Someone
seems to have hit the emergency button at the Fed, as even though the
central bank said that everything was just fine with the American
economy just a few weeks and months ago, the situation has currently
escalated into a full-blown panic mode.
On Thursday, the Board of Governors of the Federal Reserve has called an
‘emergency’ meeting for
Monday, April 11. That by itself is already very surprising, but a lot
can be explained after looking at the most recent publication of the
Atlanta Fed. The results of the forecasted GDP of the Atlanta Fed,
should push a lot of people and investors into a depression. Just eight
weeks ago, the
Atlanta Fed forecasted
GDP growth of approximately 2.5%, which would’ve been a very healthy
growth rate, and even on March 11, the Fed was still expecting the GDP
to grow by 2.3%.
Source: GDPnow, through Atlanta Fed
But
since then, everything started to go downhill. In just four weeks time,
the Atlanta Fed has revised its GDP growth rate from 2.3% to just the
0.1%, which means are basically at the tipping point between a growing
economy and the first signs of a new recession. Whatever the final
outcome will be, it is now pretty clear that the economy in the United
States is stalling. And the rate at which the economy seems to be
crumbling is really terrifying.
Just two weeks ago we
started to warn you
for this, as a corporate profits are going down, and the increases in
EPS were mainly boosted by the companies’ share buyback programs and not
by higher net profits. We were also very worried to see that a lot of
companies are overspending on share buybacks, rather than strengthening
their balance sheets and we were afraid this would return into the
spaces like a boomerang.
This
also seems to be confirmed by the Money Flow Index of the S&P
index. The last time we have reached an 'overbought' status on that
indicator, the S&P fell by 15% just a few weeks later. Will we
re-experience a similar sell-off now?
So
what will the Federal Reserve do now? With these revised GDP estimates,
there is absolutely no way the Federal Reserve will be able to hike the
interest rate by four times this year, and even the revised target of
two times will be a bridge too far. In fact, it’s now pretty likely the
Fed won’t be able to push through any rate increase in the current
calendar year, as it’s now pretty clear the American economy cannot
support a rate hike.
But
it does look like the market is convinced that situation is really bad
right now, considering the Bank of America has recently released a piece
of research claiming investors have been extremely bullish lately.
Equity funds have seen a cash inflow
of in excess of $5 billion in
the past few weeks, so it looks like investors are either denying the
Penn State of the American economy, or are relying on the Federal
Reserve posting a new policy and forget about any rate hikes this year.
It
used to be Europe that was the ‘sick man’ of the world economy, but
with the depressing outlook from the Atlanta Fed, the situation seems to
be changing right now and
feared ‘R-word’ is popping up again.
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