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Remember TV personality Jim Cramer’s famous rant about the Federal Reserve? The one in August 2007 where he lost it on air, saying about the Fed that: “They’re nuts! They know nothing!”
Well, guess what? If I were on television today, I would do the exact same thing — but for a completely different reason. This time, the Fed is nuts for not RAISING rates, rather than not cutting them!
Why? Forget everything else you have read or heard on TV, on the Internet or anywhere else, and just look at this chart. It shows the price of Eurodollar futures (the amber line), charted against initial jobless claims filings (the white one):
Not familiar with Eurodollar futures? Don’t worry. They’re simply a financial instrument that tracks expectations about the future direction of short-term interest rates.
When investors start to believe the Fed will have to raise interest rates, they sell Eurodollars, causing their price to fall. And since rates move in the opposite direction of prices, short-term yields surge when Eurodollars decline.
Now look at this chart closely and you’ll see that in the late 1990s, jobless claims fell as the economy picked up. Eurodollar prices plunged as investors priced in the Fed hikes that accompanied that improvement.
“I’m talking about a sharp break in Eurodollar futures prices, and a sharp rise in interest rates.”
Then in the mid-2000s, the exact same thing happened. Jobless claims fell, the economy improved, and Eurodollar futures plunged as the Fed hiked rates.
That brings us to today. We just learned today that initial jobless claims plunged 19,000 to 284,000 in the most recent week. That’s the lowest level going all the way back to February 2006!
That news comes on the heels of previous reports showing the country has created more than 200,000 jobs for five straight months. The last time that happened? As I mentioned recently, it was late-1999/early-2000.
Yet the Fed has — so far — steadfastly refused to raise short-term rates! It’s still pegging them at around zero percent, even as it slashes QE toward zero.
Me? I’ve been saying for a while now that the Federal Reserve is falling further behind the curve on inflation and economic growth. Now I have just shown you concrete, irrefutable proof that over the past 20 years, EVERY SINGLE TIME claims have tanked like this, the Fed has started raising interest rates and Eurodollars have plunged!
Yet some of these pinheads who come on CNBC — and their out-of-touch-with-reality counterparts at the Fed — are expecting us to forget decades of interest-rate history and assume rates will keep staying pegged to the floor? They’re saying the Fed can’t and won’t change tactics, despite radical changes in the state of the underlying economy.
Like Cramer once said: “They’re nuts! They’re nuts! They know nothing!”
|Jim Cramer on the Fed: “They’re nuts! They know nothing!”|
I believe we’re on the verge of a veritable “Rate Quake.” I’m talking about a sharp break in Eurodollar futures prices, and a sharp rise in interest rates.
It’ll be led by rising short-term rates most aggressively, though long-term rates should climb as well. And I believe it isn’t far off in the future — it’s imminent. Like in the next few weeks or months at most!
Are you ready for that kind of move? Do you know what it will mean for your bonds and bond funds? I sure as heck hope you do! Because the incredibly complacency and lack of volatility in the fixed income markets looks totally out of sync with the environment I expect is coming.
Dump your junk bonds in favor of alternatives like MLPs!
Get out of long-term Treasury bonds!
If you’re going to hold anything in fixed income, stick with floating-rate notes or securities and funds with average maturities and durations of two to three years at most. Those are two measures of interest rate risk that every single bond mutual fund and ETF provides on its website or other printed materials.
So have you already made those kinds of moves? Are you still overloaded in bonds, and if so, why? What do you think about the job market — is it improving or do you think the figures overstate that improvement? As for the Fed, what are your thoughts on whether they’re behind the curve and need to raise rates? Let me know at the Money and Markets comments section here.
|OUR READERS SPEAK|
When it comes to the situation in Eastern Europe, there continues to be a vigorous debate among readers like you.
One comment that stood out came from Reader RC. He said the following in response to a previous post blaming the U.S. for setting the stage for Ukrainian tension:
“David couldn’t be farther from the truth. His statement about the U.S. supporting separatist movements is just diluting the truth, spreading the blame. Putin is a cancer in our century and he must be dealt with directly. Russian thinking only understands strength and each time the world draws a red line and nothing happens, this is a green light for Putin to continue.
“I am not advocating war. I am a U.S. combat veteran. I live in Ukraine, and have for the past 2 years. I do know that Russians love money, and that’s where the world must come together and deal with Putin: With hard, deliberate and meaningful sanctions. Yes, it will shake the markets, but who cares? Markets will recover, but these innocent families never will.”
As for investing in Master Limited Partnerships, or MLPs, the verdict is relatively split. Many of you believe in the energy market’s prospects, but you are hesitant to invest in MLPs because of the tax reporting issues involved in doing so.
Reader Elliot shared the following on that topic: “It is interesting that you mentioned two MLP funds that issue standard 1099-b’s rather than the dreaded K-1. Both Alerian AMLP and JPMorgan’s ALJ pay taxes at their level, which diminishes yield but also cuts hassles of the K-1.
“There are at least three landmines embedded in owning MLPs as a partner and getting a K1 rather than 1099:
“1) State taxes must be paid in any state charging income tax in which a pipeline travels.
“2) Placing shares in a Roth or other IRA can evoke the Unrelated Business Taxable Income if distributions exceed $1,000 from all such investments per year.
“3) Accounting for which portion of distribution is a tax free ‘return of capital’ versus income, and applying the depletion allowances in some cases makes it a confusing and expensive accounting task. Even with the instructions sent by the MLP (often late, requiring amending tax return or filing for an extension) no two accountants follow these instructions in the same manner.”
Those are certainly worth keeping in mind. But I have generally never advocated putting the tax cart before the investment horse. In other words, if an investment has strong potential, I am all for investing in it even if requires more work at tax time.
Any other comments on MLPs? Putin? Other topics we’ve covered? Then don’t hesitate to share them here!
|OTHER DEVELOPMENTS OF THE DAY|
Yet another airplane has gone down, this time an Air Algerie flight with 116 on board. It was flying between two cities in Africa and has reportedly crashed in Mali. Tragic.
Fighting continues to rage in the Middle East, with shelling and rocket fire between Israel and Hamas militants showing no sign of letting up. U.S. Secretary of State John Kerry is in the region trying to help negotiate a cease fire, but so far has little to show for it.
Even as I’m relatively optimistic about the economy, I don’t think housing is going to lead us in this economic cycle. Instead, the housing market should lose some steam as all the investor buying we saw in the past couple of years cools.
We just learned that new home sales fell a greater-than-expected 8.1 percent in June to a seasonally adjusted annual rate of 406,000. Previously reported numbers for the spring selling season were also revised sharply lower.
Facebook (FB, Weiss Ratings: C) blew it out on earnings, with profit of $791 million, or 30 cents a share, in the second quarter. Excluding items, EPS came to 42 cents – well above the average estimate of 32 cents. Revenue also topped forecasts, sending the shares to a record high.
On the flip side, mobile phone chip giant Qualcomm (QCOM, Weiss Ratings: A-) laid an egg. Its shares came under pressure after the company forecast weaker-than-expected sales. Concerns over its market position in China also weighed on the shares.
Reminder: You can let me know what you think by putting your comments here.
Until next time,