Let’s play that popular game – “What is Janet Yellen Thinking?”

This time … it wasn’t the energy stocks as much as … wait for it … bank stocks are having their wheels fall off the cart. Huh? More in a minute … Let’s do the “Big Three Drill” … and remember, the Dow, S & P 500 & Nasdaq is not the economy, and the economy is not the Dow, S & P 500 or Nasdaq. And, thanks to my friends at Dunham for their weekly report which I have attached below. I have highlighted the news in yellow I think is positive. Bad news is in red, if it is a “mixed blessing” it is both.

And, before I go further, “a word from the attorney’s at my compliance firm”:

The information in this communication (email) contains general market information only, should not be considered as a comprehensive statement on any matter, and should not be relied upon as such.  Nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general.  This communication (email) is for informational purposes only and does not constitute a solicitation or an offer to sell securities or advisory services.

Whew … with that out of the way, here is the scorecard:

Not been a pretty over the last twelve months, but still up with a longer point of view. And, here are the bright spots for the week:

• Despite the rough ride, consumer spending is up and “Consumer Confidence Surveys” are still moving higher. Even with the crazy stock markets, at current levels, the quarter will be pretty strong economically – in the 2.0 – 2.5% expansion rate. Remember that consumer spending accounts for 65-70% of the economy. “Da—the torpedoes. Full speed ahead!”
• Even with a flatter last quarter, the US economy is likewise expanding between 2-2.5% … which is not going to bring a wet spot on the floor, but it’s good news for expanding orders, more equipment to be purchased and more jobs.
• Speaking of more jobs, the Labor Department released a report last Tuesday stating that job openings rose to 5.61 million during December. This was the second-highest level recorded since March of 2006, which may be a good sign that the U.S. economy can withstand much of the current global volatility.
• The Fed Chair said they will leave rates alone and not raise them four times in 2016 as previously announced. (That really is a mixed blessing, as I would rather not have them “spook” the markets by micromanaging things. Stay confident. The US economy has many things going right or well for it right now.)
• We continue to have very low inflation rate, and moderately increasing wages at a rate above inflation, but not at a level where the Fed is worried … a good place to be

Things to note:

• Oil will likely keep going lower. Neither Russia or Saudi Arabia have “blinked” yet … and then you add in Iran’s 500,000 barrels a day to an already over-glutted market and it’s classic Econ 101 – the “inelastic supply” – just because there is greater supply available does not mean more of it will get used … at least, not at present. It would appear that a couple of the main players are going to bankrupt more expensive competitors (like US shale driven oil producers), and keep their population moderately happy with money in their system. That’s why the statement that “we’ll see $20/barrel oil before we see $40/barrel oil” seems a harbinger of truth to me.
• Why are bank stocks getting hammered? The default rate on lowest-rated debt worldwide is expected to hit 4.2% within a year … double the rate of 2% in 2015. Not only that, but there is growing concern over “negative lending” practices. Banks in Europe and now Japan are engaged in negative lending … charging businesses and individuals to safeguard their money. The banks themselves are being penalized by governments for not getting money into circulation, but so far … many businesses in the Eurozone are not biting. They would rather sit on their cash … even if they have to pay the bank something to do so … than risk taking out a loan. So far only a few banks are actually charging customers – usually their biggest clients – but that may be changing.

Here is what Bloomberg has to say:

Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it, too. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire.

If negative interest rates work, however, they may mark the start of a new era for the world’s central banks.  Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the Euro area. While it’s still too early to tell if they will work, Draghi [Mario Draghi is the new president of the European Central Bank] said in January 2016 that there are “no limits” on what he will do to meet his mandate.

And, negative rates may be coming to America soon. When asked if the Fed would consider implementing them in an effort to “forcibly encourage” banks to lend money out, several of those within the Fed, including Chair Yellen said they are looking seriously at the policy, that a change in economic circumstances could put negative rates “on the table”. The downside to this suggests that when a banking system chooses such drastic measures, that they have basically run out of options to stimulate their economy … something that, for now in the US, is not an issue. The economy is still growing, slowly and steadily.

• Last point … gold has dramatically risen in value – seeing its biggest weekly gain in seven years. I see this as a general reaction to the dramatic volatility in the general market. Personally, I would not recommend buying gold, but instead, add to your portfolio a fund which deals with commodities and futures … as a counter balance. There are several “fund of fund” approaches that make a lot of sense for upwards of 10% of a portfolio, to as much as 15% according to certain managers. (This is referred to as a “non-correlated investment”. It goes up or down irrespective of what other types of investments do.)

Overall … the economy in America is growing, and if you just do business in the US, there are a lot of things to like in this current economic cycle. There are still good people out there … just take your time and use some of the tools to make sure you have the “right people sitting in the right seats on the bus” … as Jim Collins reminds us in his classic book, Good To Great. (See Here for the tool we use in assessing new team members and clients. It takes only 12-13 minutes and produces an uncannily accurate report.)

Thanks for reading … and don’t hesitate to reach out on a particular question or concern, and be sure to click below to get your 2019 tax & financial data. Or, let me know and we’ll mail one out to you.

For now … remember that “Shared joys make a friend, not shared sufferings.” Philosopher, Friedrich Wilhelm Nietzsche

Why not take a moment to call a friend and share some good news?

“Imagine That™”! 

Written by R. J. Kelly – February 2016

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