Stocks Looking Down After Rate Hike

Everything happened as expected on Wednesday. Stocks stayed in a tight range until 2PM. The Fed raised rates. Yellen spoke about reducing the balance sheet. And the bullish Fed trend was significantly muted. Given how stocks closed, there is a very short-term trend which indicates lower prices today and possibly into next week. However, with the stock market set to open lower, the opportunity to take advantage is likely gone.

The Dow is now the leading index and that’s not the index which typically leads in the healthiest of markets. I don’t expect this to continue. Mid caps have really started stepping up with small caps not looking as dead as they did a short time ago. The NASDAQ 100, on the other hand, looks like it has more downside ahead with some sideways movement coming after that.

As I always say, it’s not what the news actually is, but rather how stocks react. On Fed day, we saw good behavior from industrials, healthcare, home builders, banks, staples, discretionary, REITs and utilities. Read that sentence again. For the most part, those are not the same leaders as we have seen. Rather than the rally ending, it looks like it’s morphing after two “shock” days (big down days out of nowhere) in tech over the past month.

Now, tech may be done leading for a while, but it doesn’t look like the rally is over. Sure, we could see a pullback, but that would be yet another buying opportunity in a long line of successful opportunities.

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Fed to Hike Rates Today In Spite of Falling Inflation. Dow 23,000 Next

Model for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Five meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 75%, however with the bulls using a lot of energy over the past few days, that trend’s power has been muted significantly.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

It’s also June option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has been seen just on Tuesday.

1/4% Hike Against Mixed Economic Picture

Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. They have been chatting up a storm in their speeches and it’s also Yellen’s quarterly news conference and economic outlook update. I would be shocked if more than Neel Kashkari dissented.

While most pundits forecast two rate hikes in 2017, I have been very clear that those expectations are too low. In my 2017 Fearless Forecast, I offered that,

“While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.”

The flaw in my thinking is that I did not believe a change in the balance sheet would be a 2017 event. We will likely hear otherwise from Janet Yellen today. Markets are expecting to learn of a plan outline to begin to curb asset purchases by the Fed sooner than later. That should eventually lead to letting assets organically roll off the balance sheet rather than outright sales in the open market. The markets would be very surprised and caught off guard if Yellen speaks about a plan to sell bonds in the open market any time soon.

I would say that today’s move has a 95%+ certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Banks will then raise the prime lending rate and other rates will move off that. While the economy continues to improve, Q1 GDP was less than stellar although recently revised higher. My own work suggests that Q2 could see GDP grow close to 3% with Q3 perhaps even higher.

Monthly job creation has been very strong in four of the past five months. Only March was a lemon. I expect the growth trend to continue. The official unemployment rate hasn’t been lower since 2001 and the “real” rate or U6 is down to 8.4%, the lowest since 2007. This data certainly support a hike.

The chink in the armor and what Neel Kashkari may cite if he votes against the hike is the recent decline in inflation. From a 5 year high of 2.7% in February, the consumer price index declined in March, April and May to 1.9%. That is exactly what the Fed does not want to see as it tries to normalize interest rates.

Velocity of Money Still Collapsing

Turning to a chart I continue to show time and time again, below is a long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates

Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in www.investfortomorrowblog.com and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years.

As I have written about, I truly believe that one of the main reasons Yellen and her inner circle worry about raising rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom.

Below is a chart I continue to show at each FOMC meeting. While Dollar Index bounced around between the blue lines after that huge rally on the left side of the chart, all was very well and that was normal and expected behavior. When price broke above the blue line late last year, I thought the next big move had started. I was clearly and definitely wrong.

In the strongest bull markets, price should not have declined much below 100. This has been an unexpected turn for the worse. However, I am not ready nor close to being ready to abandon my long-term positive position. If my view is going to continue to pan out, the dollar will likely spend some time going sideways before gathering itself for a run to 104 and then much higher in 2018 and 2019.

I still forecast that the final bull market price peak lies ahead and at least towards the 120 level. Nothing has changed in my long-term view that the Euro will ultimately fall to all-time lows below .80 and the Pound under par. Those are the same long-term targets from 2008.

A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S.-centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000 (my most recent target), 25,000 and possibly 30,000.

What’s so bad about that?

Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

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Getting Closer to a Bottom

Stocks  begin the week on their heels after a relatively ugly day on Thursday. The pullback and selling are not over just yet, but the market is certainly closer to the end of the decline than the beginning. With Thursday’s price action closing at the low of the day and the March bottom only a few points away, I would think that the major indices are heading for a quick trip below the March lows before the bulls put up a real stand. That should occur before the end of the month.

While the stock market was closed on Friday, economic data was still released. Inflation came in a lot lower than expected and there were some downward revisions on previous months. That is exactly what Janet Yellen and the Fed heads do not want to see as they raise interest rates and float trial balloons about beginning to reduce the Fed’s massive $4.5 trillion balance sheet. Interestingly, reaction looks to be muted to start the day. Remember, it’s not what the news as much as it is how markets react.

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Going Nowhere

Well, at least last Wednesday was fun if you were a bull! The Fed raised rates by 1/4% as expected and stocks took off on the premise that there would only be two more interest rate hikes the rest of 2017. That hurt the banks and the economically sensitive sectors and gave a strong push to the defensive sectors. I remain skeptical of only two more hikes and stand by my forecast that four hikes are in the cards this year and the risk is to the upside.

Before the FOMC decision, I offered the model for the day which called for a plus or minus .50% move until 2pm and then volatility with a green close. One of our FOMC trends indicated a 75%+ likelihood that stocks would close higher. With March option expiration also last week and that being a separate and strong upside bias, the market had all of the ingredients for a rally.

However, as is often the case with outsized FOMC-driven moves, those gains or losses are usually reclaimed in the short-term. Through Friday, the S&P 500 has given back all of Wednesday’s gains. In short, the stock market’s pullback continues, however the weakness seems to be more about time than price. The major indices are moving sideways or consolidating instead of declining in price with the exception of the NASDAQ 100 which continues to power ahead, albeit at a slower pace. Both pullback scenarios serve the same purpose and should eventually lead to an upside resolution once the pullback ends, likely by early Q2.

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Fed to Hike Rates Today. Dow 23,000 Still On Track

Model for the Day
As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Three meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, there is a significant upside edge which has been accurate more than 75% of the time. Stocks also typically see a range of plus or minus .50% until 2 pm before volatility hits and a bigger move is seen.

It’s also March option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has not been seen which means that the odds favor strength into Friday’s close.

1/4% Hike Against Better Economic Picture
Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. After the December increase, the masses were not pricing in a March rate hike although I was very clear 6 weeks ago as well as in my 2017 Fearless Forecast.

“While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.”

I would say that today’s move has a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. The economy has definitely improved since the December rate hike and we have had back to back 200,000 jobs reports which are also stronger than at this time last year. The U6 or “real” unemployment rate now stands at 9.20% which is the lowest level since before the Great Recession. The stock market has continued higher. Even data from Europe is a little better.

Velocity of Money Still Collapsing
Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.


This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates
Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years.

As I have written about, I truly believe that one of the main reasons Yellen and her inner circle worry about raising rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.


A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S.-centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000 (my most recent target), 25,000 and possibly 30,000.

What’s so bad about that?
Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

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BONUS Surprise. Janet Yellen Reappointed Fed Chair

#9 – Janet Yellen reappointed Fed Chair

Donald Trump attacked and criticized the Fed and Chair Janet Yellen during the campaign. He blamed her and them for many of our economic woes along with the stock market being on the edge of a cliff about to plummet. Once 20,000 was hit, Trump changed his tune dramatically, exclaiming how great it was to achieve that milestone with more upside ahead.

As Yellen’s term as chair expires at the end of 2018, Donald Trump does an about face and reappoints her for a second four year term. At that time, the Fed successfully raised interest rates to 2.5% without adversely slowing down the economy. At the same time, the stock market’s bull market kept on going with the Dow exceeding 23,000.

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Strong Fed Trend Active Today

It doesn’t feel like it’s been six weeks since the December meeting when the FOMC raised interest rates 1/4%, but it really has. Can we get time to stand still for a month or so in order for us all to catch up? With President Trump occupying the headlines on a daily basis, Janet Yellen & Co. must be ecstatic that they out of the limelight and crosshairs for that matter.

Today concludes the Fed’s two day meeting and expectations are for no rate hike, especially after that weaker than expected GDP report last week. While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.

However, as you know, I still don’t think the Fed should hike at all. They are fighting a battle that doesn’t yet exist and risking another leg higher in the dollar’s bull market which will have grave long-term consequences. For now, I have been discussing, the dollar’s is seeing a mean reverting move to the downside as it gears up for a bigger rally later in the year.

