Created in 1913 with the enactment of the Federal Reserve Act, the Federal Reserve (the Fed) is the central banking system of the U.S. The Fed functions as the bank of the U.S. government, overseeing the nation’s financial institutions. As the central bank, the Fed safeguards and manages the U.S. economy and its money supply with its economic and monetary policies, which makes it a very powerful global player. Ben Bernanke is the current chairman of the Federal Reserve.
Last week, at the end of its regularly scheduled meeting, the Federal Reserve said:
1) It would continue to reduce the amount of money it creates each month. The Fed said it will be out of the money printing business by the end of this year. By that time, the Federal Reserve will have created more than $4.0 trillion new American dollars (out of thin air).
2) And when the Treasuries and mortgage-backed securities the Fed has bought mature, they will roll them over—which means they will just continue collecting interest on the securities they bought as opposed to taking the cash when they mature. (Source: “Press Release,” Federal Reserve, September 17, 2014.) I doubt the Fed has any choice on this. If the Fed doesn’t roll over the Treasuries it has bought, who would buy them when they hit the market?
The Federal Reserve also provided its economic projection on where it expects the federal funds rate, the key U.S. interest rate, to be down the road:
1) The central bank believes the U.S. economy will grow between two percent and 2.2% in 2014, then grow in the range of 2.6% to three percent in 2015. From there, it goes downhill. In 2016, the Federal Reserve projects more of the same—U.S. economic growth of between 2.6% and 2.9%. In 2017, the U.S. growth rate is projected to be sluggish and in the range of 2.3% to 2.5%. (Source: “Economic Projections,” Federal Reserve, September 17, 2014.) Hence, we are looking at four more years of slow growth.
2) A majority of the members of the Federal … Read More
According to the Investment Company Institute, investors have been taking money out of U.S. equity funds since April of this year.
Between April and July of 2014, investors pulled $32.0 billion from long-term stock market mutual funds that invest in U.S. stocks. While August’s monthly figures are not available, looking at weekly data, it appears investors ran away from the stock market in August as well. (Source: Investment Company Institute web site, last accessed September 16, 2014.)
How does a stock market rise when investors are selling? Well, there is a bigger anomaly in the stock market you need to be aware of.
Another indicator is suggesting investors are scared about the stock market. The yields on long-term U.S. bonds have been declining since March despite the Federal Reserve’s prediction that interest rates are to rise sharply next year and in 2016.
Chart courtesy of www.StockCharts.com
As the chart above shows, yields on long-term U.S. bonds continue to go lower. Again, this is on the backdrop of the Fed getting out of the money printing business (and warning investors that interest rates are going to rise).
U.S. bonds have historically gone down when the Fed has told us interest rates are going to rise. But the fear of higher rates (and lower bond prices) is overwhelmed by the strong demand for U.S. bonds, as scared stock market investors jump into U.S. bonds—where they believe their money will be safe.
There are definite cracks starting to show in the stock market. While we hear and read about the main indices moving higher, there are fewer and fewer companies reaching new price … Read More
Getting a sense of where stocks are going to go in the year ahead is always difficult with the major indices at their all-time highs.
The fundamental backdrop is still very favorable for equities. While the Federal Reserve has put off raising interest rates for the near future, the cost of capital, especially for corporations, remains extremely low. And corporate balance sheets remain in excellent condition with strong cash positions and good prospects for rising dividends going forward.
The stock market recovered extremely well from the financial crisis and subsequent crash in 2008/2009. But it wasn’t until early 2013 that I saw the beginning of a new cycle for stocks, or a bull market as it were.
Until then, I viewed the market’s performance purely as a recovery period from the previous cycle, which was the technology bubble.
Many of the technology stocks have only now recovered to their previous highs set in 1999 and 2000. The recovery cycle took a long time to play out and the catalyst for its breakout was, not surprisingly, the Federal Reserve.
Stocks can move significantly higher in a rising interest rate environment, but only from a low base, which is what we have now. And within the context of a new market cycle or bull market, the economy can experience a full-blown recession and stocks can experience meaningful corrections.
The two most important catalysts for the equity market near-term are what corporations actually report about their businesses and the Federal Reserve’s actions.
The surprising weakness in oil prices should be evident in corporate financial results (especially in the fourth quarter). Old economy industries … Read More
A week ago today, the Bureau of Labor Statistics (BLS) released its jobs market report for the month of August. To say the very least, there was nothing in that report that says the labor market in the U.S. economy is back on its feet. In fact, the report painted a gruesome image of employment in this country.
In August, 142,000 jobs were added to the U.S. economy—the lowest monthly pace in 2014. And the jobs market numbers previously released for June and July were revised lower. (Source: Bureau of Labor Statistics, September 5, 2014.)
But this is just the tip of the iceberg.
Americans who have been out of work for more than six months continue to make up a significant portion of the total unemployed population—31.2% of all unemployed to be exact. Over the past few years, this number hasn’t really come down much.
What’s worse is that the labor force participation rate, that is the rate of those who are in the working-age population and are looking for work, stood at 62.8% in August. This is the lowest rate of labor force participation in the U.S. economy seen since the late 1970s! (Source: Federal Reserve Bank of St. Louis web site, last accessed September 5, 2014.)
Adding to the misery, and as I have reported many times in these pages, we are seeing more part-time jobs created than ever and job creation remains concentrated in the low-wage-paying sectors, like service and retail.
There’s another problem that doesn’t get much attention. Incomes in the U.S. economy are falling. According to a report by the Federal Reserve, median household … Read More
A 1962 Ferrari 250 GTO Berlinetta has set a new record selling for $38.1 million at an auction in Pebble Beach, California. News of the sale was all over the Internet and made it into major newspapers like The New York Times, The Wall Street Journal, and the Los Angeles Times.
But it’s not just old, rare cars that are selling. The high-end luxury car market is also booming. For example, Maserati sold 6,573 cars this past July, compared to only 1,536 cars a year ago. (Source: Motor Intelligence web site, last accessed September 2, 2014.)
The markets for high-end real estate and high-end fashion goods are hot in the U.S. economy, too.
The mainstream is looking at the boom in various luxury markets and calling it economic growth. Truth be told, only a very small fraction of Americans can afford to live a lavish lifestyle and buy expensive cars, homes, and other gadgets.
The other side of the story—the story of the 99%-plus—usually goes untold.
What follows below is a picture (I personally took) of a sign posted in every grocery store I went into in a prominent town very close to New York City. The picture not only shows how the average American is struggling, but it also puts a big dent in the theory of economic growth in the U.S. economy.
Americans are using food stamps and other government assistance programs like never before. The truth is that if the U.S. economy was witnessing economic growth, we wouldn’t have 46.25 million Americans and 22.5 million households using food stamps in the U.S. economy…. Read More
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