Notice These Red Flags

October 1st, 2017 | S.P.
federal reserve dump

Perhaps it may be time to heed the warnings that are in front of our eyes. Several indicators have been flashing red for some time, but we may be too caught up in the common demands of our lives to notice. Everything seems to have been going well so far, but how long can these economic fortunes carry us before collapsing? In the era of Trump, everything seems well in the financial markets, but we should not be fooled by any red herrings.

The US Federal Reserve has made some startling moves over the past days that warrant some scrutiny and concern. One of which saw the Fed unload up to $4T in treasury bonds and assets that have been held since 2008. The immediate impacts of this “unwinding” are not yet known, but it is expected to have some consequences arising from the uncertainty it creates. The Economic Times reported the following:

The Fed also is likely to announce a scheduled reduction of its approximately $4.2 trillion in holdings of bonds and mortgage-backed securities, most of it accumulated in response to the 2007-2009 financial crisis and recession. 

That plan, anticipated by markets and not expected to have much immediate impact, will limit the amount of maturing bonds used each month to purchase new ones. The initial cut in reinvestment will be $10 billion per month, probably beginning in October

Analysts and investors, however, say they will look more intently at policymakers' forecasts for the end-of-year federal funds rate as an indication of whether a quarter-point increase widely expected in December is likely to occur.

More startling than that, however, is Janet Yellen's admission on September 26 that herself and her colleagues may have misjudged the labour market. At a meeting among business heads in Cleveland, Yellen said, “My colleagues and I may have misjudged the strength of the labour market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.”

USA Today reported on Yellen's comments and inflation as such:

Yellen said several forces could be suppressing inflation, including a labor market that may not be as tight as it appears; weak long-running inflation expectations by investors, employers and consumers; and factors such as discounted online shopping.

The Fed has raised its benchmark short-term interest rate three times since December to a range of 1% to1¼%. Last week, it maintained its forecast of three quarter-point rate hikes next year but cut its projection from three to two increases in 2019, lifting the rate to 2.9% by 2020.

The Fed’s preferred measure of inflation fell to 1.4% in July from nearly 2% early this year. Yellen said the Fed’s baseline outlook still calls for an acceleration and blamed the recent retreat on a drop in wireless service prices due to the rollout of unlimited data plans, among other temporary factors. But she also gave more weight to the view that wages and prices could continue to edge up slowly because of longer-term obstacles.

To be clear, no one in their sane mind wants to hear that the Federal Reserve has misjudged anything. The single independent body that controls inflation and interest rates must be held to higher standards, but it seems Janet Yellen, the first woman to ever hold the position, has failed to hold the Federal Reserve to any such degree.

It should be of some concern that that a body which has “misjudged” the labour market and the growth of inflation is now dumping more than $4T in bonds and assets. Yellen's Fed had misjudged the labour market and made her organization's monetary policy-making much less difficult, however, that does not excuse the Federal Reserve's inability to make correct judgments, many of which could harm the US and global economies in the future.

When it comes to Yellen's latest hike in interest rates, the world's largest hedge fund, Bridgewater, has criticized Yellen's move as a mistake. Business Insider reported on that like this:

The world's largest hedge fund told clients the Federal Reserve was making a mistake by raising interest rates.

"The Fed is basing its moves on classic cyclical indicators and the desire to 'normalize' the balance sheet," Bridgewater Associates told clients in a private note, which was seen by Business Insider. "Based on the calculations that we do, we doubt that the Fed will be able to execute its plan without causing problems."

Bridgewater founder Ray Dalio, co-CIO Bob Prince, and staffer Melissa Saphier wrote the note, dated September 21. The firm, based in Westport, Connecticut, manages about $160 billion.

The Fed has twice raised rates this year, and investors expect it to do so a third time at its meeting in December. The central bank kept rates at historic lows following the 2008 financial crisis to boost the economy — a move originally welcomed by a Wall Street on the brink but since challenged by banks yearning for higher returns.

When the world's leading hedge fund, organized and controlled by some the world's leading economic experts, tells you that you are making a mistake, perhaps you should listen. If, indeed, Yellen did misjudge the strength of the US labour market, why has she chosen to increase rates? Most often, rates are increased when fear of inflation is a factor. We now know, based on Yellen's own words, that the US labour market is stronger than was expected and inflation has grown slower than was expected—yet her Fed has chosen to slow any possible growth and strength in the market by increasing rates.

Something within Yellen's logic simply does not add up.

Lump an increased interest rates with the Fed's $4T asset dump and you have a less competitive and more volatile market. The Financial Times reported:

James Sullivan, multi-asset investment manager at Coram, said: “The expansion of the Fed balance sheet quite clearly coincided with the liquidity fuelled appreciation of many markets (since the financial crisis), notably the S&P.”

He said that if economic data doesn’t improve markedly from here, then “the odds would suggest” that the Federal Reserve shrinking its balance sheet could have the effect of causing the US market to under perform, in the same way that the bond buying programme caused the market to perform well.

Mr Sullivan said: “This has led us to invest in markets that remain supported by loose monetary policy, or where the valuations are more appealing. Markets such as Japan and Germany.”

With an increase in rates, there will surely and undoubtedly be a decrease in spending, investing and lending nationally across the United States. Together with the asset dump, it looks as though the Fed may be trying to stifle US markets—or they are simply and quietly preparing for some sort of significant change or collapse in current trends.

Which ever may be the case, there should be some alarm bells sounding. Indeed there probably is among the investment community, or at least among the most powerful investors of our time.

One of America's largest industrial families, the Rockefellers, have been dumping US stocks since the middle of 2016. Through their investment firm, Rockefeller Financial Sevices Inc., they have dropped significant ownership in top US stocks, including FANG. As of June, RFS has shed a collective total of more than 50,000 in FANG stocks like Facebook, Alphabet (Google) and Amazon. One of their largest tech dumps has been Microsoft, with the Rockefellers dumping more than 300,000 holdings in the company. This can be tracked at Holdings Channel.

It does not stop there for the Rockefellers. They have dumped more than 200,000 shares in VISA; 82,000 from JP Morgan Chase; 125,000 from Kinder Morgan; 107,000 from Exxon Mobil; and 4,000 from Vanguard Mortgage Backed Securities.

As of June, the Carlyle Group—and investment firm compromised of prominent figures from Washington and ex-bureaucrats—has dumped millions in energy stocks. Some of those stocks have been those in the renewable energy market, like Pattern Energy Group, of which Carlyle dropped 8.7M in shares—a significant dump. Some include natural gas energy companies, like Rice Energy Inc., of which Carlyle dumped 1.2M in holdings.

European banking moguls like the Rothschilds have also been on a startling dumping spree of US stocks since last year. Dumps from Rothschild Asset Management Inc. include: 24,000 from JP Morgan Chase; nearly 47,000 from Microsoft; 13,000 from Pfizer; 72,000 from United Health; 165,000 from Procter & Gamble; and 11,000 from American Express.

The dumping trends among some of the world's most successful investors may either be a sign of impending doom or nothing more than an exercise of caution in a volatile and unpredictable Trumpian America. However, it is of utmost importance to consider that much of this dumping began pre-Trump in mid-2016. Perhaps it was fear of uncertainty or a prediction of something terrible. What we can know for certain is that Janet Yellen may not know what is on America's horizon any more so than some of the world's most successful bankers, investors and industrialists. Perhaps some wisdom could be found in her actions rather than her words as we press on into 2018.