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Did The Fed’s Monetary Policy Experiment Just Fail?

Did the Fed’s "monetary policy experiment" fail? The recent dislocation between consumer confidence and the financial markets may indicate just that.

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This article was originally published by Real Investment Advice

Did the Fed’s “monetary policy experiment” fail? The recent dislocation between consumer confidence and the financial markets may indicate just that.

“U.S. consumer sentiment dropped sharply in early August to its lowest level in a decade, in a worrying sign for the economy as Americans gave faltering outlooks on everything from personal finances to inflation and employment,” – Reuters

However, to understand why I am asking the question, we have to revisit what Ben Bernanke said in 2010 to support the idea of a second round of “Quantitative Easing.”

“This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose, and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

What he is referring to is known as “Animal Spirits.”

Animal spirits came from the Latin term “spiritus animals,” which means the “breath that awakens the human mind.” Its modern usage came about in John Maynard Keynes’ 1936 publication, “The General Theory of Employment, Interest, and Money.” Ultimately, “animal spirits was adopted by Wall Street to describe the psychological factors driving investor actions.

Specifically, Ben Bernanke realized that investors would respond to that stimulus and increase asset prices by providing accommodation.

In other words, as long as individuals “believe” the Fed is lifting asset prices higher, they take action buying stocks and driving asset prices higher. Thus, investor actions deliver the desired outcome.

It Was All Going According To Plan

Since the Fed began its monetary interventions, the correlation between the asset prices and confidence remains high.

As noted, the entire premise of monetary policy was to spur consumer spending. Everything seemed to be according to plan.

The problem was that while the Fed lifted asset prices, the economy didn’t strengthen as expected. As discussed recently:

“However, while the Federal Reserve got the desired outcome of increasing asset prices, “quantitative easing” failed to “trickle down.” Despite the massive expansion of the Fed’s balance sheet and the surge in asset prices, there was relatively little translation into wages, full-time employment, or corporate profits after tax which ultimately triggered very little economic growth.

Data Fed Wealth Gap, The Data Shows The Fed Is Behind The Surging Wealth Gap

“Since 2007, the stock market returned nearly 200%, which is more than twice the growth in GDP and nearly 4-times the growth in corporate revenue. (I use SALES growth as it happens at the top line of income statements and is not subject to as much manipulation.)”

Data Fed Wealth Gap, The Data Shows The Fed Is Behind The Surging Wealth Gap

Again, it was all going according to plan, sort of.

Until now.

Did The Monetary Policy Experiment Just Fail?

“Over the past half century, the Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy,” Richard Curtin, chief economist for the University of Michigan’s Surveys of Consumers, said in a release. Two of those larger month-over-month movers were April 2020 amid the pandemic and October 2008, during the financial crisis.” – CNBC

The decline was extremely sharp.

“Not only was the release dramatically worse than the last update, but it was a huge miss relative to expectations. Today’s release came in 11 points below expectations. The only other month going back to 1999 that even comes close was a 9.9 point miss in February 2004.”Bespoke Investment Group

The mainstream analysis missed that the correlation between confidence and markets broke down in 2019. Notably, while the Fed is engaged in monetizing $120 billion in debt monthly, higher asset prices isn’t inflating confidence.

That breakdown of consumer confidence will likely show up in consumption in the coming quarter. Such is mainly due to stimulus and other financial supports fading.

A decent warning sign such may be the case was the weak retail sales report this past week. The large gap between retail sales and employment will likely get filled sooner than expected and not necessarily by higher employment.

If the most giant “monetary policy experiment” just failed, the Fed has an enormous problem.

The Problem For The Fed

Over the next couple of weeks, all eyes are on the Fed. Lately, there has been an abundance of communication from Fed members discussing the need to “taper” its monetary interventions.

As Morgan Stanley recently noted:

“If the July FOMC minutes suggest that there was strong consensus and Chair Powell’s indication on tapering at Jackson Hole is therefore much firmer, we could see that as consistent with the FOMC gearing up to move on tapering sooner.”

Such is something the markets are probably not ready for.

So far, market participants have ignored weakening economic data, the collapse of Afghanistan, and rising risks of infections across the U.S. As long as the Fed is engaged in providing liquidity, the “risk of missing out” outweighs being more conservative with allocations.

However, the Fed remains trapped between two very tough policy choices.

