Four Reasons You Should Ignore the Fed Rate-Hike 'Hoopla'

The best jobs growth in years?... 100% chance the Federal Reserve moves next week... Four reasons you should ignore the Fed rate-hike 'hoopla'... The 'Bond God' warns of higher rates... What happens when the next crisis comes?... P.J. O'Rourke: Armchair Predictions About Consumer Trends...


February was the third-strongest month of U.S. jobs growth since the financial crisis...

The latest monthly report from payroll processor Automatic Data Processing and forecasting firm Moody's Analytics showed the private sector added a better-than-expected 298,000 jobs last month.

This was the biggest monthly gain since April 2014, and the third-biggest since firms began hiring again in early 2010. As the Wall Street Journal reported this morning...

Private-sector hiring accelerated last month fueled in part by new construction jobs, according to a report released Wednesday, as goods- and service-producing sectors beefed up their payrolls...

"Powering job growth were the construction, mining and manufacturing industries," said Mark Zandi, chief economist of Moody's Analytics, adding that mild winter weather probably played a role in such activity last month. "But near record high job openings and record low layoffs underpin the entire job market."

A separate report this morning from professional social-media network LinkedIn confirmed this recent strength...

According to the firm, January and February were the strongest consecutive months for U.S. hiring since August and September 2015. From the report...

Hiring across the U.S. was 1.4% higher in February than February 2016... Two months doesn't make a trend, but it seems like the stronger hiring is being driven by elevated business confidence due to the new administration's promises to lower taxes and reduce regulations. It's unclear if this trend is sustainable, or merely a temporary blip on the radar, but we're keeping an eye on it.

Following this morning's employment data, the odds of a March Federal Reserve rate hike moved even higher...

According to the so-called "Fed Funds" futures market, the odds are nearly 100% that the Fed will raise rates again when it meets next week. And the odds of a second hike in June have now jumped to more than 50% for the first time.

In the meantime, you can count our colleague Dr. David "Doc" Eifrig among those who think the "hoopla" around the Fed's rate decision is overblown...

In fact, Doc believes most investors would be better off ignoring the Fed's decision altogether. He shared four big reasons why in today's edition of his free Retirement Millionaire Daily e-letter. (If you're not receiving the Daily, you're missing out. Click here to subscribe for free with one click.)

First, as Doc explained, the one interest rate the Fed controls – the short-term Fed Funds rate – simply doesn't matter much for most folks...

There are lots of different interest rates... from interest rates on U.S. bonds to the interest rate you earn on your savings account. The most chatter is about bonds... Bond prices and yields move in opposite directions. So some people are worried that the Fed raising interest rates means bond prices will fall.

Here's the current interest rate you'd earn on different maturities of U.S. government Treasury securities, depending on time to maturity...

Maturity
Interest Rate
2-year
1.29%
5-year
1.99%
10-year
2.46%
30-year
3.06%

Here's the point: None of these rates are controlled by the Fed... None. They're all controlled by supply and demand. If a lot of investors want to lend for five years, they'll buy up the bonds and the interest rate on five-year bonds will decline.

The only interest rate the Fed controls is the "federal funds rate"... the rate at which banks and credit unions lend to each other on an overnight basis.

Now, in theory, if the Fed raises that rate, it would hurt bonds with longer maturities (what we'd call "further out on the curve"). But in practice, this effect is miniscule. Supply and demand will determine what happens with the interest rates that affect everyday life most, not the Fed's rate.

Next, Doc noted that even if the Fed moves again this month, the increase will be very small...

And, as we've discussed many times, rates will still be historically low. More from Doc...

If the Fed raises rates, it will be a very small increase – say, one quarter of one percent...

That's what we saw the last two times the Fed raised rates – in December 2015 and 2016. A rate increase of 0.25%. And remember that prior to the financial crisis of 2008, the federal funds rate was regularly as high as 3% or 4%. So we could have as many as a dozen raises before we're at "normal" levels again.

Make no mistake about it, this is still an "easy money" policy.

Third, the market has likely already "priced in" this move and others...

As Doc noted, markets aren't always perfectly priced, but this rise in short-term rates has been anticipated for years...

Financial markets are forward-looking... If everyone knew that a stock would be worth $10 tomorrow, they'd buy and sell until it was $10 today...

Again, in theory, higher interest rates drive down the price of bonds. This leads some to claim that the day the Fed hikes rates, bonds will plummet. But do you really think there's an investment manager sitting on a pile of bonds who hasn't considered that rates are set to go up?

