Rope-a-dope Fed style – “I’m going to sting like a butterfly and float like a bee!”

In June the Federal Reserve announced no rate increase. In typical Fed doublespeak they dropped several hints. The original rope-a-dope man, Muhammad Ali, is probably rolling his eyes in bewilderment.

Remember the Fed said they would hike rates when unemployment got below 6.2%. Oops! Too soon, and they waffled refusing to commit to further benchmarks. Last summer the Fed hinted the economy was improving; possibly a rate hike in the fall. Then it was the spring of 2015 – well maybe in the fall. Rope-a-dope, duck and evade.

The Dance Marathon continues.

The Fed wants us to believe the market has already priced in a rate increase – no worries! Yeah right! Retirees are risking trillions in high yield bonds and dividend paying stocks – they need income and have no place else to go.

“Massive overvaluation” is a bubble. When the massive overvaluation in fixed income and equity markets eventually rights itself – and it will – bubbles burst, people get stung financially, particularly retail investors.

My expert for all things Fed is Chuck Butler. Chuck deals with central bank rope-a-dope daily as editor of The Daily Pfennig. He is a master Fed decoder. I asked Chuck what happens if/when the fed raises rates a couple of times?

“Economists and Fed watchers believe the Fed is determined to hike rates this year. I’m not a believer, however we must deal with the what if’s…

In the U.S. we currently have over $18 Trillion of current debt on the books, and estimates of over $200 Trillion of Unfunded Liabilities. That’s a lot of debt folks… As interest rates are raised, debt service cost goes higher. Every 1% rise in interest increases our debt by $180 billion a year on top of all other spending.

I feel large debt slows an economy because resources are diverted away from things that could be done to spur economic growth. The 1st QTR GDP was negative and the 2nd QTR GDP will most likely be worse. IF the Fed gets around to hiking rates in the 3rd QTR, it could immediately begin to damage the economy even worse than it already is damaged. IF the Fed hikes again in the 4th QTR, we could easily experience a double dip recession.”

After reviewing the June Meeting Minutes, Chuck reminds us; “Fed member Williams came out, in an effort to preserve the 2 rate hikes before year-end message, and said that he “still sees two hikes by year-end, but is in a “wait-n-see” mode until he sees evidence that inflation is moving back to 2%.”

Shortly after the Williams remarks, Janet Yellen spoke to the City Club in Cleveland.

“Yellen said she saw “hints” of wage gains in the recent data and “encouraging” data that consumer spending is picking up.

The Fed chairwoman did not seem in a rush to move and her remarks also suggest a preference for one rate move this year.

She noted that the labor market has improved but “still has not fully recovered” and the course of the economy and inflation remained highly uncertain and something unexpected could delay or accelerate the first step.”

A rate increase symbolizes an “all clear” signal. The internet is full of articles showing the economy is a far cry from “all clear”. Zerohedge provides one example with “About those Rising Wages: Real Hourly Earnings Drop to Lowest in 2015”. The advocates of a rate hike say, “wage growth is just around the corner”. It’s fantasy, “What they don’t touch on is facts,…not only is nominal wage growth for over 80% of the labor force barely above recession levels, and in a clear downtrend…(they conclude), “hourly earnings, which in May just dropped to $10.53, indicating zero real wage growth and in fact, the lowest real wage number of 2015 (emphasis Zerohedge)”.

Let’s take a look at instant replay for a minute.

  • The Fed was going to raise rates when unemployment dropped to 6.2%, but didn’t.
  • The Fed was going to raise rates in the summer of 2014 – but didn’t.
  • Perhaps an increase in the fall of 2014 – nope!
  • Maybe the spring of 2015 – naah, not ready yet!
  • Fed member Williams says two hikes by year end in 2015 – (better talk to your boss!)
  • Fed Chair Yellen says she sees “hints”of wage gains and possible one rate hike before year end – (we will see).

But never fear, in a question and answer session Ms. Yellen gave us plenty of reassurance:

“Asked about what she thinks are pending “threats to America,” Yellen said the biggest challenge for the Fed is to make sure the financial system was strong and well-regulated so that there is no repeat of the financial crisis “in the lifetimes of anyone in this room and hopefully not the lifetimes of our children, either.”

Despite all the rhetoric, neither the Fed nor the markets have a clue about what is going to happen; the dance continues. I fear the Fed will raise rates to save face, which is exactly the wrong reason to do so.

What does this mean for baby boomers and retirees?

As Muhammad Ali taught us, the dance is over with a lightning-fast knockout punch – like a bubble bursts!

Retirement money should be invested conservatively to prevent catastrophic losses. In other words, your money survives not because of, but rather in spite of, whatever the central bank decides to do. Position limits, stop losses, international diversification, currency diversification and non-correlated assets are integral parts of the safety first retirement portfolio.

The retiree mantra is preservation of capital – get and stay conservative.

On the Lighter Side…

Jo and I are enjoying the nice Indiana summer with the two grandchildren Brock and Braidyn. While the younger generation seems to get bored quickly, there is something about swimming in a lake that provides hours of enjoyment.

The baseball All Star game is behind us and we are looking forward to an exciting pennant race for the rest of the season.

And finally…

Good friend Bob L. passed along some advice from an old farmer that seems appropriate to this week’s article.

“If you find yourself in a hole, the first thing to do is stop digging”.

Until next time…

 

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