The Fed's 'costly failure' is leading to a 2017 bear market, economist says
Expert says Fed decision will lead to bear market
Matt Clinch | @mattclinch81
Friday, 23 Sep 2016 | 3:47 AM ETCNBC.com
Money and credit growth in the U.S. has now become inflationary and is encouraging another bubble in stock markets, according to the chief economist at London-based consultancy firm Lombard Street Research.
"The Fed has put market sentiment before the economy yet again. It is doing U.S. stocks no favors by provoking an unnecessary bubble with its certain subsequent burst," Charles Dumas said in a new research note Thursday, following the decision by the U.S. Federal Reserve to defer its next rate hike.
"The economy is running hot, led by consumers. Productivity growth has slumped to 0.5 percent, meaning GDP (gross domestic product) outpaces potential growth by more than 0.5 percent. With inflation already on target, the Fed is encouraging yet another bubble-bust," he added in the note entitled "Fed's costly failure = 2017 bear market."
Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Fed has since looked to unwind this policy and performed one rate hike at the end of 2015. Many still anticipated another rate hike before the end of the year.
Dumas believes that the Fed "helpfully" aided money growth and borrowing following the crash but is now stoking inflation. Furthermore, the negligible cost of borrowing in this "overheated economy" has boosted corporate borrowing that has not trickled down to the real economy. Instead, large companies are using the cash to buy back a portion of its own shares, he said.
Nonetheless, Dumas believes that these buybacks have caused unusually high valuations in stocks markets that are dependent on artificially cheap money. And the problem could arise when the Fed does indeed continue its rate hiking path, he added.
"When the Fed gets real and makes the necessary increases, this market could prove much more vulnerable than is traditional in the early stages of a rate-hike cycle ... While the growth we expect should boost earnings, through rising capacity utilization though not improved underlying margins, these gains could occur in a market that has already priced in such profits as a result of QE (quantitative easing)," he said.
"The economy will soon get even more overheated, implying a bubble and burst," he added.
REUTERS - Business News | Wed Jan 18, 2017 | 10:25pm GMT
U.S. Federal Reserve Board chair Janet Yellen testifies before a Congressional Joint Economic hearing on Capitol Hill in Washington, DC, U.S. November 17, 2016. REUTERS/Gary Cameron
Stocks, U.S. dollar, bond yields rise after Yellen comments
The U.S. dollar rose and stocks also gained ground on Wednesday after Federal Reserve Chair Janet Yellen suggested the U.S. central bank was ready to raise interest rates quickly this year.
U.S. Treasury yields rose too after Yellen said "waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road - either too much inflation, financial instability, or both."
Oil futures tumbled, however, dragging down the energy sector index .SPNY, which was one of the biggest weights on the S&P 500.
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Yellen's comments were not seen as a departure from the Fed's previous tone but they highlighted strong U.S. fundamentals which support a strong dollar, high yields and stocks.
"It just adds to the Fed’s story and an argument that the economy is ready to weather interest rate hikes," said John Doyle, director of markets at Tempus Inc in Washington.
The U.S. dollar index .DXY, which measures the greenback against a basket of six other major currencies, was up 1 percent after hitting a nearly six-week low Tuesday after Trump said dollar strength was hurting trade relations with China.
With rates rising, "it's going to be more attractive for money to be in the U.S. than abroad," said Jason Pride, Director of Investment Strategy at Glenmede in Philadelphia.
The Dow Jones Industrial Average .DJI fell 22.05 points, or 0.11 percent, to close at 19,804.72, while the S&P 500 .SPX gained 4 points, or 0.18 percent, to 2,271.89 and the Nasdaq Composite .IXIC added 16.93 points, or 0.31 percent, to 5,555.65.
For most of the session many investors seemed to be waiting for clarity on the incoming Trump administration's policy plans, while others were holding out for more fourth-quarter reports.
After the election Wall Street had bet heavily on Donald Trump's campaign promises of lower taxes, lighter regulation and fiscal spending. But so far in 2017, many investors have hit the pause button ahead of Friday's inauguration.
"The market's kind of treading water. We're in a tight narrow range here and we haven't really busted out of the range in a while," said John Canally, investment strategist and economist for LPL Financial in Boston. "Once the earnings season heats up, once we get past the inauguration, maybe you'll get some sort of movement once companies start to give guidance."
Also In Business News
UK house price growth slows for first time since July - RICS
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U.S. Treasury yields rose to session highs on Yellen's comments. Benchmark 10-year notes US10YT=RR fell 24/32 in price to yield 2.41 percent, up from 2.33 percent late Tuesday. Prices had weakened earlier on Wednesday after data showed that U.S. consumer prices increased in December as households paid more for gasoline and rental accommodations, leading to the largest year-on-year rise in 2-1/2 years.
Gold XAU=, already lower on the inflation data and dollar strength on Wednesday, fell further after Yellen's remarks. It was last down 1 percent at $1,203.96 per ounce, erasing most of Tuesday's gains. It had risen for seven sessions.
Oil prices pared losses after settling on data showing much a bigger-than-expected draw in U.S. crude stocks. Brent futures LCOc1 were down 2.2 percent at $54.25 per barrel after settling down 2.8 percent while U.S. crude CLc1 was down 2.1 percent at $51.36 after settling down 2.7 percent.[O/R]
(Additional reporting by Dion Rabouin, Chuck Mikolajczak and Karen Brettell in New York and Patrick Graham in London; Editing by Peter Cooney and James Dalgleish)
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THE OTIUM POST
Expert says Fed decision will lead to bear market
Matt Clinch | @mattclinch81
Friday, 23 Sep 2016 | 3:47 AM ETCNBC.com
Money and credit growth in the U.S. has now become inflationary and is encouraging another bubble in stock markets, according to the chief economist at London-based consultancy firm Lombard Street Research.
