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Now we know why...! Print
Written by Site admin   
Friday, 14 July 2017 12:43


A picture tells a thousand words.

Lat month the Fed and Janet Yellen's comments, led the market to belive we were on the hawk trail to higher interest rates, 'normalistion' they called it. With that, commentators were falling over themselves to call the end of QE, actual tapering would be just a few months away...lardy dar, etc. Read more, plus the charts...

This month, and today, realism just kicked in. Now we know why, during her testimony to congress this week, Janet switched tack, moving well away from hawkish comments to those of the Dove. The mealy mouthed statement and Q&A did nothing to clarify but showed up even greater Fed confusion. Or was it confusion, no, she knew what today's numbers would show. 

The reality is that the US economy in is deep do-do. The Fed have been in denial over the last couple of years, presenting massaged numbers to the world while the average Joe and Josephine were living through higher costs of living with squeezed wages and lower full time employment available.

As the numbers just came through, Gold jumped (a nice Hikake pattern we traded), the DXY, US Dollar Index, dropped through it's June supports (4 hr chart Harami play). But what of the stock market? No worries here, the Dow is almost through it's all time highs. Sure, the economy is shot, but the Fed has our backs. Normalistion, not a chance, this must mean more cheap money coming our way!

DXY Harami from TMEST



Gold play from TMEST



From the blog

An opposing view

An opposing view

Conventional wisdom is a wonderful thing, particularly for herding creatures. In our herds we are social animals and so agreeing with others' points of view gives us the group acceptance that we crave.

It's safe, it takes no independent thought, it's comfortable and easy to go along with the majority opinion.

Questioning, by applying thought to the reality of what is actually happening, and stating those thoughts, risks being labelled a heretic and an outcast. Now, feeling unsettled, the herd is now longer safe and comfortable for us.

Those in control of "herd think", are those who shout loudest and the most often. And so it is with the US Federal Reserve, who have told us there is no alternative to their current policies in achieving economic growth.

They want us to spend our savings and then borrow and spend, borrow and spend more. The goal, they tell us, is so the economy will not collapse but will grow again and we will all achieve Nirvana.

This became the conventional wisdom and has lasted since at least the GFC in 2008.

Lower, then negative, rates will ensure we can spend even more than we can borrow. The banks will even pay us to borrow - as long as we spend of course.

Reality is turning out a little differently.

Bank of America recently published a chart showing what happens when savings rates drop below 4%. The opposite of what the Federal reserve were telling us they expected.

Spending does increase as rates fall, but this effect changes below about 4%. Consumers then worry about their future. Ever lower rates then reduce spending and increase savings, as BofA quote:

As low growth & inflation make low-risk-asset income scarce (e.g. from government bonds), households are forced to reduce consumption and increase savings in order to meet retirement goals.

Forced saving further depresses demand in a vicious cycle.

It's a doomed loop as the full article here explains.

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