Is This Federal Reserve President an Idiot or a Liar?
Is this Federal Reserve president an idiot or a liar?... The Fed's 'credibility' is crumbling... A new record in oil... Just days away from the next decline?...
On Monday, January 4 – just as U.S. stocks were beginning a six-week, 10%-plus decline – the following headline appeared on financial-news network CNBC: "Fed's Williams not too concerned over weak China data."
It was referring to San Francisco Federal Reserve President John Williams, who earlier that day said investors had little reason to worry about the slowdown in China.
Williams said China was seeing a normal slowdown as it moves from a manufacturing economy to a service economy, and that those developments were unlikely to "ricochet" to the U.S. economy, which he believed was "in very good shape."
This week, we noticed Williams was making headlines again, but with a slightly different stance: "Fed's Williams Sees 'Huge Impact' on U.S. From China, Brazil."
In this article, he was quoted as saying...
We have a domestic mandate... but that said, we understand that we're in a global economy so what happens in Brazil or China has a huge impact on the U.S. in terms of our inflation and employment goals.
As we've discussed, the Fed has been growing increasingly erratic. It has flip-flopped several times between "dovish" and "hawkish" statements. More and more folks – even those in the mainstream financial media – are beginning to question its credibility.
CNBC host Steve Liesman has long been known as one of the staunchest supporters of the Federal Reserve. But at the Fed's latest post-meeting press conference, Liesman asked Fed Chair Janet Yellen a question that would have been unthinkable in the past...
Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report. The tracking forecasts for GDP have returned to two percent. And yet the Fed stands pat while it's in a process of what it said at launch in December was a process of normalization.
So I have two questions about this. Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn't end up doing it?
And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?
Of course, Yellen's long response avoided answering either of those questions. But the point remains... it's incredible that the mainstream media even asked them.
Expect this trend to continue... and for the Fed to become increasingly desperate and erratic as it does.
Speaking of insane central bank policies, nowhere are the effects of these policies more obvious than the government-bond market...
Thanks to super-low (and in some cases, negative) interest rates and years of direct bond-buying through quantitative easing ("QE") programs, governments have been able to issue debt at record-low yields.
It has become normal to see 30-year government bonds yielding less than 3%... 10-year bonds yielding less than 1%... and shorter-term debt trading close to 0%. Many are yielding even less today...
German 30-year bonds (known as "bunds") are yielding just 0.83%. Ten-year bunds are yielding just 0.15%. And incredibly, Japanese 30-year government bonds are yielding just 0.53%, while 10-year bonds have a negative 0.04% yield. Yes... some folks are actually paying the Japanese government to hold its 10-year debt.
But yesterday, one European country made even those deals look reasonable by comparison...
Thanks to the European Central Bank's ("ECB") massive QE program, Ireland was able to issue its first-ever 100-year bond. Investors who bought the bond will receive an annual yield of 2.35% for their trouble. This is less than the 2.63% that 30-year U.S. Treasury bonds currently yield.
Regular readers know we're no fan of U.S. government debt, either. But this is truly insane... This is the same country that was on the verge of disaster less than five years ago, when its 10-year bonds were yielding nearly 12%.
Despite the ECB's massive easing programs, the same fundamental problems that led to the euro crisis remain. Does anyone really believe Ireland's debt is somehow less risky than U.S. Treasurys?
Buyer beware.
Another week, another new high in oil inventory...
According to the U.S. Energy Information Administration, crude-oil stockpiles rose again last week by 2.3 million barrels to 534.8 million barrels. That marks the seventh straight week stockpiles have set a new record high.
This latest record came alongside an 11-year high in seasonal refinery utilization... meaning more oil than usual was being refined into gasoline and other products. Without this, stockpiles likely would have increased even more.
Meanwhile, despite lots of talk from OPEC members about freezing production, the latest estimates suggest OPEC production actually rose this month.
According to news service Reuters, OPEC output likely rose by 100,000 barrels per day ("bpd") in March to 32.47 million bpd. And OPEC member Iran is expected to add at least another 500,000 bpd over the next year.
We remain skeptical of the "recovery" in crude oil.
As regular Digest readers know, Stansberry Short Report editor Jeff Clark doesn't think a bear market is approaching... He thinks it has already begun.
And after telling Stansberry Short Report subscribers to expect an oversold rally in mid-February, Jeff is seeing several "warning signs" that another round of selling is likely to begin soon.
Today, he shared one more reason for concern. Jeff says the market's "fear gauge" just hit an important extreme. As he explained in today's edition of our free Growth Stock Wire e-letter...
[This week] the Volatility Index ("VIX"), widely viewed as Wall Street's "fear gauge," dropped to its lowest level so far this year. At just over 13, the VIX is down 50% from where it was trading in early February. But here's the thing about fear: It's cyclical.
The VIX cycles back and forth between low and high levels. The trick, of course, is knowing how to recognize when one cycle is ending and another one is beginning.
Look at this one-year chart of the VIX plotted along with its Bollinger Bands...
As Jeff explained, the blue arrows mark times when investors are unusually fearful, and tend to lead to lower volatility. Red arrows mark times when investors are complacent, and usually lead to more volatility and fear. And as you can see in the chart, the latest red arrow appeared this week...
The VIX closed right on its lower Bollinger Band this past Monday. That's a good sign that we're nearing the end of a "declining fear" cycle. Despite the VIX continuing even lower on Tuesday and Wednesday, a reversal is near.
And as we've seen so many times before, a rising VIX usually accompanies a falling stock market.
These signals don't always lead to immediate reversals in the market, but there are other reasons to believe a correction could be coming sooner rather than later...
As of Wednesday's close, the benchmark S&P 500 had closed up for three days straight.
This isn't rare... According to Dave Lutz, macro strategist at financial-services firm JonesTrading, it has occurred 20 times since January 2015. But you may be interested to learn that 18 of those 20 times, stocks closed lower than those levels within five days.
Meanwhile, Lutz notes the Daily Sentiment Index – a reliable measure of short-term market sentiment – has soared to 83% bullish for the S&P 500... an extreme level that often precedes a market decline.
In other words, several intermediate- and short-term bearish indicators are now aligning, suggesting the market decline Jeff has been expecting could be just days away.
We'll end today with a reminder...
For the past several days, Jeff has been offering Stansberry readers an incredible discount on his Stansberry Short Report service. But that offer ends tonight at midnight.
If you've ever considered the Stansberry Short Report – which includes exclusive access to Jeff's real-time Direct Line service – there has never been a better time to try it. Click here before midnight Eastern time to learn more.
New 52-week highs (as of 3/30/16): Ciner Resources (CINR), Coca-Cola (KO), McDonald's (MCD), Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Premium Income Municipal Fund 2 (NPM), Travelers (TRV), and Wells Fargo – Series W (WFC-PW).
Another light day in the mailbag. What can we do for you? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
March 31, 2016
Baltimore, Maryland
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