The model for today’s stock market is plus or minus 0.50% until 2pm and then a rally into the close. One of our Fed models is active today and that suggests at least a 75% chance of a higher close.

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Top 8 Shocking Surprises Plus 2 Bonuses Under Donald Trump

The Friday before the election, our quantitative election model forecasted that Donald Trump was going to be the 45th President of the United States. I didn’t believe it myself, yet I didn’t question whether the model was broken. After all, it’s accuracy rate has been higher than 80%, correcting predicting every election since 1996.

After a barrage of media interviews where some questioned whether I was just a shill for Mr. Trump, the election came and he was in fact elected President. In follow up interviews the day after the election, I offered that any pullback in stocks would be a buying opportunity for a run to all-time highs by the first quarter or so on the way to my longstanding target, first offered in 2010, of Dow 20,000.

I also opined that while Mr. Trump may have run under the GOP label, he was certainly not conforming to any traditional Republican platform and was really a populist who leaned right. Although he often fought with Speaker Paul Ryan during the campaign (and many other mainstream Republicans), Trump knew he needed Republican leadership and they needed him to advance their pro-growth and America First nationalistic agendas. “Politics makes strange bedfellows”

Economically, I believed that the corporate tax rate would be one of the first and easiest items to pass. I even expected a few Democrats to join the party. Tax reform would be next with the individual brackets being cut from 7 to 3 and rates for everyone making less than a million to go down. Legislation to terminate hundreds of Barack Obama’s executive orders would also be seen in the first 100 days. Infrastructure, where I have my own idea of how to pull this off without having the government borrow, would be tabled until 2018.

While Donald Trump began his term with an approval rating of 42%, 66% of the people believe better times are ahead. Consumer Confidence spiked for the past two months to a 13-year high. People may seem to dislike President Trump, but they have very high expectations for the economy and their own well-being. Some could argue that’s because the GOP controls Congress and they believe Speaker Ryan will get the job done.

In any case, with the stock market breaching 20,000 and at all-time highs and the economic data from Q4 still stuck in neutral, the markets and public hopes seem to be priced for perfection. That means there is not a lot of margin for error. With that in mind, it got me thinking about things that could go wrong or different paths President Trump could take.

8 – Economy sees recession during the next four years.

With all of these pro-growth economic plans from Speaker Ryan, this surprise may seem counterintuitive. The past 8 years have seen the worst economic recovery of the modern era. While it may be the typical post-financial crisis expansion, it’s still underwhelming. I think Barack Obama inherited part of this, but I also think his policies caused part of it and prevented more robust growth. There is a chance that our economy has significant structural problems, like Japan on a smaller scale, and even a strong, pro-growth agenda won’t help.

Additionally, presidents who follow two-term presidents typically see a recession within four years. Obama followed Bush 43 and he inherited the Great Recession. Bush 43 followed Clinton and he had the post 9-11 one. Bush 41 succeeded Reagan and he saw the S&L crisis/Gulf War oil recession. Carter followed Nixon/Ford and the economy pulled back in 1980 from Fed rate hikes. Nixon succeeded Kennedy/Johnson and he faced recession at the end of 1969 from higher inflation. JFK followed Eisenhower and he inherited a Fed-driven recession. Ike succeeded Truman and saw another inflation-led recession in 1953. Lastly, Truman took over for FDR and presided over two recessions during his first term as the economy was changing back to a peacetime economy with less government spending.

7 – Bear market in stocks by 2020.

The U.S. stock market has been driving ahead since March 2009. From a low of 6500 in the Dow to 18,300 on Election Day, Barack Obama has seen one of the best stock markets of any president in history. It’s a bit ironic that the president who most railed against wealth inequality enjoyed one of the greatest booms ever and couldn’t really celebrate that.

Bear markets come in two forms: with and without recession. Recessionary bear markets typically last longer and experience a larger decline. If I believe that recession is possible under Trump then so should a bear market. The next bear market will likely see a loss greater than the largest decline of the current bull market but not nearly as great as the financial crisis bear market. In that case, the next bear market should see a drop between 25% and 40% and last 6-15 months.

6Not all cabinet nominees confirmed

Another surprise that seems counterintuitive since the Senate is controlled by the GOP. No president since Ronald Reagan saw all of their cabinet nominees confirmed. Every single president had at least on nominee who was rejected, John Tower in 1989 under Bush 41 or withdrawn, all of the rest since Clinton. In fact, Clinton, Bush 43 and Obama all had at least two nominees withdraw their name. While Betsy DeVos seems to be the most controversial at the moment, my sense is that a less public nominee will withdraw.