The system has elevated inflation levels, as indicated by the spread between the PPI and CPI inflation measures. Currently, with PPI at the highest spread to CPI in history, it suggests producers can’t pass on costs to customers. Such equates to weaker profit margins and earnings in the future. However, if they elect to pass those costs onto consumers, such will raise living costs well above wages.

With unemployment levels dropping, and inflation rising, the Fed should be tapering monetary policy.

However, the reduction in liquidity will trigger a decline in asset prices, hinder consumer confidence, and contract economic growth further.

It’s a tough choice.

Conclusion

We agree with Morgan Stanley’s assessment on the likely path of “taper” when it comes.

The path of least resistance is to follow the path most traveled, that is, the playbook established in the last cycle when the Fed began to reduce its purchases of longer-term assets following the 2013 taper tantrum. That playbook included a long lead-time to signal the start, a promise that tapering would be gradual and flexible, and assurances to the market that tapering would have nothing to do with the timing of first rate hike. Indeed, the Fed did not first raise rates until six months following the end of tapering.”

While such is undoubtedly the path of least resistance, it is unlikely the market will like it much. As discussed in “3-Signs Of The Next Bear Market:”

“Therefore, it should also not be surprising that when the Fed starts ‘tapering’ their bond purchases, the market tends to witness increased volatility. The grey shaded bars in the chart below show when the balance sheet is either flat or contracting.”

Next Bear Market, When Is The Next Bear Market? 3-Things Will Tell You

Notably, the time from the initial tapering of assets and a market correction is almost immediate.

If “monetary policy” has lost effectiveness in supporting consumer confidence and “animal spirits,” the significant risk to investors could be a market decline the Fed cannot halt.

Currently, investors are highly confident the Fed can support markets against any risk.

But what if they can’t?

The post Did The Fed’s Monetary Policy Experiment Just Fail? appeared first on RIA.

Economics

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

Soaring natural gas prices across the UK have disrupted companies…

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UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

Soaring natural gas prices across the UK have disrupted companies from operating. The latest is slaughterhouses that use carbon dioxide, a byproduct of fertilizer derived from natural gas. 

Richard Griffiths, chief executive officer of the British Poultry Council, told Bloomberg surging natural gas prices is a massive blow for poultry companies, which frequently use a byproduct of fertilizer production -- carbon dioxide -- to incapacitate birds at slaughterhouses.

CO2 supplies are incredibly tight, Griffiths said, adding that any further shortages could create massive headwinds for the industry and hinder chicken production. Already, weekly chicken output has dropped 5-10%, and Christmas turkey production could drop by a fifth. 

The unintended consequences of natural gas shortages are the effects on the food industry and how it may result in rising meat prices if slaughterhouse output continues to decline. 

On Thursday, we outlined how CF Industries Holdings' fertilizer plants, one in Billingham and another in Ince, suspended operations "due to high natural gas prices." 

"I would expect it to be having impacts very quickly," Griffiths said by phone. "At the moment, we've got all the Brexit effects, including labor shortages, all the Covid add-ons. And now, we're seeing these supply-chain problems emerge at a time when we really don't need it." 

Energy inflation could be a company's worse nightmare in the UK -- prices for the fuel have already doubled this year, while power costs are on a record-breaking run thanks to the lack of renewable energy output

More companies could be impacted by soaring natural gas prices and elevated electricity prices. This problem isn't likely to fade anytime soon as gas inventories remain low ahead of the winter season. 

All of this is feeding into inflation across the continent. European Central Bank President Christine Lagarde recently said energy markets are a significant driver in higher inflation. To solve this, Germany has to certify Russia's Nord Stream 2 to begin receiving shipments - but as we recently noted, that could take months and may suggest European inventories won't be resupplied in time for winter. 

    Tyler Durden Sat, 09/18/2021 - 07:35
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    Economics

    US stocks close in a sea of red as tax hike fears grow

    US stocks closed the week in a sea of red on Friday September 17 after technology shares led the broad losses across segments and tax hike fears dragged…

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    US stocks closed the week in a sea of red on Friday, September 17, after technology shares led the broad losses across segments and tax hike fears dragged the benchmark indices down.

    The S&P 500 fell 0.91% to 4,432.99. The Dow Jones fell 0.48% to 34,584.88. The NASDAQ Composite Index declined 0.91% to 15,043.97, and the small-cap Russell 2000 was up 0.18% to 2,236.87.

