Our 26th president, Theodore Roosevelt, famously adopted that foreign policy approach at the dawn of the 20th century. The general idea? America should try to negotiate solutions to the world’s problems peacefully … but simultaneously maintain a strong military and make clear it would be used if necessary.
But today’s monetary policymakers are doing the exact opposite. They’re talking loudly and carrying no stick. They’re grabbing microphones at every opportunity to share their views on the economy and interest rates. But their opinions are so wildly divergent that nobody can figure out what they really think – and they’ve cried “Wolf!” so many times that many investors are convinced they’ll never wield the rate hike “stick” again.
Yesterday, it was Federal Reserve Vice Chairman Stanley Fischer’s turn at the podium. He told an audience in Aspen, Colorado, that “we are close to our targets” on growth, and that inflation was “within hailing distance” of the Fed’s 2% target. But he also lamented the economy’s lousy productivity and talked about longer-term challenges.
So the dollar bounce and the bond selloff that initially followed Fischer’s comments in overseas trading didn’t hold. That’s almost exactly what we saw after New York Fed President Bill Dudley’s comments last week, which ostensibly had a slightly hawkish bent.
|Fed Chairman Janet Yellen will grab the microphone on Friday at 10 a.m.|
Of course, all of these Fed comments are just a warm-up for 10 a.m. on Friday. That’s when Chairman Janet Yellen grabs the microphone in Jackson Hole, Wyoming, at the Kansas City Fed’s annual symposium. Since she’s at the top of the Fed hierarchy, her words carry the most weight of all.
But what I find interesting is all the “think piece”-style speeches and articles coming out in advance of the gathering. This one today from the Wall Street Journal‘s “Fed Whisperer” Jon Hilsenrath is a prime example, as is this other article from the Financial Times.
The general theme that runs through all of them? Growth is never going to get back to where it was in, say, the 1990s … that rates will therefore have to remain lower than they otherwise would be for a much longer period of time … and that mad monetary experimentation is going to be the rule, not the exception, as a result.
That doesn’t seem like the kind of thing we’d be reading and hearing about if the Fed was about to embark on a serious tightening cycle, or if policymakers really believed the economy was in solid shape. So anyone waiting for the Fed to pull out its big stick – and to simultaneously stop speaking loudly – is likely to be disappointed.
That’s my take, anyway. What’s yours? Should the Fed just stop talking and start hiking? Will it do so? Does any of that impact your investment approach? Or do you think trends in the real economy and the markets themselves are going to overwhelm all the Fed speak? Let me know in the comment section here at the website.
Until next time,
Distortions, distortions everywhere, and not a drop of reasonably priced assets to drink … er … buy? That seems to be the situation we find ourselves in as investors.
Reader Donald L. said: “I could not agree more with your take on the Fed and the horrible distortions in interest rates. Insurance companies, retirees, pension plans, and a host of others have suffered and in many cases, the full price has yet to be paid.
“Not only is the Fed raising in small increments, it is doing it slowly to increase, not ameliorate, the pain. One would almost think these actions are deliberately designed to cover bad fiscal policy. This will not end well.”
Reader Gordon added: “As someone now 78 years old and having lived many years and looking back, I must say we have lost our way in this world – mostly morally. I agree with the gentleman who said that in his 40 years of investing, he has never seen the investment world so upside down. It’s like a three-ring circus with the Fed as its ringmaster.
“Sadly by now people should see through the Fed, but they have not. Investors still make investment decisions based on Fed speak and spin. They are being disingenuous to investors and financial markets. They keep acting like the Gods on Mount Olympus, but in essence they are emperors with no clothes laid bare for all the world to see.”
But will things change anytime soon? Reader Ian is skeptical: “Yes, they’re stupid interest rates. But surely they can’t afford to raise them. That’s the mess we are in with fiat money, plus the bubbles are everywhere.”
Reader Lorne D. added: “The S&P 500 companies aren’t concerned because they always benefit from federal actions, whether through taxing, regulating, and punishing mom-and-pops out of competition, or by taxpayer bailouts – otherwise known as privatizing gains and socializing losses.
“The vast majority of individuals responsible for past insider transgressions went unpunished before. Obviously, they do not fear prosecution in this coming round, either. Someone needs to be made to pay, but the feds always sell out the little guy to save the Big Fish and Fat Cats!”
Thanks for taking some time out to share your thoughts. My belief is that the Fed won’t voluntarily end this state of affairs. The market will force its hand. The interest-rate market tremors I wrote about recently suggest that process may be getting underway, but only time will tell. Anything else you want to add? Then make sure you take advantage of the comments section.
Drugmaker Pfizer (PFE) is buying the California biotechnology firm Medivation (MDVN) for $14 billion, or $81.50 per share. The move will add Medivation’s prostate cancer treatment Xtandi and an experimental drug Talazoparib to Pfizer’s product line.
Not only is the European Central Bank buying bonds in the secondary market. Now it’s acting as a direct investor in corporate bonds via so-called “private placements”. That’s when a company sells hundreds of millions of dollars to just a select handful of buyers with no public marketing, no public roadshow and little transparency. Just another in a long list of QE-driven market distortions.
The Rio Olympics are now in the history books, with last night’s ceremony bringing the two-week Summer Games to a close. Brazil handed the metaphorical torch off to Japan, which is hosting the 2020 games in Tokyo. U.S. athletes ultimately brought home 121 medals, with China coming in second at 70 and Great Britain right behind with 67.
Do you think we’ll continue to see more health-care and drug-sector M&A? What do you think about the ECB going straight to corporations and buying their bonds? Did you watch the closing ceremony, and what was your impression of the overall Olympics? Share your thoughts in the comment section below.
And by the way, if you’re more interested in learning about the gold market than tracking the gold medal count, make sure you join me this October at the New Orleans Investment Conference. It’s one of the longest-running, most important gatherings focused on metals, mining shares, and the broad markets.
I’ll be speaking there, as will several other experts. It runs from October 26-29, and you can find out more by clicking here. You can also call 800-648-8411 for more details. Just be sure to mention that you’re calling as a Safe Money Report or Money and Markets reader.
Until next time,