As our colleague Steve Sjuggerud says about Fed decisions, "Let me ask you... how many crises have you been able to mark in advance on your calendar?"

Finally, as we highlighted ahead of the Fed's previous rate hikes, history suggests rising rates aren't as bad for stocks as most folks believe...

In fact, as Doc explained, when rates begin rising from low levels like today, it's often great news for stocks...

Many investors fear that rising rates will choke the life out of the stock market. The theory goes that higher interest rates reduce profits for companies because they pay more to borrow... Plus, other interest-paying assets will look more attractive relative to stocks.

In reality, the Fed typically raises interest rates when the economy looks healthy enough to withstand it. Right now, GDP is growing, employment is strong, and even wages are growing a little. In my experience, it's the real economic factors pushing stocks up that outweigh the theoretical ones that could push stocks down.

Looking at historical data, when interest rates rise from low levels, like from 0%-4%, stocks tend to rise with interest rates. (It's not as safe if rates start at a higher level... When rates rise from 5% and higher, that does tend to put pressure on stocks.)

Speaking of interest rates, "Bond God" Jeffrey Gundlach shared his latest outlook on Tuesday...

Regular Digest readers know Gundlach, the CEO of investment firm DoubleLine Capital, called the top in U.S. Treasury bonds – and the bottom in long-term interest rates – last summer when virtually everyone was bullish on bonds, and thought rates could only go lower. As we noted in the July 13 Digest...

Gundlach doesn't just believe bonds are forming a near-term top... He thinks the entire, decades-long bull market in bond prices is ending. And while he doesn't think yields will soar higher immediately, he doesn't believe rates will go much lower.

He agrees that sentiment has become extreme. He says he has fielded more investor questions about buying Treasurys recently than at any other point in his career. He also noted that no one he talks to thinks interest rates can go higher today... and said it's often when most people say something "can't happen" that it's most likely to occur.

Of course, we know now he was exactly right... Long-term rates – as tracked by the yield on the benchmark 10-year Treasury note – bottomed at 1.35% in early July and soared to more than 2.55% by year-end. Since then, rates have been trading in a relatively tight range...

But Gundlach believes the next big move in rates is approaching...

During his latest monthly investor webcast, Gundlach said that we could see another temporary drop in rates in the near term. But he expects rates to resume their rise to 3% or more this year.

He also repeated his call that this level will officially mark the end of the 30-year bond bull market... and again predicted that rates would rise above 6% before the end of Trump's first term.

Gundlach also noted that stocks aren't cheap, but said rising "inflationary pressures" and improving business confidence mean stocks are likely to "grind higher" a while longer. But he warned rising long-term rates could eventually begin to weigh on the market...

"We all know that the stock market has some momentum behind it and there's some animal spirits behind it," he said. "But I do think it will succumb to higher Treasury yields should they begin to occur in the middle of the year as we expect."

Gundlach also thinks rising inflation and long-term rates could push the Fed to pick up the pace of future rate hikes...

And he noted history suggests that once the Fed starts a tightening cycle, it often doesn't stop "until something breaks."

He has a point... As you can see in the following graphic, courtesy of Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett, recent rate-hike cycles have ended with a financial "event" of some sort or another...

Worse, these "events" have been occurring at lower and lower peak interest rates over time, as the economy has become more and more dependent on "easy money" policies.

We could still be a year or more from the next peak, but this chart suggests the Fed will have little room to cut rates when the next crisis occurs. (And the recent failures of negative interest-rate policy mean the Fed is unlikely to go much below zero.) Instead, the Fed could be forced to launch a massive new quantitative easing ("QE") program – or something even more extreme – in response.

In other words, despite what you might hear from the financial media today, the reasons for owning gold and silver remain as valid as ever. Invest accordingly.

New 52-week highs (as of 3/7/17): Altria (MO) and short position in GGP (GGP).

In today's mailbag, a longtime Stansberry Alliance member weighs in on our recent discussion of the oil markets. Send your questions and comments to feedback@stansberryresearch.com. And be sure to read on after the mailbag for a brand-new essay from Digest contributing editor P.J. O'Rourke.

