From the Contrarian..........
Market sees bright side of Fed rate hike
Monday's rally continued around the globe and we had more of the same. In the first 10 minutes this morning, the Nasdaq was up 2 percent or so and there was kind of an across-the-board explosion as yesterday's euphoria carried over to today.
I'm not going to take a lot time describing today's action, because there isn't much to say. The opening levels were maintained all day. When the Fed came out and gave Wall Street the joyous news of a 50-basis-point rate hike and a tightening bias, we had a momentary sell-off and the market rallied back to about where it was when the news was released and we had a tiny sell-off going into the close. It doesn't really make much difference to talk about what stocks were hot and which ones weren't.
Give that fish a pompom. . . Suffice it to say that tech was on a roll once again, and tonight everyone will wait to see what kind of stories Lou Gerstner's long-lost cousin, Carly Fiorini, from Hewlett-Packard can spin. I would expect HP to play the new version of Three Card Monty and release five variations of the company's earnings results, so the dead fish who like to wear cheerleader uniforms to work can claim that HP blew away whatever number it wanted. That's the new game on Wall Street. I think we may have to change the name of the dead fish to cheerleaders, because we are becoming more and more insulting to our piscine friends.
The fixed-income market was marginally better after seeing a little bit of motion on the back of the Fed action. My guess would be that rates are going to continue to head higher because the inflation rate is going to get worse.
The euro was weak once again and the dollar was strong, depending on how you like to look at it. While silver was up a couple percent, gold saw a small change. This was on the back of a new high in the CRB commodity index for the year and strong moves in other commodity indices as well. But I guess that we don't have to worry about those because there's no inflation, right?
There are many things in the news that pertain one way or another to the investment landscape, so I'd like to do a little more about that than usual. First of all, before we discuss the Fed and its decisions, let's take a minute and turn to one of the least credible central banks on the planet, the ECB.
Telltale footing prints. . . Regular readers know that I've been critical of the ECB for its complete mistreatment of the euro, and I noticed yesterday - thanks to the latest issue of Grant's - that the "bank" footings of the ECB have been growing at an annualized rate of more than 20 percent. This probably helps explain one of the reasons why the euro has gone down. Folks may not know this, but on a year-to-date basis, the ruble has done better than the euro. This just goes to show you what a piece of trash the euro has been so far.
The CPI report was released this morning, and it was just what everyone hoped it would be, only slightly stronger. Inflation statistics were also released out of Ireland, which showed an annualized rate of 4.9 percent. Ireland matters because it's been enjoying a little boom of its own. So that's what we're going to start to see out of Europe, too, more inflation. We have a budding inflation problem going on around the globe, which should come as no surprise considering how fashionable it's been for central bankers to print tons of money.
Central bankers seem to believe that they have a crystal ball and know what the future holds. They think that they know exactly what rate to pick to make everything hunky-dory. I guess that's one of the reasons why the ECB has been so smug in the face of a complete collapse of its brand-new euro. I always thought the euro was ultimately going to collapse, because I saw no way for the disparate views of different countries to pull on the same oar in a recession. However, I figured that since that was so obvious, the ECB would work very hard to make it a real currency initially to mitigate those potential risks. Obviously, they've done nothing of the sort. One of these days we'll get a dead-cat bounce in the euro, but that is all it's likely to be unless something changes.
Behind the times. . . Turning to our central bank, the merry pranksters at the Fed, who have become slightly more serious about things this year as we've had a few doves go off the committee replaced by a few hawks, have been woefully late in addressing the issue of dealing with the bubble and inflation. The fact that we have inflation picking up now, given that the statistics are so doctored, just goes to show you what kind of a problem has really begun.
