The Fed Believes 'This Time Is Different'

The 'Draghi Asset Bubble' rolls on... The Fed believes 'this time is different'... Student-loan defaults are still surging... What legendary speculator Doug Casey is thinking now...

Don't expect higher rates in Europe anytime soon...

So said European Central Bank ("ECB") president Mario Draghi following the bank's latest policy meeting this morning.

The ECB left its two benchmark short-term rates unchanged for the 21st straight month, at negative 0.4% and 0%. And while it still intends to slow its quantitative easing ("QE") bond-buying program from 60 billion euros to 30 billion euros in January, Draghi was clear that "easy money" policies aren't going away.

He said QE will continue until September 2018 or "beyond"... and that interest rates will "remain at present levels for an extended period of time, and well past the horizon of [QE.]" He went on to say that "the news on inflation remains somewhat muted," and he noted again that the ECB won't hesitate to increase the "size and/or duration" of QE if necessary.

In short, the "Draghi Asset Bubble" rolls on...

Meanwhile, here in the U.S., the Federal Reserve continues to 'tighten'...

Yesterday, the Fed raised short-term interest rates for the third time this year. The bank's Federal Open Market Committee ("FOMC") voted 7-2 to raise rates another 0.25 percentage point to a range of 1.25%-1.50%.

The Fed has now raised rates five times – by a total of 1.25 percentage points – since it began tightening in December 2015, and expects three hikes next year. It also confirmed it would double the pace of "tapering" – essentially selling the trillions of dollars of bonds it bought during its QE programs – from $10 billion per month to $20 billion per month in January.

None of this was unexpected...

But current Fed Chair Janet Yellen did make some "interesting" comments in her post-meeting press conference. Among them was her response to concerns about the yield curve we've discussed in recent Digests. As Bloomberg reported...

Yellen isn't among those losing sleep over the flattening U.S. yield curve.

By just about every measure the curve is the flattest in a decade after a relentless one-way trade over the past few months, sparking warnings by some investors of an impending economic slowdown. The spread between short- and long-term Treasury yields has dropped below zero ahead of each of the past seven recessions.

In her last scheduled press conference as Fed chair, Yellen acknowledged the relationship between inversions and economic slowdowns, but offered some (cliché) advice to traders: "correlation is not causation."

Yellen pointed to something called "term premium," a component of long-term rates. This is simply how much more yield investors demand to hold a long-term bond rather than a series of short-term bonds.

Usually, term premium has been positive. To use a simple example, this means the yield to hold a 10-year U.S. Treasury note to maturity has usually been greater than the total yield you would earn to hold a one-year Treasury bill for 10 consecutive years.

But today, term premium is negative. And Yellen believes this – and not excessive Fed tightening – is to blame for the falling yield curve today. As she explained...

Now there is a strong correlation historically between yield curve inversions and recessions... But let me emphasize that correlation is not causation.

The yield curve is likely to be flatter than it's been in the past. When the yield curve has inverted historically, it meant that short-term rates were well above average expected short rates over the longer run.

Typically, that means that monetary policy is restrictive, sometimes quite restrictive. [But now] it could more easily invert if the Fed were to even move to a slightly restrictive policy stance.

I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed.

In other words, Yellen believes "this time is different."

According to Yellen, a flattening yield curve isn't a sign that the economy is too weak to survive without the Fed's easy-money "life support." This time, she says, it's just a meaningless consequence of unusually low long-term rates.

History suggests she may regret those words.

But that wasn't her only eyebrow-raising comment yesterday...

As regular readers know, Yellen is set to leave the Fed in February when her term ends. And when asked to grade her time at the Fed, she included another gem. More from Bloomberg (emphasis added)...

"Look, at the moment, the U.S. economy is performing well," Yellen said. "The growth that we are seeing, it's not based on, for example, an unsustainable buildup of debt, as we had in the run-up to the financial crisis."

We presume she said that with a straight face.

Speaking of unsustainable debt...

More and more Americans are falling hopelessly behind on their student loans. According to the latest data from the U.S. Department of Education, a record 4.6 million borrowers are now in default – defined as having missed at least 12 months of payments – on federal loans.

This is double what it was just four years ago, and now represents 22% of all borrowers. Worse yet, that figure doesn't include the millions more who are delinquent but not yet in default.

As we've discussed, this is occurring despite a growing economy... record-low interest rates... and unemployment at 17-year lows. What will happen when the next recession inevitably arrives?

We can't say for certain... But we know it won't be good for the country, the economy, or your hard-earned savings. As we wrote in the October 27 Digest...

A huge number of Americans have borrowed more money than they can ever dream of repaying. They have little of value to show for it. They have no way out. And they have no hope that things will get better.

So what you're seeing on the news is just the tip of the iceberg... Tens of millions of angry Americans increasingly feel they have nothing to lose...

The likely "end game" is clear... Sooner or later, the U.S. government will have no choice but to appease these folks. They will wipe out these debts and redistribute trillions of dollars in the process.

One last note before we sign off today...

Regular readers know the resource sector is historically cheap compared with stocks today. If the past is any guide, commodities are likely to be among the few big winners when the long bull market in stocks finally ends.

If you're looking for the best investments and speculations in the resource sector, we urge you to join our colleagues at Casey Research tonight.

Our friend and legendary speculator Doug Casey is hosting a FREE "masterclass" where he'll be sharing the four critical secrets behind his most successful speculations... the No. 1 trend he's personally investing more than $2 million in today... and a surprising corner of the resource market that he believes is on the verge of a massive bull market.

This event kicks off tonight at 8 p.m. Eastern time. Click here to tune in.

New 52-week highs (as of 12/13/17): AbbVie (ABBV), Altius Minerals (ALS.TO), Boeing (BA), First Trust Nasdaq Cybersecurity Fund (CIBR), Cisco Systems (CSCO), iShares MSCI Japan Fund (EWJ), iShares MSCI Singapore Capped Fund (EWS), Grubhub (GRUB), iShares Transportation Average Fund (IYT), McDonald's (MCD), Potash Corporation of Saskatchewan (POT), ProShares Ultra Health Care Fund (RXL), Steel Dynamics (STLD), and short position in Duluth (DLTH).

In today's mailbag, we clear up some confusion about bitcoin and fractions. How can we help you? Let us know at feedback@stansberryresearch.com.

"Regarding [Wednesday's] Digest, [you wrote:] 'We all know that those tickets will likely be worthless after the lottery drawing. Even before the drawing, when those tickets have some value because they have some (infinitesimal) chance of paying off... if someone offered you double the price you should take it... If nothing else, you can go buy twice as many lottery tickets. (That would up your chances from one in 292 million to one in 146 million. How could you lose?)'

"Actually, this wouldn't change your odds to one in 146 million. It would change your odds to 2 in 292 million. Big difference." – Paid-up subscriber Chris C.

Brill comment: We hate to break it to you, Chris, but it looks like your calculator is broken. What do you get when you divide 292 by 2?

"Good luck waiting for mom and pop to start buying bitcoin. From what we read in your publications, there aren't too many moms and pops that can afford to shell out $17K." – Paid-up subscriber Luis A.

Brill comment: You're right, we doubt most folks could afford to buy an entire bitcoin at $17,000 each. But they don't have to: Bitcoin trades in fractional quantities of as little as 0.00000001, representing a price of just $0.00017 at today's prices.

Regards,

Justin Brill
Baltimore, Maryland
December 14, 2017