Instead, she flopped — at least as far as the markets are concerned.
After rallying by more than 180 points, the Dow Industrials rolled over late in the day and finished down 99. Not only that, but there were indications everywhere of risky “carry trades” and other speculative global bets being unwound. I say that because the Japanese yen soared and Treasury bonds surged.
Why did things play out this way? And what’s coming next? Well, let’s start with the news: Yellen went before the House Committee on Financial Services to testify on the state of the economy, monetary policy, and other issues at a particularly delicate time for the markets.
Here’s a summary of her major points …
The job market is humming along — She cited the 2.7 million increase in payrolls last year, and the 13 million in cumulative jobs added since 2010. She also underscored that unemployment was running at only 4.9% and that there were “noticeable declines” in underemployed and discouraged workers.
Growth is good but not great — Yellen noted the “moderate expansion” in GDP, calling out household spending in general, and housing and auto sector growth in particular. But she also acknowledged that “subdued foreign growth and the appreciation of the dollar” were holding things back, and discussed weak activity in the energy sector.
Yes, we see the market turmoil … — The Fed chairman highlighted declining stock prices, rising borrowing costs for risky debtors, and a rising U.S. dollar, saying they “could weigh on the outlook for economic activity.” Plus, she discussed the risks associated with China’s economic slowdown and weakness in commodity-linked economies.
… But no, we’re not changing course (yet) — At the same time, she blunted those concerns by saying that “ongoing employment gains and faster wage growth” should help here at home. She also said that “highly accommodative monetary policies abroad” would likely boost global economic growth down the road. In other words, she basically said the Fed wasn’t yet changing course and looking to cut rates, launch another round of QE, or otherwise try to ease policy further.
Early on, it looked like Wall Street might cut Yellen some slack. Stocks rose and bonds took a breather. Even deeply oversold European financial stocks, including Deutsche Bank (DB), bounced. That bounce stemmed from a Financial Times story saying that DB was considering buying back some of its senior debt securities.
But I was skeptical from the start.
First, there’s the fact other recent rallies fueled by central banker speeches and actions haven’t had staying power. They’ve all faded, sometimes in a day or two, sometimes in a matter of hours.
Second, there’s the pattern of the last credit crisis. Throughout the market decline from 2007 to early 2009, we saw multiple periods of short-term market panic … and multiple attempts by government officials and monetary policymakers to stem the bleeding.
Those actions invariably led to short-term bounces. But those bounces didn’t hold until the last of the housing, mortgage, and financial market excesses were wrung out.
|Janet Yellen’s comments today helped stocks move higher. But, like other attempts at rallies, this one also faded.|
It sure looks like that process is now playing out again, with a particular focus on European banks. When I hear officials from Deutsche Bank proclaim that everything is fine, and German government officials echo that message, I can’t help but recall similar proclamations almost a decade ago from officials at U.S. institutions like Bear Stearns and Lehman Brothers, as well as from U.S. policymakers.
I’m not saying Deutsche Bank is necessarily mortally wounded like they turned out to be. I simply can’t say yet if that’s the case. But the credit markets are obviously very worked up about something. So a new round of forced bank mergers, massive capital raisings, bailouts, or outright failures is certainly possible both here and abroad.
Finally, there’s the issue of the underlying economy. I have repeatedly pointed to deterioration in the economic data, growing strains in the credit markets, and other threats because they all suggest my forecast of a major turn in the credit cycle is on track.
|“I’m skeptical that bounces driven by central bank “happy talk” will prove to be long-lasting.”|
Past rounds of QE, interest-rate cuts abroad and market jawboning “worked” because they came during the bullish phase of the credit cycle. We’re not there anymore. We’re in the bearish phase. So bounces driven by central bank “happy talk” are vanishing in the blink of an eye.
Bottom line: I suppose you can play these quick counter-trend moves if you really, really want to. But I think a better strategy is to avoid getting too hung up on short-term gyrations or short-term oversold readings. Instead, stay focused on the big picture – and the need for protective, proactive action to defend or build your wealth in tough times like these.
Am I off-base? Will the Yellen rally actually have legs for more than a few hours or days? Or is her rally going to suffer the same fate as the Draghi and Kuroda rallies before it?
