Double-Talk From the Fed and the Israel Elections

By Victor Sperandeo with the Curmudgeon




Victor analyzes the Fed's recent policy statement, Yellen's comments and notes the Fed's lower economic forecasts (which no one seems to have paid any attention to). He then expresses his opinion on the outcome of last week's elections in Israel. 


The Curmudgeon continues to be astonished by the markets extreme obsession with the wording of the Fed's forward guidance/policy statements, while ignoring more important issues (like a weakening U.S. economy).  For example, the ISM Manufacturing Purchasing Managers’ Composite Index (PMI) has declined four consecutive months as per this chart:


No comment on Netanyahu's victory in the Israel elections, as it would be too lengthy, which would dilute the power and punch of Victor's op-ed remarks.


The Fed's Play on Words:


“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Chair Janet Yellen said in a press conference Wednesday in Washington.


The Federal Open Market Committee said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”


"Double-talk" is a form of speech in which inappropriate, invented, or nonsensical words are used to give the appearance of knowledge and so confuse (or amuse) the audience.


Comedians which have used "double-talk" as part of their act include: Al Kelly, Cliff Nazarro, Danny Kaye, Gary Owens, Irwin Corey, Jackie Gleason, Sid Caesar, Stanley Unwin, and Reggie Watts.  So have the last three Federal Reserve Board Chairs: Alan Greenspan, Ben Bernanke, and (more recently) Janet Yellen.                                                                                                                


At the Q & A session following last Wednesday's Fed meeting, the "double-talk" was palpable if not deafening.  As noted above, the word "patient" was deleted from the Fed's policy statement, which was supposed to be forward guidance that the Fed could raise short term interest rates at any time (likely this June). Before "patience," the words were: "interest rates would be kept low (i.e. at 0-to-25bps) for a considerable time."


So just after the word "patient" is removed, the Fed Chairwoman says the Fed will not be "impatient."  That's almost as good double talking as Sid Caesar.  It seems her words are so ridiculously meaningless as to make them funny - hah, hah!  :-)) And the stock market loved it!  The DJI reversed a triple digit loss after release of the Fed minutes to close up 227.11 points or 1.3% on Wednesday. The Russell 2000 closed at a new record high, climbing 9.91 points, or 0.8%, to 1252.14.


Did anyone notice that Ms. Yellen lowered the Fed's estimate of GDP growth this year to a range of 2.3% to 2.7%, from an estimate of 2.6% to 3% in its previous forecast last December?  That was an unappreciated acknowledgement that many key economic indicators have been weaker than expected in recent months. The Fed's GDP forecasts for 2016 and 2017 were also reduced, part of a long-running series of growth-estimate downgrades the Fed has confronted in recent years.


“Economic growth has moderated somewhat,” the central bank said in its statement. That was a downgrade from January when the Fed described the pace of activity as solid. Bad weather might have restrained growth in the first quarter. But the longer-run downgrades of their estimates suggest officials see other headwinds holding the economy back in the months ahead.


Yet a half dozen or more issues could arise to make GDP lower than the already reduced Fed forecasts.  For example, the housing recovery has stalled, retail sales have declined three consecutive months, the strong dollar has hurt U.S. exports, manufacturing output moved down 0.2% in February - its third consecutive monthly decline, etc.  Also, the ACA ("Obamacare") could be crippled or die in June when the Supreme Court rules on it again.  That decision might have a negative impact on economic growth.


As a result, a weak U.S. economy is a very high probability.  Therefore, I think interest rates will remain at zero till we elect a new U.S. President in November 2016.


Under the current perverse/convoluted "logic" of the stock market:  If the U.S. goes into recession and earnings drop, but rates are still at zero, the market should continue to advance. Of course, that's predicated on Yellen telling us more double-talk tales.


A critically important question never asked:  Why didn't the Fed raise rates in May - July 2014, when year -over- year CPI was above the 2% Fed target (it was 2.13, 2.07% and 2.0% respectively while the core CPI was 1.9+%)? 


Also, what happened to Bernanke's "below 6.5% unemployment rate" as a signal for the Fed to raise rates?  Yellen now says that labor market needs to strengthen even though the unemployment rate has fallen to 5.5% before the Fed can consider raising rates.


The point she stresses is all Fed moves are "data dependent." What does that mean?  To me, it suggests that U.S. economic data (as reported) has to be significantly better for the Fed to consider raising rates.  Yet that's not the case at all in the investment business!


The SEC requires money managers and mutual funds to state in their disclosure documents/Prospectus':  "Past performance is not a reliable indicator of future performance." 


That's often been true for the U.S. economy too, especially since the rebound from last year's negative first quarter appears to have fizzled out now.


John Gotti (former head of the Gambino crime family) is quoted as saying: "I never lie because I don't fear anyone. You only lie when you're afraid."  The Fed fears no one as they can't be fired, but they use double- talk to deceive all its followers to get what they want. The Fed acts as if they're a virtual macro economist for the U.S.  


The very well known book "Economics in One Lesson," by Henry Hazlitt states: "The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not for one group but for all groups."


For the last 6.25 years, the Fed has helped the top 5% of the population by inflating financial assets. Meanwhile, "Main Street" has gone nowhere.  Most folks are struggling to make ends meet and living paycheck-by-paycheck.


Yet, the failed Fed policies continue.  As I've often written in these columns, the distortion effects of these policies onto the markets has to end badly.  The Fed has no idea where “the longer term effects" of its policy are going to end! 


My View of Israel's Election:


The election in Israel has caused a great deal of controversy, especially among American Jews. I am happy about the result even though my co-author has a different opinion (Email the Curmudgeon if you're interested in his take).


My view is based on the context of what Bibi (Benjamin Netanyahu) represents to Israel versus Isaac Herzog, his closest rival from the Zionist Union party (a far left of center new party).   I firmly believe that Israel needs a Winston Churchill type as their leader - not a Neville Chamberlain.                               


The issue with Israel is not "hope and change;" its survival, as they've been threatened by many enemies since the state was formed in 1948.  Hamas, Hezbollah and other Islamic extremist groups don't recognize the state of Israel, which they refer to as "the Zionist entity (or enemy)."

Former Iranian leader Mahmoud Ahmadinejad, several times said that "Israel should be wiped off the face of the earth."  Last November, Iran's Supreme leader Ayatollah Ali Khamenei called for the destruction of Israel, stating that the “barbaric” Jewish state “has no cure but to be annihilated.”  The Ayatollah was said to have a "nine point plan to destroy Israel."  


Bibi is tough and not someone to threaten. The Israeli left is so passive it could be "very" dangerous for the survival of the Jewish state. Consider the above remarks about Iran's leaders wanting to annihilate Israel, and you will better understand why Bibi is against a soft agreement with Iran over their nuclear program.


As we've pointed out in a recent Curmudgeon post Iran sponsors terrorist groups to kill Jews.  Is that any different than Hitler's gas chambers?

In Mein Kampf Hitler stated his views and carried them when he was elected as the Führer.  More than six million Jews were killed in the holocaust.  That many would die if Iran nuked Israel!


In my opinion, all other problems in Israel are not in the same league as the existential threat from Iran.  It's all about survival of the country!  Bibi is the man to stand up to Iran, as Churchill was in 1940-45 when he was the Conservative Prime Minister of Britain.

Till next time...


The Curmudgeon


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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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