Money and Markets: Investing Insights

Is September Fed Meeting Now “Live”?

Mike Larson | Monday, August 29, 2016 at 4:30 pm

Market Roundup Dow 18,502.99 (+107.59) S&P 2,180.38 (+11.34) NASDAQ 5,232.33 (+13.41) 10-YR Yield 1.57% (-0.07) Gold $1,320.90 (-$0.50) Oil $46.96 (-$0.68)

Is the September 20-21 Federal Reserve meeting now “live”? That’s the question financial markets are debating in the wake of Chairman Janet Yellen’s keynote speech in Jackson Hole, Wyoming late last week. She chose to include one passage in her speech that hints at a “Yes” answer. It read: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”
Vice Chairman Stanley Fischer followed Yellen’s speech up with a television interview, and he too implied that rate hikes are back in play. He said the U.S. economy was “reasonably close to what is thought of as full employment” and that inflation was moving in the right direction (“right” in terms of the Fed’s goal of 2%, anyway).

Then Cleveland Fed President Loretta Mester piled on in a post-Jackson Hole interview with the Financial Times. She said the economy was “resilient” in the face of multiple economic shocks, and that “making another gradual step – there is a compelling case for that.”
So that settles it, right? Well, not exactly. The CME Group’s analysis of federal funds futures trading shows markets are only pricing in a roughly 30% chance of a hike in September, and a 44% chance or so that there will be a hike by the December meeting. A separate Bloomberg analysis puts the chances of a hike at just over 40% by September and around 64% by December.

“We’ve been here what seems like a million times before.”

Why would the markets be “fighting the Fed,” so to speak? Because we’ve been here what seems like a million times before.
The first inklings of tighter Fed policy came almost three and a half years ago, when former Chairman Ben Bernanke suggested QE would be dialed back. The markets freaked out, forcing the Fed to backtrack on how soon and how fast it would wind QE down.
Then the markets freaked out again after the Fed finally raised rates for the first time last December. That caused the Fed to dial back its plans for tighter policy once again.

It hasn’t paid to bet aggressively on an aggressive Fed.

In other words, investors have been conditioned to expect the Fed to back down repeatedly. It simply hasn’t paid to bet aggressively on an aggressive Fed. Maybe this time it’ll be different. But to get investors to dump all their low-rate plays, and wholeheartedly embrace rising-rate ones, it’ll take an actual Fed hike or wildly strong economic data.
So where do you come down on this whole rate debate? Is the Fed finally going to pull the trigger again? Do you think they’ll do so in September, December, or not at all in 2016?
What does that mean for your investment strategy? Is this the time to dump low-rate investments like utilities and telecoms, and embrace rising-rate ones like banks or cyclicals? Let me know what you’re thinking in the comment section.
Until next time,
Mike

Our Readers Speak

The drug price controversy was front and center at the website over the past few days, even as some of you also took time out to weigh in on the economy and interest-rate policy.
Reader Rob said: “Mylan is acting more like a drug dealer, getting people hooked on the drug and then hiking the prices. When they state most of the increase is paid by insurance, we all know the American taxpayer will foot the bill for another greedy corporation.”
Reader Paul added: “Any business deserves to make a ‘reasonable’ profit. In addition, in our human nature, we are supposed to help one another out. EpiPen is the opposite – and all about ME versus WE! We do need more competition to suppress the price gouging.”
Reader John also said: “I have to buy EpiPens every year as a healthcare provider, and I am personally irate with this kind of behavior. I hope Mylan gets creamed, but they probably won’t. It illustrates everything that’s wrong with our healthcare system.
“Why the American public puts up with this nonsense is hard to comprehend. Until we remove the private insurance industry as the gatekeeper for our healthcare system and allow the public to negotiate equitable drug prices like every other intelligent democracy on the planet, we’ll continue to get the shaft and see our healthcare costs explode, with or without Obamacare. This has been going on for far too long. Enough!”
Meanwhile, on the topic of monetary policy, Reader Mike said: “At some point the Fed will realize that self-interested savers spend only a fraction of their earnings from savings. When you drive interest rates to zero, you then drive earnings to zero, and you thus drive spending to zero. The debtors don’t have the spare change to spend; they are paying monthly on their loans. So, if you want to help GDP, stop artificially depressing interest rates!”
Reader Mike C. added: “The surface tension that exists between the issues noted in your article, and the pouring in of money from all over the world seeking income/safety in the U.S. markets, is what’s keeping the markets and monetary systems from blowing a gasket. That surface tension will eventually give way, and one side of the tension barrier will overcome the other side.
“My hunch is that the issues noted in your article will take over. The question that needs to be asked now is ‘Where will money go in pursuit of income/safety?’ when all hell breaks loose. My second hunch is that there will be nowhere to go at that point. Thus, for those people (most likely the majority of investors), staying put in cash, or even your long-term investments will be the sanest thing to do.”
Thank you for taking the time out to weigh in on these important issues. EpiPen pricing may be at the center of the current controversy. But I know from both your comments and my own personal experiences that rising healthcare costs (insurance premiums, drug prices, co-pays, etc.) are a major problem we just can’t seem to get under control.
Any other thoughts you’d like to add? Then don’t keep them bottled up. Share them below.

Other Developments of the Day

Mylan (MYL) took another step to quell the furor over the price of its EpiPen drug-delivery system, announcing plans to roll out a generic version in a few weeks. The generic product would feature a list price of only $300, half the price of the current branded version.
The only economic data of note was personal income and spending for July. Income rose 0.4% while spending climbed 0.3%. Both figures were in line with market expectations.
The conflict in Syria continues to intensify, with Turkey losing its first soldier following the country’s recent push across the border. Turkey said it invaded northern Syria to fight ISIS. But it also has a long-standing conflict with Kurdish rebels known as the YPG, who are fighting ISIS forces in the area. That means that two U.S. allies in the region – Turkey and YPG – could end up fighting each other.
Uber Technologies may be a wildly popular way to get around these days. But it’s not a profitable business venture, according to fresh figures provided by the company. The ride-hailing app company lost $750 million in the second quarter after losing $520 million in the first three months of the year. Even though revenue has increased substantially, driver subsidies and other costs have resulted in Uber losing more than $4 billion in its seven-year history.
What do you think about the ongoing controversy over Mylan’s EpiPen drug-delivery system? How about the conflict in Syria? Or, the massive losses Uber keeps racking up? Let me hear about it in the comment section below.
Until next time,
Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.