"The Fed has put market sentiment before the economy yet again. It is doing U.S. stocks no favors by provoking an unnecessary bubble with its certain subsequent burst," Charles Dumas said in a new research note Thursday, following the decision by the U.S. Federal Reserve to defer its next rate hike.
"The economy is running hot, led by consumers. Productivity growth has slumped to 0.5 percent, meaning GDP (gross domestic product) outpaces potential growth by more than 0.5 percent. With inflation already on target, the Fed is encouraging yet another bubble-bust," he added in the note entitled "Fed's costly failure = 2017 bear market."
Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Fed has since looked to unwind this policy and performed one rate hike at the end of 2015. Many still anticipated another rate hike before the end of the year.
Dumas believes that the Fed "helpfully" aided money growth and borrowing following the crash but is now stoking inflation. Furthermore, the negligible cost of borrowing in this "overheated economy" has boosted corporate borrowing that has not trickled down to the real economy. Instead, large companies are using the cash to buy back a portion of its own shares, he said.
Microsoft announced a $40 billion buyback this week, but on the whole the number of S&P 500 companies with buybacks over $1 billion dropped to a 3-year low in the second quarter, according to data released by FactSet this week.
Nonetheless, Dumas believes that these buybacks have caused unusually high valuations in stocks markets that are dependent on artificially cheap money. And the problem could arise when the Fed does indeed continue its rate hiking path, he added.
"When the Fed gets real and makes the necessary increases, this market could prove much more vulnerable than is traditional in the early stages of a rate-hike cycle ... While the growth we expect should boost earnings, through rising capacity utilization though not improved underlying margins, these gains could occur in a market that has already priced in such profits as a result of QE (quantitative easing)," he said.
"The economy will soon get even more overheated, implying a bubble and burst," he added.
------------------------------------------------
REUTERS - Business News | Wed Jan 18, 2017 | 10:25pm GMT
U.S. Federal Reserve Board chair Janet Yellen testifies before a Congressional Joint Economic hearing on Capitol Hill in Washington, DC, U.S. November 17, 2016. REUTERS/Gary Cameron
Stocks, U.S. dollar, bond yields rise after Yellen comments
The U.S. dollar rose and stocks also gained ground on Wednesday after Federal Reserve Chair Janet Yellen suggested the U.S. central bank was ready to raise interest rates quickly this year.
U.S. Treasury yields rose too after Yellen said "waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road - either too much inflation, financial instability, or both."
Oil futures tumbled, however, dragging down the energy sector index .SPNY, which was one of the biggest weights on the S&P 500.
ADVERTISING
inRead invented by Teads
Yellen's comments were not seen as a departure from the Fed's previous tone but they highlighted strong U.S. fundamentals which support a strong dollar, high yields and stocks.
"It just adds to the Fed’s story and an argument that the economy is ready to weather interest rate hikes," said John Doyle, director of markets at Tempus Inc in Washington.
The U.S. dollar index .DXY, which measures the greenback against a basket of six other major currencies, was up 1 percent after hitting a nearly six-week low Tuesday after Trump said dollar strength was hurting trade relations with China.
With rates rising, "it's going to be more attractive for money to be in the U.S. than abroad," said Jason Pride, Director of Investment Strategy at Glenmede in Philadelphia.
The Dow Jones Industrial Average .DJI fell 22.05 points, or 0.11 percent, to close at 19,804.72, while the S&P 500 .SPX gained 4 points, or 0.18 percent, to 2,271.89 and the Nasdaq Composite .IXIC added 16.93 points, or 0.31 percent, to 5,555.65.
For most of the session many investors seemed to be waiting for clarity on the incoming Trump administration's policy plans, while others were holding out for more fourth-quarter reports.
After the election Wall Street had bet heavily on Donald Trump's campaign promises of lower taxes, lighter regulation and fiscal spending. But so far in 2017, many investors have hit the pause button ahead of Friday's inauguration.
"The market's kind of treading water. We're in a tight narrow range here and we haven't really busted out of the range in a while," said John Canally, investment strategist and economist for LPL Financial in Boston. "Once the earnings season heats up, once we get past the inauguration, maybe you'll get some sort of movement once companies start to give guidance."
Also In Business News
UK house price growth slows for first time since July - RICS
Credit Suisse finalises $5.3 billion mortgage deal with U.S.
U.S. Treasury yields rose to session highs on Yellen's comments. Benchmark 10-year notes US10YT=RR fell 24/32 in price to yield 2.41 percent, up from 2.33 percent late Tuesday. Prices had weakened earlier on Wednesday after data showed that U.S. consumer prices increased in December as households paid more for gasoline and rental accommodations, leading to the largest year-on-year rise in 2-1/2 years.
Gold XAU=, already lower on the inflation data and dollar strength on Wednesday, fell further after Yellen's remarks. It was last down 1 percent at $1,203.96 per ounce, erasing most of Tuesday's gains. It had risen for seven sessions.
Oil prices pared losses after settling on data showing much a bigger-than-expected draw in U.S. crude stocks. Brent futures LCOc1 were down 2.2 percent at $54.25 per barrel after settling down 2.8 percent while U.S. crude CLc1 was down 2.1 percent at $51.36 after settling down 2.7 percent.[O/R]
(Additional reporting by Dion Rabouin, Chuck Mikolajczak and Karen Brettell in New York and Patrick Graham in London; Editing by Peter Cooney and James Dalgleish)
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