Also, what do you think about European bank risk? Are institutions like Deutsche Bank going to suffer the same fate as Bear Stearns, Lehman Brothers, or other troubled firms during the Great Recession? Or are you taking a “this too shall pass” approach to the latest financial-sector turmoil? These are very important issues, so please try to take some time out of your day to comment below.
Negative interest rates, large-scale debt defaults, falling bank stocks — those were among the subjects you were debating overnight.
Reader Anthony G. maintained that central banks are proving increasingly ineffectual, saying: “Bank stocks and government debt are things to avoid. Draghi is being called out on his super-stimulus bluff. It is becoming evident that this unelected emperor has no clothes.”
Reader Lynn pointed to a serious problem with central-banker thinking: “I am not sure about this contorted thesis the central banks utilize to support their contention that lower/negative interest rates will encourage consumers to spend more. If anything, it is having the opposite effect as savers — particularly those near to or in retirement — must save more, not less, to achieve their retirement savings goals. It is an inverse correlation: The higher interest rates are, the less that investors must add to savings and vice versa.”
And Reader J.R. suggested the next crisis will stem from aggressive auto lending: “The coming credit default collapse in the U.S. will be initiated by the gradually increasing defaults on all those subprime auto loans that have been repackaged and sold (as were the housing loans). The millions of subprime car loans can never be repaid, and the defaults will snowball as the recession deepens. It is inevitable.”
So what does this all mean for the markets? Reader F151 said: “Are we still early in this bear-market process, or are stocks about to reverse course and surge higher? My guess, in looking at the charts: We have another 90 to 100 points down on the S&P before a rally. Then much more downside.”
Reader Gaeton added: “The market is itching to rally given its oversold condition. I expect Janet Yellen to do the ‘right’ thing with her comments. The markets will buy into it and rally up to around S&P 2,000. Then the party will be over. The support at 1,800 will be taken out and the real pain will begin. I am looking to get very short and have a lot of cash if this plays out.”
Thanks for weighing in, and keep those comments coming in the discussion section below.
Walt Disney (DIS) blew the cover off the ball in the most recent quarter thanks to the blockbuster Star Wars: The Force Awakens movie, earning $1.63 per share after items. Analysts expected only $1.45 per share. Revenue also topped estimates at $15.2 billion. But the stock struggled anyway amid ongoing concerns over subscriber defections and falling profit at its ESPN and ABC networks.
Why do oil producers keep spewing out oil even as prices plumb depths they haven’t seen in many years? Because they have so much debt, that’s why! This story points out that energy producers need to bring cash in the door to meet debt payments regardless of the oil price. That is perpetuating the glut, and the process won’t end until we see an even bigger wave of bankruptcies in the sector.
Donald Trump and Bernie Sanders easily won in the New Hampshire primary yesterday, with Trump taking roughly 35% of the Republican vote and Sanders grabbing 60% on the Democratic side. Republican John Kasich finished second at 16%, while Democrat Hillary Clinton nabbed around 38%.
Negative interest rates don’t seem to be helping the global economy at all, and you could easily make the case they’re hurting by crushing the banking sector. But an analysis from JPMorgan Chase (JPM) suggests we could go even further down the rabbit hole over time. The firm’s analysts said rates could be cut all the way to negative-4.5% in Europe and negative-3.45% in Japan, provided central bankers there only applied the rates to a limited percentage of bank reserves.
What do you think about Disney’s struggles? How about the prospect of even more negative interest rates? And what about the oil glut – is it going to start getting better soon? Share your thoughts on these or other topics in the discussion section here at the website.
Until next time,
P.S. Is your stock portfolio taking a hit? Most investors’ are. The S&P 500 is off about 13% since July of last year. The Nasdaq is down 18%.
But there is an alternative: The currency market!
You see, unlike stock markets, the currency investment markets never crash.
No matter what’s going on in the world, currencies will always rise and fall against each other, giving you the opportunity to make money.
What’s more, currencies move independently of stock markets. Even if every stock market on the planet fell to zero, you could still build a FORTUNE in currencies.