Oil is now $30 and I talked to someone who is familiar with the statistics who said that it's practically a slam dunk that we're going to get a 0.6 for next month (which would be more than 7 percent annualized). So we now have an incipient inflation problem on top of the bubble. This is why I have been critical of the Fed for so long. This is why central bankers - if they're ever to do a proper job - are supposed to use a little common sense and not just focus on one thing. The most recent issue of The Economist sounds a lot like what I've been saying here in the Rap for the longest time:
"The current focus on inflation and only inflation is too narrow. . . The clearest current example is America, where the Federal Reserve turned a blind eye to the stock market bubble and waited until inflation started to rise before tightening policy."
More where that came from. . . Of course, the real problem is that the Fed hasn't really been tightening policy, they've just been picking a higher interest rate. Now that may sound like a distinction without a difference, but it's not. The fact of the matter is that the Fed has basically just raised the cost of borrowing money, it hasn't restricted the amount of credit, with interest rates going up as a by-product of that restriction. They just keep picking a rate and matching it with money.
I have a somewhat technical description of this that I want to share with readers. It's from an economist that I use, whom I think is quite good, named Carl Pellegrini. When you read Carl's analysis, which describes exactly what's been happening in terms of what the Fed has been doing rather than what it's been saying, you can only reach one conclusion, which is that interest rates are going to go higher until the stock market cracks big time:
"The Fed is raising the Federal Funds rate and the Discount Rate. Does this mean that the Fed is tightening? No! [The Fed is so tight that M2 grew at an 8.9-percent rate in March and an even faster 10.7 in April.] The Fed is not tightening in the sense that the Fed is causing the flow of available funds to be created at a rate slower than the demand for available funds. The Fed talks a lot and does little. M2, at $4.7T, is up 5.7 percent for the 12 months ending March; M3, at $6.6T, is up 8.3 percent for the last 12 months; and Modern Money, at $3.0T, is up 9.8 percent for the last 12 months." (Modern Money, a concept I started measuring when the Euro Dollar market started to become important, is defined as Demand Deposits, Other Checkable Deposits, Money Market Funds, Repurchase Agreements, Eurodollar Deposits, and Sweep Accounts).
"Please do not fall into the mental or emotional trap that current interest rate increases by the Fed will produce a slower inflation/real growth environment. With Modern Money up 9.8 percent over the last 12 months and credit growth well in excess of that figure, current levels of short-term rates have little, if any negative influence on economic decision making. Inventories in the U.S. economy are about $1.16T and inventory profits are running at close to $38B or 3-4 percent. The increase in interest costs means little with an inventory turn over of 4x and inflation profits helping to boost stock prices. Alan Greenspan said in the question and answer period of his last appearance on the Hill that he was going to let demand clear the market, not reduced supply. The Greenspan Fed has little real control over the growth of money outstanding and I'm not sure that they want the control."
Reason to worry. . . If that weren't enough, today we have some hearings in Congress into the lending practices and so forth of the government-sponsored enterprises: Freddie, Fannie, the FHLB, etc. Of course, the first thing that the big chieftains that run those firms had to say in the committee hearings was that they are worried about "market instability" and "higher mortgage rates" if their cozy little world is interfered with. These companies have been monster providers of credit in the last couple of years, and largely fly below the radar screen of most people. They have also been one of the conduits through which this bubble has been built.
It will be important to follow these hearings and how any future regulation plays out. These corporations have been able to pile on enormous amounts of leverage thanks to their implied credit backing of the U.S. government. If that changes it will definitely alter the way things work.
So where are the showgirls?. . . After the Berkshire Hathaway annual meeting, I reprised a couple of quotes from Warren Buffett, but I wanted to add one more, courtesy of Grant's. "What are the consequences of the stock market being taken over by a casino. . .A casino is dominated by greed and fear; when the reversal comes it is likely to be extreme." Obviously, those are my sentiments exactly; he even uses the same analogies that we've been using in the Rap for so long. When a guy like Warren Buffett stands up and talks about the stock market becoming a casino, you can be sure that is what it's become, as he chooses his words very carefully.
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