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Bonds & Interest Rates

Is Inflation an issue or did the Fed Mess Up?

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Posted by Sol Palha - Tactical Investor

on Tuesday, 08 August 2017 07:49

26-1427341963-inflation-deflationBankers know that history is inflationary and that money is the last thing a wise man will hoard.

William J. Durant

The Fed has been trying to create the illusion that inflation is an issue. The guys from the hard money camp also maintain that inflation is an issue and to a point they are right. Their definition of inflation is an increase in the money supply. The Fed, on the other hand, defines inflation as an increase in prices. The real definition of inflation is an increase in the money supply; rising prices are just the symptom of the disease. This article from mises.org summarises this concept quite succulently

Inflation, therefore, means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.

The holder of un-backed receipts can now engage in an exchange of nothing for something. As a result of the increase in the amount of receipts (inflation of receipts) we now also have a general increase in prices.

We are not going to spend time dwelling on this point as the crowd has bought the line the Fed has sold them and so the above point is moot. This article will focus on the price factor and not money Supply factor.

In numerous articles published over the last twenty months, we stated that Fed would be playing with fire if they raised interest rates as this economic recovery is based on “hot money”. We went on to state that if they raised rates, it would be a temporary ploy to buy them more wiggle room. Yellen recently confirmed that the Fed’s Hawkish bias might be coming to an end. She acknowledged that Inflation was below the Central bank’s target of 2%

Yellen, as she has in other statements recently, told lawmakers that she expects low inflation to be transitory. "Temporary factors appear to be at work. It's premature to reach the judgment that we're not on the path to 2% inflation over the next couple of years,” Yellen said. "As we indicate in our statement, it's something we're watching very closely, considering risks around the inflation outlook.” Full Story

Based on the factors we are going to list below, Yellen, might have to wait a very long time before inflation hits the Fed’s target rate of 2%. All we need to do is look at Japan; they have been trying to generate inflationary forces for decades without any success. They continue to inject billions into the economy hoping for change, but inflation remains stubbornly low. Our economic recovery is not real; remove the easy supply of money, and the economy will collapse.

Former Bond King Bill Gross seems to concur:



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Bonds & Interest Rates

Raising the Debt Ceiling Means Jacking Up Future Inflation

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Posted by Stefan Gleason

on Thursday, 03 August 2017 06:38

lying-politicianThe dramatic failure of the U.S. Senate’s last-ditch Obamacare repeal effort leaves Republicans so far without a major legislative win since Donald Trump took office. No healthcare reform. No tax reform. No monetary reform. No budgetary reform.

The more things change in Washington... the more they stay the same.

Despite an unconventional outsider in the White House, it’s business as usual for entrenched incumbents of both parties. The next major order of business for the bipartisan establishment is to raise the debt ceiling above $20 trillion.

Since March, the Treasury Department has been relying on “extraordinary measures” to pay the government’s bills without breaching the statutory debt limit.

By October, according to Treasury officials, the government could begin defaulting on debt if Congress doesn’t approve additional borrowing authority.

Treasury Secretary Steven Mnuchin wants Congress to pass a “clean” debt limit increase. That would entail just signing off on more debt without putting any restraints whatsoever on government spending.

Fiscal conservatives hope to tie the debt ceiling hike to at least some budgetary reforms. But even relatively minor spending concessions will be difficult to obtain from the bipartisan establishment.

Democrats and a few left-leaning Republicans together have an effective majority in the U.S. Senate. They wielded their legislative might by defeating the GOP’s watered down Obamacare repeal bill, with the decisive “no” vote cast by ailing Republican John McCain.

It was exactly the sort of media spotlight moment Senator McCain has craved throughout his long political career.

The narcissistic Senator’s shtick is to posture as a selfless crusader for noble causes that his fellow Republicans just aren’t high-minded enough to get behind.

Yet for all his sanctimony, McCain is just as politically opportunistic and just as hypocritical as many of his Senate colleagues. The Senator from Arizona ran for re-election last time around on repealiång Obamacare. Yet when given the opportunity, he voted to keep it in place.

He campaigns as a conservative when it suits his political needs and portrays himself as a maverick when he wants media accolades. He legislates as neither a conservative nor a maverick but as an entrenched establishment incumbent. That can also be said of other big-name Republicans.

Trump’s Budget Cut Proposals Declared “Dead on Arrival” by Spending-Drunk Congress



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Bonds & Interest Rates

Thoughts on FOMC Day

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Posted by Gary Tanashian via NFTRH

on Wednesday, 26 July 2017 08:20

It is FOMC day, a periodic ritual where a group of economists get together and pretend to have decisions to make about interest rate policy. Well, according to CME and the Fed Funds Futures there is a 97% chance that the Fed sits on its hands today. That won't be a surprise.

