There’s No Turning Back for the Fed Now
The Federal Reserve is stalling…
Eight years ago, the Fed dropped its key interest rate to near zero. It did this to encourage people to borrow and spend more money. It kept its key rate near zero for seven years.
Then, in December, the Fed lifted its key rate for the first time in almost a decade.
Many people thought the “era of easy money” was coming to an end. The Fed even planned four more rate hikes for 2016.
But the Fed hasn’t lifted rates once this year.
In May, it held off after the U.S. Bureau of Labor Statistics released the worst jobs report in years.
In June, it didn’t raise rates due to concerns about the global economy and “market volatility.”
Yesterday, the Fed had another chance to raise rates. This time, it held off because it said it wants to see more improvement in the job market.
• Stocks rallied on the news…
The S&P 500 closed yesterday up 1.1%. The NASDAQ gained 1% and closed at a new all-time high.
Meanwhile, gold jumped 1.0%. It was gold’s third straight daily gain.
Gold stocks, which are leveraged to the price of gold, spiked too. The VanEck Vectors Gold Miners ETF (GDX), which tracks large gold miners, surged 7%. It was GDX’s best day since June.
• Yesterday’s decision tells us the Fed is worried about the economy…
After all, the whole point of low interest rates is to “stimulate” the economy.
But Fed Chair Janet Yellen was quick to downplay this concern. At yesterday’s press conference, she said “our decision does not reflect a lack of confidence in the economy.”
She even told investors to expect a rate hike later in the year.
If the Fed does raise rates this year, it would likely happen in December…after the presidential election.
• We wouldn’t count on a December rate hike…
Remember, the Fed’s been saying all year that it wants to raise rates. But when the time comes, it can never pull the trigger.
The Fed has ZERO credibility right now. Even worse, it looks more clueless than ever.
• Yellen kept rates low because “the economy has a bit more running room”…
You might find Yellen’s choice of words odd.
After all, the economy isn’t “running” right now. It’s limping along.
Since 2009, the U.S. economy has grown at just 2.1% per year—its slowest recovery on record. And this year has been even worse, with the economy growing at an annual rate of just 1.0%.
Eight years of easy money have done nothing for the economy.
Yet, Yellen is more worried about the economy overheating than stalling out:
“Nevertheless, we don’t want the economy to overheat, and if things continue on the current course, I think some gradual increase will be appropriate.”
• An “overheating economy” is the least of our concerns right now…
We’re far more worried about the “bubbly” stock market.
You see, the Fed made it incredibly cheap to borrow money by holding interest rates near zero. It also made it very difficult for investors to earn a decent return.
Consider the 10-year U.S. Treasury, a popular safe haven asset.
From 1962 to 2007, 10-years paid an average annual rate of 7.0%. Today, they yield just 1.6%.
These days, you almost have to own risky assets to earn a decent return.
• Many investors have “reached for yield” in the stock market…
Since 2009, the S&P 500 has soared 222%. It’s now trading near an all-time high.
In many ways, stocks have lost touch with reality…
They’re trading at record highs despite a weak global economy. The U.S., Europe, Japan, and China are all growing at their slowest rates in decades.
They’re rising while profits fall. Profits for companies in the S&P 500 are on track to fall for the sixth straight quarter.
And they keep climbing despite sky-high valuations. The S&P 500 trades at 18 times “forward” earnings. U.S. stocks haven’t been this expensive since 2002.
• The Fed doesn’t think you should worry about stocks…
At yesterday’s conference, Yellen said:
In general, I would not say that asset valuations are out of line with historical norms.
To her credit, Yellen did add that “bubbles could form in the economy” if rates stay low for too long.
But eight years of rock-bottom interest rates is already “too long.”
Stocks are now more expensive than they were before the 2008–2009 financial crisis. Bonds are also trading near record highs. And U.S. commercial property prices are 27% above their 2007 peak.
• Legendary trader Carl Icahn thinks asset prices have lost touch with the real economy too…
Last week, Icahn said: “If they don’t raise rates, I think we’re in a major bubble.” His message to investors is simple: use extreme caution.
You look at the environment, and I think it’s very dangerous. You’re walking on a ledge and you might make it to the end, but you fall off that ledge and you’re really going to see trouble.
• You need to be careful if you have money in the stock market…
If you haven’t already, we encourage you to take a close look at your portfolio.
Get rid of expensive stocks. They tend to fall harder than cheap stocks during major selloffs.
You should also avoid companies that will struggle to make money during a long economic downturn. We would steer clear of retailers, restaurants, airlines, and any industry that needs a healthy consumer to do well.
Cashing out of your weaker positions will help you sleep easier at night. It will also put you in a position to buy stocks when they get cheaper.
• We also recommend you own physical gold…
As we like to point out, gold is real money.
It’s preserved wealth for thousands of years because it’s unlike any other asset. It’s durable, easy to transport, and easily divisible. Most importantly, gold’s value isn’t tied to a government or central bank.
Unlike paper currencies, its value often rises when central bankers do reckless things like print money or cut interest rates. This makes gold the ultimate insurance against desperate governments.
If you’ve been thinking about buying gold, read this first. It reveals what may be the cheapest way to buy gold in America. Click here to learn more about this incredible offer.
Chart of the Day
The online lending industry is “clueless.”
At least, that’s what Steve Eisman thinks. You may have heard of Eisman. In 2007, he made a huge bet against the U.S. subprime mortgage market. When the housing market collapsed, he made a fortune. The actor Steve Carrell played him in the popular movie The Big Short.
Today, Eisman sees huge problems in the online lending industry. Bloomberg Businessreported on Monday:
The central problem is that these lending startups, their founders and backers in particular, don’t have a lot of experience making loans to consumers, and some of them approach loan-making as they would retail sales…
“Silicon Valley, I think, is clueless” to this, Eisman said.
Eisman’s warning might surprise some readers. After all, many investors thought online lending was going to be “the next big thing.” But not E.B. Tucker…
In last November’s issue of The Casey Report, E.B. called LendingClub (LC), the largest U.S. online lender, “A Club for Suckers.” He told his readers to steer clear of the stock:
LendingClub members will suffer along with the company’s stock price. The only winners will be the insiders who pocketed the loan origination fees and dumped their shares on the public.
Whether you’re a shareholder, a borrower, or a lender, this is one club you don’t want to be part of.
E.B.’s call was spot-on. You can see in today’s chart that LendingClub’s stock has crashed 54% since November.
E.B. never shorted (bet against) LendingClub, but he is shorting three of the most vulnerable companies in America right now. One of those shorts has returned 15% since June. Another has made Casey Report readers 11% in just two weeks.
Those are big gains for such short periods. But E.B. expects both stocks to head much lower in the coming months.
To learn why, click here. As you’ll see, E.B. thinks a major crisis is about to hit America. When it does, U.S. stocks could plunge 50% or more. Weak companies (like the ones E.B.’s shorting) could fall even more.
This link will also show you how to access The Casey Report for 50% off the regular price. Click here to learn more.