5 – Trump and the GOP fall out of love

It was a vicious campaign that saw allegiances move all over the place. In the end, after attacking a good number of his fellow candidates, Donald Trump reconciled in one way, shape or form with every single one of them. Given Trump’s personality and populist and nationalistic tone, there is a good chance that Paul Ryan, Mitch McConnell and the GOP end up at odds with President Trump over the details of legislation or executive orders which don’t sit well with the GOP and their constituents.

4 – Trump and Chuck Schumer kumbaya

As recently as 2011, Donald Trump may have been or was aligned with the Democrats. He and Senate minority leader, Chuck Schumer, used to be pals in New York City. If President Trump and the GOP have a falling out, it’s very likely that Chuck Schumer and some of the Democrats will fill that void, especially if it’s during a period where a Supreme Court Justice vacancy needs to be filled.

3 – Moderate Justice chosen for the Supreme Court

Whether Donald Trump has a fight with the GOP or not or if the President finds common ground with the Democrats, a moderate Justice for the Supreme Court will be nominated from one of the judges whom the GOP already approved of at a lower court. All indications are that Trump’s first nomination to the bench, due in early February, will have similar views to that of Antonin Scalia whom he or she will be replacing. That will please and appease the party base. From there, it is likely that one of the liberal Justices will retire by 2020 and Trump, the consummate dealmaker, will nominate a moderate to sail through the Senate.

2 – Trump and Putin have a falling out

This is probably the least surprising of all on the list. One of my theories is that Trump has been so pro-Putin because Obama and Hillary Clinton were such adversaries of Russia. It was yet another good way to differentiate during the campaign. The U.S. and Russia’s interests are so inversely aligned that it would be almost impossible for the two countries not to have a falling out by 2020. I will venture a guess that the impetus for a disagreement comes from Russia’s dealings with Iran or Syria, or Russia’s military taking aggressive positions along a bordering nation.

1Donald Trump is not on the ticket against the Democrats’ candidate in 2020

I find it very hard to believe that Donald Trump will want to run again in 2020. While 74 is by no means old, he will have literally done it all by that time. I think there is a binary path to his party’s nomination in 2020. First, things go so well that Trump opts to leave on top, securing his legacy with the country in great shape. On the flip side, after an amazing honeymoon, his policies get bogged down first in committee and then on the floors of Congress. For the first time in his life, he is unable to make a deal.

At the same time, Angela Merkel already lost the 2017 election in Germany and the euro currency and euro zone are breaking apart in 2018 and 2019. This causes major recessions in Europe and Asia that spillover into the U.S. Along with the bear market in stocks, Trump’s popularity and approval rating plummet so much that he is primaried by several in the GOP. Seeing no path to reelection, Trump withdraws from the race to retake control of his empire.

There you have 8 unexpected, outside the box surprises over the next four years. Clearly, not all of them will happen, but in a vacuum, each one has a puncher’s chance. President Donald Trump is certainly going to have his hands full.

After this list was published, I added two bonus shocking surprises a few days later.

Bonus #1 – Janet Yellen reappointed Fed Chair

Donald Trump attacked and criticized the Fed and Chair Janet Yellen during the campaign. He blamed her and them for many of our economic woes along with the stock market being on the edge of a cliff about to plummet. Once 20,000 was hit, Trump changed his tune dramatically, exclaiming how great it was to achieve that milestone with more upside ahead.

As Yellen’s term as chair expires at the end of 2018, Donald Trump does an about face and reappoints her for a second four year term. At that time, the Fed successfully raised interest rates to 2.5% without adversely slowing down the economy. At the same time, the stock market’s bull market kept on going with the Dow exceeding 23,000.

Bonus #2 – Inner circle is a revolving door

Given how Donald Trump’s campaign went and how much turnover there was at the top, that theme continues straight to the 2018 mid-term election. At least 3 cabinet members will be replaced by then and another one or two from the rest of the inner circle. Some will be asked to leave while others will become frustrated with either the president or acrimony in Congress. Steve Bannon, Kellyanne Conway, Sean Spicer, Wilbur Ross, Steve Mnuchin, James Mattis, John Kelly, Reince Priebus are a few to keep an eye on.