    Markets have been volatile this week amid mixed global cues. Loses in the Asian markets over worries of slow economic recovery and recent geopolitical developments weighed on investors’ minds. The tech-savvy Nasdaq declined the most.

    In addition, the recent retail sales and unemployment data offered mixed signals about the US economy. While retails sales were up in August, jobless benefits claims rose noticeably last week.

    Meanwhile, lawmakers were considering a proposal to hike corporate tax. The news could be worrisome for some investors as a tax hike may eat into the companies’ profits. Democrats are seeking to increase the corporate tax from the current 21% to 26.5%.

    Investors will now eagerly wait for the Fed’s monthly meeting next week. The central bank officials are expected to discuss the latest economic data as they continue with the stimulus tapering talks.

    All the S&P 500 stock segments stayed in the negative territory. Technology and communications services stocks were the biggest losers, pushing the index down. Stocks of vaccine manufacturers Moderna, Inc. (MRNA) and Pfizer Inc. (PFE) plunged 3.57% and 1.34%, respectively.

    Invesco Ltd. (IVZ) stock rose 5.71% after reports that it is in talks to merge with the asset management unit of State Street Corporation (STT). STT stock declined 2.47% in intraday trading.

    SmileDirectClub, Inc. (SDC) shares surged 12.92% after the stock was discussed on social media.

    AbCellera Biologics Inc. (ABCL) stock rose 2.53%, a day after the US Food and Drug Administration extended the emergency use authorization for its covid drug Bamlanivimab.

    In technology stocks, Apple Inc. (AAPL) fell 1.94%, Microsoft Corporation (MSFT) fell 1.65%, and ASML Holdings N.V. (ASML) declined 3.18%. Adobe Inc. (ADBE) and Cisco Systems, Inc. (CSCO) fell 1.75% and 1.19%, respectively.

    In communication stocks, Alphabet Inc. (GOOG) fell 2.08%, Facebook, Inc. (FB) declined 2.96%, and T-Mobile US, Inc. (TMUS) declined 1.19%. In addition, Sea Limited (SE) dropped 1.23%, and Snap Inc. (SNAP) advanced 3.08%.

    In the material sector, BHP Group (BHP) fell 4.46%, Rio Tinto Group (RIO) fell 3.02%, and Vale S.A. (VALE) fell 2.21%. Ecolab Inc. (ECL) and Freeport-McMoRan Inc. declined 2.01% and 4.10%.

    Also Read: Check these 5 oil and gas stocks with high price-to-earnings ratio

     

    Copyright ©Kalkine Media 2021

    Also Read: ASAN, FORG, & DATS stocks shine on higher demand hopes

    Top Gainers

    Top performers on S&P 500 included Thermo Fisher Scientific Inc (6.49%), Invesco Ltd (5.46%), Centene Corp (4.95%), Diamondback Energy Inc (3.18%). On NASDAQ, top performers were Corvus Pharmaceuticals Inc (135.40%), Helbiz Inc (96.56%), Priority Technology Holdings Inc (47.23%), Innate Pharma SA (40.87%). On Dow Jones, Amgen Inc (0.93%), UnitedHealth Group Inc (0.80%), American Express Co (0.79%), Procter & Gamble Co (0.16%) were the leaders.

    Top Losers

    Top laggards on S&P 500 included Unum Group (-6.04%), International Flavors & Fragrances Inc (-5.53%), Copart Inc (-5.46%), Nucor Corp (-4.49%). On NASDAQ, Protagonist Therapeutics Inc (-62.00%), TCR2 Therapeutics Inc (-36.45%), Eliem Therapeutics Inc (-21.92%), Janux Therapeutics Inc (-20.26%). On Dow Jones, Dow Inc (-2.89%), Caterpillar Inc (-1.89%), Apple Inc (-1.83%), Microsoft Corp (-1.75%) were the laggards.

    Volume Movers

    Top volume movers were Bank of America Corp (43.29M), Nov Inc (41.49M), Apple Inc (40.72M), AT&T Inc (38.62M), Oracle Corp (37.24M), Lucid Group Inc (39.05M), Match Group Inc (36.06M), SoFi Technologies Inc (33.81M), Tellurian Inc (28.37M), Corvus Pharmaceuticals Inc (26.47M).

    Also Read: Top five mid-cap retail stocks with more than 100% YTD gain

    Futures & Commodities

    Gold futures were down 0.22% to US$1,752.85 per ounce. Silver decreased by 1.87% to US$22.367 per ounce, while copper fell 1.15% to US$4.2322.

