Previous post Next post

Janet Yellen’s $200-Trillion Debt Problem

Summary

More than $10 trillion of government bonds now trade at negative yields. And another $10 trillion or so worth of U.S. stocks trade well above their long-term average valuations.

And there’s more than $200 trillion of debt in the world. All of this sits on the Fed’s financial applecart. Does Janet Yellen dare upset it?

Blame “Brexit”

BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.

“Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened shortly before Sweden’s euro referendum (a prominent pro-euro politician was killed by a “lone nut” a few days ahead of the vote), and Sweden still had the krona last we looked…

“Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened shortly before Sweden’s euro referendum (a prominent pro-euro politician was killed by a “lone nut” a few days ahead of the vote), and Sweden still had the krona last we looked… – click to enlarge.

More than $10 trillion of government bonds now trade at negative yields. And another $10 trillion or so worth of U.S. stocks trade well above their long-term average valuations. And there’s more than $200 trillion of debt in the world. All of this sits on the Fed’s financial applecart. Does Janet Yellen dare upset it? - Click to enlarge

“Brexit panic may be your big chance to buy the S&P 500,” says a headline at Marketwatch. The article claims investors have pushed down the value of the S&P 500 in fear of a so-called “Brexit.”

Next Thursday, in a national referendum, British voters will decide whether to end Britain’s 43-year membership in the European Union. But there are a number of problems with this…

First, there has been no big rout in the S&P 500; it’s only slightly below its all-time high. Second, Brexit is a mystery to most U.S. investors, not a cause for alarm. Third, nobody knows which side will win – or what it will mean.

Would a Brexit be good for Britain? Would it be bad for stocks? Nobody knows! Meanwhile, the Financial Times focuses on “slowing job growth and risk of Brexit…”

It notes that a possible Brexit next week is one reason Fed chief Janet Yellen cited for holding off on raising U.S. interest rates at this week’s monetary policy meeting. The newspaper also notes that the Fed has left “the door open” to rate increases.

We’ve been saying the same thing for years: The Fed will NEVER follow through on its pledge to return interest rates back to “normal.” Never is a long time; but so far, so good. The door is still nailed shut.

The “rate hike cycle” has even become a topic for cartoons these days, a sure sign that the idea is in deep trouble… Cartoon by Bob Rich

More than $10 trillion of government bonds now trade at negative yields. And another $10 trillion or so worth of U.S. stocks trade well above their long-term average valuations. And there’s more than $200 trillion of debt in the world. All of this sits on the Fed’s financial applecart. Does Janet Yellen dare upset it? - Click to enlarge

On Edge

First, the Fed waited until last December to pry open a single quarter-point rate increase. That took the federal funds rate – the base lending rate of the entire economy – to all of 0.25 – 0.5%.

When that set the world’s nerves on edge, the Fed did as we warned it would: It put away the crowbar… procrastinated… hesitated… mumbled… and dragged its feet.

Every month brought a new meeting of the Fed’s monetary policy committee… and each meeting brought forth an effluent rich in waffle and hocus-pocus.

The Fed’s chief witch doctor, Janet Yellen, says the committee will make its decision based on the incoming data. The next move toward normalization of interest rates will be “data dependent,” she insists.

That idea is preposterous, too. These are markets we’re talking about; they go up and down. After so many years of a bull market on Wall Street, Mr. Market must be planning for a change. Stocks gotta go down sometime. Can the Fed raise rates in the face of falling stock prices? We don’t think so.

And with the annual rate U.S. GDP growth falling below 1% in the first three months of the year, a prudent investor should prepare for a little backsliding in the economy, too. Will the Fed cling to its “normalizing” program when a recession sets in? Nah.

Bear markets and recessions are facts of life. Because mistakes are facts of life. That’s why markets go up and down. People pay too much for stocks; they need to take a breather until their companies are worth what they paid for them.

Businesses invest too much… hire too many people… produce more than they can sell. Occasionally, they, too, need to slow down, work down their inventories,  lay off workers and prepare for the next growth spurt.

Fed economists studying “incoming data”. Cartoon by Bob Rich

More than $10 trillion of government bonds now trade at negative yields. And another $10 trillion or so worth of U.S. stocks trade well above their long-term average valuations. And there’s more than $200 trillion of debt in the world. All of this sits on the Fed’s financial applecart. Does Janet Yellen dare upset it? - Click to enlarge

Upsetting the Applecart

There is no magic to this, nothing new to these patterns. Yet investors are surprised every time! The headline news is still relatively good – positive GDP growth, high stock prices, and presidential candidates who will “Make America Great Again.” What more could we want?

And yet, even with these benign conditions, the Yellen Fed is fearful. It won’t take a chance. It won’t make a move. The door is not open; it’s closed. Of course, the Fed knows that the headlines mask the real weaknesses in the economy.

Industrial production has been falling for nine months in a row. Factory orders have been going down for the past 18 months. Commercial bankruptcies are rising. And tax receipts are beginning to fall, as they typically do before a recession.

More than $10 trillion of government bonds now trade at negative yields. And another $10 trillion or so worth of U.S. stocks trade well above their long-term average valuations.

And there’s more than $200 trillion of debt in the world – with about $60 trillion added since the global financial crisis. All of this sits on the Fed’s financial applecart. Does Janet Yellen dare upset it?

Nah. It will have to upset itself.

US manufacturing sector: bad juju. The manufacturing sector produces the bulk of the US economy’s gross output. In other words, contrary to widespread myth, it is not the least, but the most important sector of the economy! – click to enlarge.

More than $10 trillion of government bonds now trade at negative yields. And another $10 trillion or so worth of U.S. stocks trade well above their long-term average valuations. And there’s more than $200 trillion of debt in the world. All of this sits on the Fed’s financial applecart. Does Janet Yellen dare upset it? - Click to enlarge

 

 

 

Charts by: StockCharts, St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners.

Full story here
Bill Bonner
Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.
Previous post See more for 6b.) Acting Man Next post
Tags: ,,,

Permanent link to this article: https://snbchf.com/2016/06/bonner-janet-yellen-200-trillion-debt/

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This site uses Akismet to reduce spam. Learn how your comment data is processed.