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Fed to Hike Rates But All Not Well

Model for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Two meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, the upside edge is just outside a coin flip and certainly not worth playing based solely on this. While it’s also December option expiration week which has historically added a nice tailwind to stocks, that edge has also been a bit muted by the strength seen on Monday and Tuesday. On the bright side, there could be a strong and playable short-term trend to the downside starting by the end of the week, but we will have to see how the next few days play out.

1/4% Hike Against Mixed Economic Picture

Janey Yellen and her friends at the Fed have done an excellent job of preparing the markets for a rate hike today. I would say that it’s a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Whether you want to attribute it to the Fed making an independent decision based on the economic data at hand or that Donald Trump’s agenda is assumed to be very pro-growth or that Paul Ryan will be running tax policy or even that stocks have become a bit frothy, short-term rates are going up today and next year.

Looking at what the Fed is supposed to be basing their decision, the economy, we see a mixed bag. Over the past three months, we have created 156,000, 161,000 and 178,000 jobs in the U.S which seems pretty good on the surface. However, that’s 200,000 less jobs than 12 months earlier. The manipulated unemployment rate is down to 4.6% with the real or U6 rate at 9.7%. And while the consumer price index (CPI) has finally started to uptick after percolating for years, it’s hardly hot and worrisome. Our economic output, GDP, is improving and now stands at just over 3% which is also finally good news. I fully expect that to click between 3% and 4% in 2017.

Velocity of Money Still Collapsing

Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates

Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years. As I have written about, I truly believe that one of the main reasons Yellen and her inner circle don’t want to raise rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.

A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S. centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000, 25,000 and possibly 30,000.

What’s so bad about that?

Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

I understand why the Fed is going to raise rates. I truly do. However, given our current mixed economic picture and the weakness, deflation and accommodative stances of central banks elsewhere, I believe that Yellen and her minions are barking up the wrong tree.

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Fed Model Says Rally. A November Surprise from Yellen?

Before I dive into the meat of the article, our market model for today is a plus or minus .50% move until 2 pm and then a rally into the close. Two of our Fed Statement Day (today) models are live and are very bullish with a success rate of 80%. We’ll see how that works out before long.

With the election just around the corner, it would be almost impossible to believe that the Federal Reserve would raise interest rates at the conclusion of their two-day meeting meeting today at 2 pm. And I do not believe they will move on rates. However, I would have thought the same thing about the FBI going public with their restarting the Clinton email investigation. It’s just been the most precedent setting election season of all-time and it’s not over. Who knows what else comes out between now and Tuesday morning?!?!

The surprise from the September meeting was that there were three public dissenters to the vote. That is the highest number I can recall and a shot across the bow for  Chair Yellen that a move, likely in December, is coming. We’ll see what the vote is today. It’s been pretty amazing that there has been almost none of the usual chatter on Twitter or on the financial channels regarding the meeting. Normally, my feed would be lit up with prognostications and commentary and the media would have multiple segments an hour. Hillary and Donald are sucking up all of the media’s bandwidth.

Looking at the employment picture, the economy created 156,000 new jobs in September and 151,000 in August. That’s certainly not an overheating economy nor an economy on the verge of recession. It’s just below warm. While our economy grew at a higher than expected rate of 2.9% in Q3, that wasn’t enough to balance off a weak 1.1% number for the first half of 2016. Additionally, inflation has been well under wraps not only this year, but every year since the financial crisis.

Long time readers know that I have been in the deflation camp since 2007 and remain that way until we have another recession. I offered comments about the economic indicators not because there are any startling revelations, but as another way to support the position I have taken since 2007. At every single Fed meeting since mid-2007 I have been in the accommodative camp, which meant either lowering rates or keeping them as is after they essentially hit 0%. For the record, I am not in favor of negative interest rates for now.

While the crisis has long passed for the economy and financial markets, we are still in a typical post-financial crisis recovery which I have written about over and over and over. Our economy will remain that way until the other side of the next recession, which should be mild and occur by 2019. That means very uneven growth that sometimes teases and tantalizes on the upside and terrifies once in a while on the downside. It’s very frustrating, more so now because we have complete, total and utter dysfunction in government that makes the Fed the only game in town.

As I have mentioned many, many times over the past few years, not only is Janet Yellen & Company taking into account the U.S. economy, but Europe and Asia as well as they debate policy. We may not directly care what happens abroad, but our currency certainly does. I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the left side of the long-term chart below.

Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.

dollar

Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

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