"Like many of the editors at Stansberry, I have shared a fascination for many years with the entire oil industry and how it affects markets, micro and macro economics, politics, warfare, speculations, and investing. It is a fierce dragon that bestows its hoards of riches at times on some and devours the same at other times. Bottom line though is I follow it to make money and avoid losses. If oil crashes and goes lower for an extended time, it is going to take down not only oil stocks with it, but also the stock market and especially financials, which of late have soared...

"Lost in the headlines of so called record setting OPEC compliance is the dirty secret that the majority of OPEC is cheating big time, while non OPEC agreement parties are not really even trying, and the only major producer that is meeting or exceeding agreed cutbacks is Saudi Arabia. Most of OPEC's cutbacks are because of Saudi Arabia. If the Saudi's were as half hearted as the other producers, oil would have already crashed by now. The history of OPEC is repeating itself in that it is a lock that almost everyone cheats except the Saudi's, and they decide to constrain or flood the market based on the not so royal family's political and financial self interest.

"So while the US shale oil producers will have a say on capping oil's price rise or even applying downward pressure, it is the unpredictability of the Saudi's will to carry the lions share of cutbacks in the face of predictable wide spread cheating that could be the catalyst for a big move down. If they have to keep dropping production and losing market share to match the rise in US production to maintain pricing equilibrium, will they be full of rage while they watch the rest of the fake cartel cheating? Will they once again flood the market to punish OPEC and non OPEC alike? The US oil drillers are predictable, in that they will make economic decisions and will keep producing more and more if the price stays the same or rises. Saudi Arabia is only predictable in that decisions will be made by only one or two persons, and non economic emotional decisions like anger or betrayal could be a big motivator.

"Lastly, it is highly possible we are going to get a fake break of oil pricing to the upside because of backwardation and US oil exports. Yes, that's right... exports. Currently the forward price of oil is making it uneconomic to store oil, so oil coming out of storage will accelerate. This dumping of stored oil will make it appear that OPEC's strategy is working to bring down supply and speculators will jump all over this to [temporarily] drive up spot pricing. Amazingly, right now millions of barrels of US oil are competing against and taking a bite out of Saudi's market with the Chinese refiners. Saudi Arabia recently had to drop their prices to China. This trend should continue because now oil tankers leaving the US can now be full instead of empty as they have been for the last 40 years.

"My humble prediction is there will absolutely be a crash after the mini melt up, and its cause will either be from the Saudis pumping like mad in anger over the widespread cheating or when it becomes apparent that the supply draw down is actually not because OPEC's strategy is working but rather it is flooding the market and causing such cut throat competition that it becomes every man (oil producer) for them self. Not that I would buy into the upside because it is such a crowded trade, but to me it looks like a 10 to 15 percent spike in oil prices this spring causing US oil producers to go into a production frenzy, OPEC patting themselves on the back and everyone pumps as much as they can which leads to a 40 to 50 percent plunge by late this fall.

"With Stansberry's help, I plan on making money on the downside while developing a list of energy trophy assets to buy later at much better prices than today's." – Paid-up Stansberry Alliance member Robert R.

Regards,

Justin Brill

Baltimore, Maryland

March 8, 2017


Armchair Predictions About Consumer Trends

By P.J. O'Rourke

You get a lot of valuable research in the Stansberry Digest.

Wading through all that expert advice, trying to figure out which you want to use, can put pressure on a guy... I try to relieve the pressure the expert advice puts on you by providing inexpert advice.

I am strictly an armchair observer of the financial scene. My predictions don't come from deep knowledge or brilliant analysis, they come from the seat of my pants. Literally.

Let me explain.

I make my predictions from what I see and hear sitting in a chair in my living room. My family happens to contain an ideal consumer focus group – two young millennial daughters.

This demographic is responsible for a large portion of America's consumer spending. From what I can tell by my credit card bills, my daughters do about 120% of that spending.

It's important to know what my focus group is (and isn't) buying.

That's where my armchair comes in. I like to sit there in the evening reading the newspaper and having a drink. Or, given what news has been like lately, a couple of drinks.

However, I live in a house with a stupid floor plan. At one end is a large family room, where my daughters do their homework, fiddle with their electronic devices, and watch TV. At the other end is the kitchen where my daughters make snacks and a mess. And the only way to get from the family room to the kitchen and back is by way of the living room, through which they constantly traipse.

I don't get much peace and quiet, but I do get to see both daughters frequently. And I get to overhear things about what they want and don't want, like and don't like, and are or aren't planning to do.

Lately, I've been paying attention to this information as it applies to consumer spending.

