Rosengren opens mouth, tanks stocks, clobbers commodities

Boston Fed President Eric Rosengren, former interest rate dove, says interest rates should go up as low rates could overheat the U.S. economy. Really? THIS economy?

Wile E Coyote is back again, telling us which way stocks are going this morning. (Warner Bros. character, mod by the author)

WASHINGTON, September 9, 2016 – The Fed’s Tower of Babble still lives. In a speech Friday morning, Boston Federal Reserve President Eric Rosengren, formerly an interest rate dove, claimed the Fed might be forced to raise interest rates because current interest rate levels might encourage inflation in the U.S. economy. Really? If there’s any inflation around the corner, the Maven would like to know where it is.

Predictably, stocks and some commodities, notably oil and precious metals, took a Wile E. Coyote header on the news, with the Dow dropping a quick hundred points, trying briefly to recover, then taking another sickening dive. As of 12:30 p.m. EDT Friday, the Dow is off 226 points and dropping further, a sickening one-day hit of negative 1.23 percent. And it could get worse, unless the bulls stage what Dave Fry likes to call the 2:30 p.m. “Buy Program Express.” We won’t predict today’s close because there’s no way to do it when stuff like this happens.

Significantly, the loose-lipped Rosengren is also a current member of the Fed’s Open Market Committee (FOMC), the central bank cadre that actually makes the decision on interest rates. After years and years of indecisive backing and filling and verbal gobbledygook, however, given its zero level of effectiveness, we think this outfit should be renamed the Federal Open Mouth Committee (also FOMC, no stationary change) for its members’ habit of opening their yaps at least once a week and freaking the stock market out over absolutely nothing.

The market pretty much knows that interest rates will probably have to go up a bit more this year. Maybe. Given that the government’s generally followed measures of inflation remain at or near the flatline, however, it might be nice to see at least a blip of inflation on the radar before those rates actually get jacked up.

Making Rosengren’s observations even more absurd, we’ve learned over the past couple of days that grocery stores and supermarkets—companies that profit on the most miniscule markups imaginable due to cutthroat competition—are struggling with commodity (food, in this case) DEflation and are scrambling to even make their bottom lines this quarter. How does that justify a September rate hike, which is what Rosengren seems to be implying.

We’ve been saying again and again since roughly 2010 that the Fed’s endless helicopter drops of cash will never be an effective catalyst for some much-needed inflation for the simple reason that all this free moolah is going to banks, filthy rich oligarchs and major corporations which, in turn, are using it for stock buybacks while issuing bonds at historically low rates to lock in even more cash for… whenever.

Absolutely zero of these trillions of dollars are getting in the pockets of still financially hobbled consumers, those everyday Americans that are still mired in credit card and mortgage credit that remains financed at ridiculously high interest rates. Thus hobbled by debt, even 7 years now after the initial Great Recession crisis formally peaked, average Americans could use some fresh buying power—or at least much cheaper interest rates on that existing debt so they could pay it down more quickly.

But that ain’t gonna happen, because all that Federal Reserve printing press money is going to corporations that reinvest it in their own stock, propping their numbers up by reducing share count, thus continuing the illusion that their profits continue to grow. In normal times, they’d be investing in R&D to come up with new or better—or cheaper—products to gain a leg on the competition. Now, they’re just playing games with this free cash, which all goes to them rather than to the average citizen, where it’s needed most.

In other words, as for the “velocity of money”—the number of times it changes hands in an ever more robust economy—is virtually zero and there’s your problem. The Fed’s endless corporate and banking largess results only in useless paper profits and cheap accounting tricks. There’s no real growth in this economy, money doesn’t change hands very often, and inflation remains non-existent. Until and unless this stupid game stops and the consumer (and wage earner) gets a break like the bigwigs have, there will be no inflation and therefore no reason to raise interest rates.

Why the Fed wants to take us to fantasy land and raise interest rates as if inflation were already here is a prime example of just how badly both the government and the banking system are out of touch with the real world. If the people themselves had anything to spend, they’d spend it and break out of the home-prisons they’ve been huddling in for the past eight years of this feckless and outright evil administration. Raising interest rates as a way of pretending this is happening is probably the dumbest move yet. But then, that’s pretty much what we get from official Washington these days, isn’t it.

Trading diary

Pretty much zero to communicate today. We’ve scooped up half decent profits trading out gold and silver positions in one of our accounts, but we’re holding those positions in the larger account. This could go both ways.

If we’d had any clue Rosengren was going to kill an already iffy trading week, we’d have picked up a few hundred more shares of SDS the double-bearish S&P 500 ETF, which is up sharply today. But there’s no point in chasing it. We’d thought to pick more shares up during yesterday’s rally, but that opportunity is past, so we’ll consign it to our “Oh, well…” Department.

We picked up a small position in Occidental Petroleum (OXY) this morning almost on a whim. OXY has been selling off its non-productive baggage and has a good-sized stake in highly productive U.S. oilfields, plus paying a decent dividend. We’re instantly off this morning, as OXY continues to sink, post-purchase, along with the price of WTI crude today, which is now down over 1 percent due largely to Rosengren’s remarks. But, since WTI rallied a good 4 percent Thursday, that U.S. oil measure will still close nicely up on the week, so we may pick up more OXY if we can get even better prices today or early next week.

But this is about it. When markets get this nutty, it’s best to step back and watch while the fur flies as the big bulls and bears battle it out.

See you Monday.

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