recent comments out of Wyoming suggest an increase is very much on the table.

There are only two more meetings in 2015 after it, on Oct. 27-28 and Dec. 15-16. So if policymakers truly want to move this year, they’re running out of time.

My best advice is to not get overly hung up on exactly when the Fed will move. Instead, understand that the long, long, LONG period of massive QE, zero-interest-rate policy and “autopilot” behavior in markets is over. We’re entering a whole new policy regime, one that will usher in more uncertainty, more volatility, and more market instability.

That’s why I’ve been recommending you pare down exposure by cutting losers and grabbing gains more aggressively. It’s also why I believe the extreme swings we saw last week may be just a taste of what’s to come this fall and beyond. So buckle up!

What do you think? Is a September rate hike truly on the table? Or do you think we won’t get a move until December … or later? What are the implications for stocks, bonds, and currencies? Are you rejiggering your portfolio to account for a new interest rate regime? Hit up the Money and Markets website and weigh in when you get a minute.

Our Readers Speak

Buy stocks? Sell stocks? Have a bunker ready in case the worst hits? Or just stop worrying? Several of you shared your opinions in recent days on which of these strategies makes sense in light of increasing market volatility.

Reader H.C.B. said: “I never fully accepted this ‘recovery’ to be authentic — to be a true bull market in its own right, as was the case from 1981-2000. This obviously is not a new bull market. So, I never went ‘all in.’

“The FED cannot force me to consume things I don’t need or want or invest at high valuations, no matter what. Only I decide what is best for me. So, I never fully accepted this as a real bull market as such, even in light of so much cheer-leading by the financial media and most stockbrokers.”

Reader John E. added: “I am done with individual stocks for the short term. A little gain is not worth the downside risk. I am in negative territory for the year. I have sold off 80% of my mutual funds and it is now in cash.

“The economy is sick and the market is volatile. Only an idiot or someone on the inside would be in right now.”

Lastly, Reader Jane W. said: “Our economy isn’t moving forward because there are so, so, so many regulations that companies, farmers, etc. have to meet that they feel going forward isn’t worth the time or money. Also there are no pipelines being placed, no coal mines working, limits on the amount of carbon that can be released into the air…. it just goes on and on.”

But Reader Mike S. took a more sanguine view, saying: “For all the wailing and gnashing of teeth, I’m long, long term and have been since March 9, 2007. Where the SPY is before the close on the first trading day of September will decide whether or not I go to Money Markets and inverse funds long term.”

Reader Hans also said: “Investors are overreacting. People still need paper products, gas, insurance, food, etc., which is produced by companies that are fundamentally strong, that is as simple as that. Keeping things in perspective seems to be hard to do these days.”

And finally, Reader Tom said: “Of course you shouldn’t sell stocks. Do you think Warren Buffett is panicked? No, he’s buying up stocks (and holding them for the long run). When the Dow hovers between 19,000 and 20,000 by year’s end, you’ll be sorry if you sell stocks.”

So as you can see, it’s a pretty even split on the website between bulls and bears. That seems to be the general split on Wall Street as well, given the very sharp break and the quick, decisive bounce that followed.

Me? I’m not complacent or encouraged by this action at all. This kind of tremendous volatility and these types of sizable technical breaks often occur at major market turning points.

So I’m carefully analyzing every bit of incoming data to see if we are, in fact, seeing a return to bear market territory. And in the meantime, I’ve been taking several steps for months to prepare my Safe Money Report subscribers for today’s much more challenging market. 

Other Developments of the Day

BulletThe U.S. Federal Reserve isn’t the only central bank whose policies have failed to spark a vigorous economic recovery and higher inflation. The European Central Bank has been failing as well, with consumer price growth lagging behind the ECB’s 2% target for two years.

Prices rose just 0.2% in August, and is on track to rise by only 0.3% for the full year. That’s leading to speculation the ECB could boost or accelerate its QE program before long; its next meeting is this Thursday.

BulletOil refiners have been one of the few bright spots in the energy sector, and Warren Buffett is taking notice. The billionaire investor’s Berkshire Hathaway has snapped up roughly 58 million shares of Phillips 66 (PSX) – a stake valued at around $4.5 billion.

BulletDon’t criticize stocks in China – you might go to jail. That’s because China is detaining and harassing “malicious” rumor-mongerers for daring to say the stock market is dangerous. Almost 200 people were rounded up in a crackdown by Chinese officials tied to the recent market meltdown.

BulletIf you’re the kind of person who appreciates a good horror movie, then you’re probably mourning the news out of California that Wes Craven has died at the age of 76. The director is best known for the “A Nightmare on Elm Street” films, as well as for the “Scream” series of movies that poked fun at horror film conventions.

So what do you think of Buffett’s most recent move? Or the Chinese crackdown on stocks? And are you expecting central bankers to succeed or fail at boosting inflation? Let me know at the website.

Until next time,

Mike Larson

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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