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The Fed Did The Right Thing Even If We Briefly Suffer
Friday September 18, 2015 18:38
In case we didn’t have enough of the truth-or-consequences scenario that has been catapulted into markets since the Federal Reserve decided yesterday to stand pat on rates, we now have the right wing in the U.S. Congress again troubling its own house. (And everyone’s house with it.)
Yes, we are facing another revival of the great Washington hit musical, “Let’s Shutdown The Government.” This cannot come at a worse time and only demonstrates the irresponsibility of the Congress and its utter disregard for Americans of all economic statuses.
The Fed yesterday told the world that it is extremely wary of what is going on in China and that country’s effective re-peg of its currency. That pop devaluation of the yuan annoyed U.S. financial policymakers no end, especially given the rest of China’s opaqueness regarding its economy. We have to wonder if, concealed inside the decision not to raise rates, is a threat to China that, if it doesn’t start playing by universally accepted rules, it will no longer be welcome in the big stadium with the big league teams.
After hitting a three-week trough, the U.S. dollar recovered dramatically against the euro. We shudder to think how strong the dollar would have grown if the FOMC had bumped rates 25 basis points yesterday. The green back rose only modestly against the GB pound and fell against the Japanese yen.
At one point earlier today, gold was up $19.50 per ounce. It has since fallen back to being up now only $7.50 (as of 3PM in New York). The newly re-risen dollar put a nearly four-dollar dent into the overall price of the yellow precious metal. Silver is struggling to show any kind of gain and platinum and palladium are in the red for the day.
It is interesting how the herd mentality affects even the biggest players in the markets. Is there anyone who really was biting on the idea that the U.S. – not to mention the rest of the world – has been growing so spectacularly that it needed reining in? Let’s hope not.
Yet, reactions to the Fed news release and some comments made by Chairwoman Janet Yellen would have us think that some investors and traders were discovering indoor plumbing for the first time.
Of course, many, many analysts thought the Fed should not have raised rates, given the global economy’s stumbling. Fed funds futures betting before the meeting indicated only about a 20 to 30% chance that the Fed would hike yesterday.
"The people betting real money never expected the Fed to do anything yesterday," said Nick Raich, CEO of The Earnings Scout. "Ultimately, the Fed did the right thing by holding."
He noted there were some who thought "if the Fed did not hike, oh my goodness, what do they know, what's so bad in the economy that we don't know."
What don’t we know? Well, first, let’s say what we know.
The U.S. legislature, like the legislatures of many developed countries, has not embarked on any significant infrastructure funding. Second, money is still too tight for housing financing. The burden of scam colleges who have sucked youngish people into taking out nearly a trillion dollars in student loans is a drag on spending by Millennials.
That much we know.
What we don’t know is how bad off China is and how much their problems will degrade the economic growth of other developing countries or of “junior” second world nations.
The developed world has to solve its own specific problems through the legislative process. That is why a potential shutdown bothers us fundamentally.
China has to learn to be honest. Failing is not fun, naturally, but succeeding using lies and then being discovered? That’s humiliating and a good way to get your partners angry with you and distrustful of you during future involvements.
For those that would like a deeper analysis, I invite you to watch today’s Weekend Review in which I look at the potential that this long corrective period in gold might in fact be over. Simply use the link at the bottom of this article to view this special report.
Wishing you, as always, good trading,
Gary Wagner