    Brent oil futures decreased by 0.45% to US$75.33 per barrel and WTI crude was down 0.81% to US$71.97.

    Bond Market

    The 30-year Treasury bond yields was up 1.13% to 1.902, while the 10-year bond yields rose 2.43% to 1.363.

    US Dollar Futures Index increased by 0.33% to US$93.227.

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    Economics

    Victor Davis Hanson: The Death Of Science

    Victor Davis Hanson: The Death Of Science

    Authored by Victor Davis Hanson,

    The scientific method used to govern much of popular American…

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    Victor Davis Hanson: The Death Of Science

    Authored by Victor Davis Hanson,

    The scientific method used to govern much of popular American thinking.

    In empirical fashion, scientists advised us to examine evidence and data, and then by induction come to rational hypotheses. The enemies of "science" were politics, superstition, bias and deduction.

    Yet we are now returning to our version of medieval alchemy and astrology in rejecting a millennium of the scientific method.

    Take the superstitions that now surround COVID-19.

    We now know from data that a prior case of COVID-19 offers immunity as robust as vaccination. Why, then, are Joe Biden's proposed vaccination mandates ignoring that scientific fact? Dr. Anthony Fauci, when asked, seemed at a loss for words.

    Is this yet another of the scientific community's Platonic "noble lies," as when Fauci assured the public last year that there was no need for masks?

    He later claimed he had lied so that medical professionals would not run out of needed supplies.

    Fauci also threw out mythical percentages needed for herd immunity, apparently in an attempt to convince the public that it will never be safe until every American is protected from COVID-19 by vaccination only.

    And why was it that hard for the scientific community to postulate a likely origin of COVID-19 Some of the very scientists engaged in gain-of-function research oversaw an investigation with Chinese authorities. They confirmed the predetermined conclusion that the virus likely had little to do with gain-of-function engineering. And they saw little proof it was birthed in a Wuhan virology lab. Yet scientific opinion, emerging evidence and basic logic have suggested the opposite.

    How can the government hector citizens that they have a moral duty -- and soon a legal obligation -- to be vaccinated when it does not mandate vaccinations for unvetted refugees flying in from Afghanistan?

    How can the government medical community remain largely silent when an anticipated 2 million foreign nationals will cross into the United States in the current fiscal year -- almost none of whom are vaccinated or tested for COVID-19?

    Why do the media and government blame particular races for the delta variant outbreak on grounds that they were insufficiently vaccinated?

    Why wouldn't officials simply urge the Latino and Black communities to be vaccinated as quickly as possible?

    Data shows that both groups have lower vaccination rates than white and Asian populations.

    Are woke political agendas discrediting science and losing public health?

    We saw just that in June 2020, when more than 1,200 "health care professionals" signed a petition demanding exemptions from lockdowns and quarantines for Black Lives Matter protesters marching en masse. And they concocted medical excuses such as "vital to the national public health" to insist that violating quarantines was less unhealthy than not pouring into the streets.

    Why did presidential candidate Joe Biden and his running mate, Kamala Harris, warn the American people on the eve of vaccination rollouts that an inoculation under the Trump administration could be unsafe, thereby undermining confidence in vaccines?

    Why was the medical community largely silent about such dangerous sabotaging of new vaccines, but months later became vociferous in warning the public that any doubts about the safety of these Operation Warp Speed vaccinations were scientifically misplaced? Was there a medical breakthrough on Jan. 20, 2020, to alter their consensus?

    From rewarding wokeness in medical school admissions to the peer reviewing of scientific papers, the anti-scientific mania has polluted scientific endeavors.

    "Critical race theory" would preposterously tell us that we need racism to fight racism.

    "Critical legal theory" ludicrously claims that laws have no rational basis but simply reflect power inequities.

    "Modern monetary theory" defies millennia of evidence and basic logic in stating that governments can simply print money without worrying about balancing expenditures with revenues or inflating the currency to ruination.

    Corporations are now asked to substitute a new woke agenda theory -- "Environmental, Social and Corporate Governance (ESG)" -- in lieu of market realities, rules of investment and economic data.

    Science is dying; superstition disguised as morality is returning. And we'll all soon become poorer, angrier and more divided.

    Tyler Durden Fri, 09/17/2021 - 22:20
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