My 19-year-old daughter is a living issue of Vogue magazine, except more interested in clothes. If you're wondering where all the weird getups from New York Fashion Week go after the runway shows, they're in her room. How she gets dressed in there I don't know. The room is so full of clothing that there's no space for the girl who wears it.

And yet (all kidding about my credit-card bills aside), my daughter is remarkably frugal. She pays for most of her clothes herself with wages from a none-too-lucrative after-school job.

I could not figure out where the clothes were coming from. I was beginning to worry. So as she passed from kitchen to family room wearing something that Lady Gaga had rejected as too "out there," I asked. And my daughter set me straight about her generation's shopping habits.

She and her friends – and from what I can tell, millions of other girls their age – are on the Internet constantly buying and selling and trading their clothes to each other. My daughter's room isn't just filled with clothes. It's also filled with UPS boxes, some being opened, some being packed.

They look at fashion magazines, blogs, and YouTube videos to get high-style ideas, then network with fellow young "fashionistas" to find low-price knockoffs. Or they alter existing garments to get what's chic. Some make clothes themselves. Others paw through the racks at Goodwill stores for vintage finds. They wear their outfits a few times, then pass them along at bargain rates.

My daughter visits department stores, boutiques, and malls, but mostly to check fabrics, quality, and sizes. My daughter goes to Bloomingdale's the way I go to a Ferrari dealership. Which Ferrari would be just right for me? In my dreams!

My prediction is that the retail clothing business aimed at young women (a big part of the retail clothing business) had better wake up and smell the packing tape on the UPS boxes.

For decades, this retailing – both in-store and more recently, online – has been based on the idea that girls are voracious and vacuous shoppers, who regard clothing as essentially disposable and compulsively buy new things. The girls have found a way to fight back.

My 16-year-old younger daughter is less interested in clothes, possibly because she goes to a school with a boring dress code. But she is an avid consumer of personal electronic communication in its every form.

I'd often see her, as she walked by my armchair with an armload of devices, texting, e-mailing, tweeting, Snapchatting, Skyping, checking Facebook, and talking on the phone at the same time.

Then, one evening she came in, sat down on my footstool, and poured her heart out. With big, sad eyes, she told me it was over, done, they were breaking up – she and personal electronic communication.

She said, "I just can't stand it anymore! It's like having everybody you've ever met on permanent sleepover at your house forever. All the whispering, giggling, gossiping, and pillow fights... I mean virtual pillow fights... have just got to STOP!"

I questioned her gently, expecting to hear mean girl stories or reports of unwelcome Instagram photos of boys in their underpants.

But her concerns had a greater maturity than that. "Dad," she said, "what I really can't stand is all the political stuff everybody is sending all the time. It's so angry. It's so, like, loud."

Here is a girl who goes to a liberal private school, but who grew up in conservative rural New Hampshire and was raised by parents with firm libertarian principles. She has friends and family with political views of every conceivable stripe. Until now, this had never bothered her. She just thought she lived in a diverse world where reasonable people had reasonable disagreements... Until she encountered "Communication Overload."

She said, "Dad, it's worse than a permanent sleepover. I mean there's lots of that, too, and it drives me nuts. But now it's like the school debate team. Except everybody from everywhere is on the debate team. And everybody's making their debate argument all at once at the top of their lungs and nobody's in the audience, there is no audience, nobody's listening!"

I didn't know what to say. Finally, I told her, "Well, I suggest you stop listening, too."

"I'm going to," she said. "I'm turning everything off."

Which, of course she didn't do. She still chats on her iPhone and sends texts to her friends with a blur of young thumbs. But I notice she is, indeed, spending less time with her devices.

My guess is that her Communication Overload would have come anyway, even without the current political fracas.

Constant communication deprives us of an important part of communication – the part where we pause between communications and have time to accumulate experiences, knowledge, and thoughts that are worth communicating.

My prediction is that someday we will look back on the personal electronic communication fad with as much bafflement as we look back on the hula hoop. We'll consider being in constant communication with each other to be as silly and (unless you permanently injured your spine during the hula hoop craze) more dangerous.

My inexpert advice is that, next time you hear about an initial public offering for an app that will make it easier for the whole world to get in touch with my younger daughter, keep your investment money in the pocket of the good-as-new, perfectly tailored cashmere cardigan sweater that my older daughter can get you for $15.

Regards,

P.J. O'Rourke