8514e8d7-268e-4f67-b89d-a7b825537d13

But Janet Yellen has a little problem and his name is Uncle Buck. The US dollar index and its pairing vs. several global currencies are on the verge of collapsing below important support levels. This update on currencies from this week's NFTRH 457 explains why I am short the euro and prepared for the USD to find support and bounce. Now, at this point that is just a contrarian's fantasy because the market says USD is in trouble. But have a look at the post and see if you might agree with some of its premises, especially where sentiment and Commitments of Traders are concerned.

So here we have the Fed, overseeing a massive bull market in stocks and ostensibly in accommodation removal mode. My premise since the election of Donald Trump has been that the Fed could now slowly and routinely remove the monetary policy stimulants it had injected into markets nearly non-stop during the Obama years because that admin's goals depended on monetary policy (i.e. monetary stimulation, because there sure was precious little real economic stimulation going on) whereas the new Republican policies would depend upon fiscal stimulation. I would argue, however, that "fiscal stimulation" may be code for 'dollar devaluation' to spur exports and boost manufacturing.

So a big question now is whether the Fed, despite its slow tightening regime and stated intention to implement future rate hikes and reduce the size of its balance sheet (USD-supportive actions) actually means business, leaving the Trump admin to its fiscal policies; or whether the Fed will 'play ball' with this admin in a different way.

Core to the Trump fiscal agenda would be a weak US dollar. We just may get a look at Yellen's cards today. If FOMC rolls over and keeps things well and dovish despite the weak USD, we'd have a clue that they are on board the weak dollar express. But what if the Fed chooses to support the dollar through some subtle jawboning about future hikes and balance sheet reductions? I have no real dog in this fight. I'm just trying to make sure NFTRH is on the right side of it.

Looking at it from a different angle and taking out the political while only considering market-oriented inputs, here is a big picture look at previous Fed tightening cycles. The stock market topped on the last two occasions that the Fed Funds Rate (FFR) caught up to and slightly exceeded the 2 year Treasury yield. But a more acute signal was when the 2yr began to decline and negatively diverge the FFR (note the red lines on the chart below).



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Bonds & Interest Rates

Something Big, Bad And Ugly Is Taking Place In The U.S. Retirement Market

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Posted by Steve St. Angelo - SRSrocco Report

on Wednesday, 26 July 2017 07:32

While the highly inflated value of the U.S. Retirement Market reached a new high this year, something is seriously wrong when we look behind the scenes.  Of course, Americans have no idea that the U.S. Retirement Market is only a few steps from falling off the cliff, because their eyes are focused on the shiny spinning roulette wheel called the Wall Street Stock Market.

Yes, everyone continues to place their bets, hoping and praying that they will win it big, so they can retire in style.  Unfortunately, American gamblers at the casino have no idea that the HOUSE is out of money.  The only thing remaining in their backroom vaults is a small stash of cash and a bunch of IOU’s and debts.

According to the ICI – Investment Company Institute, the U.S. Retirement Market hit a new record $26.1 trillion in the first quarter of 2017:

Q1-2017-US-Retirement-Market



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Bonds & Interest Rates

The Fed May Show Trump No Love

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Posted by Peter Schiff - Euro Pacific Capital

on Friday, 21 July 2017 07:03

Peter SchiffTypically, U.S. Presidents are wary of claiming stock market performance as a referendum on their success. Most have seemed to understand that taking credit also means accepting blame, and no one would want to make the tortured argument that the positive moves reflect well on their presidency but that the negative moves do not. But Donald Trump has shown no reluctance to make any argument that suits his political purpose of the day, no matter its absurdity, and no matter if he has to contradict the arguments he made last year, or last week. Perhaps he assumes, as most investors seem to, that the risks are minimal because the Federal Reserve will jump in to save the markets if things turn bad. But in binding his performance so closely to the markets he overlooks the possibility that the Fed will be far less charitable to him than it was to Obama.

The Federal Reserve's Quantitative Easing program, which lasted from the end of 2008 to October 2014, was specifically intended to push up asset prices by lowering long-term interest rates and reducing financial risk. This provides a good explanation why the stock market gained nearly 200% from the bottom in March 2009 to October 2014 despite the fact that the U.S. economy persistently performed below expectations during that time.

Many people, myself included, argued that once the stimulus was removed stock prices would have to fall. Two and a half years later that has yet to occur. Although U.S. stocks are no longer rocketing upwards like they were during the QE era (the S&P 500 is up just 19% since the program wound down completely in November 2014), they have yet to experience any type of meaningful correction. Certainly market observers sense danger, but with the Federal Reserve cavalry always ready to ride to the rescue (as they did in January of 2016), markets have been free to drift upward.



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