The Federal Reserve’s TRUE Dual Mandate! Taylor Rule Suggests Target Rate Of -8.58% As Federal Spending Rages Out Of Control

The Federal Reserve has a dual mandate: stable inflation and low unemployment. Well, core inflation is currently at 1.2% (core PCE growth is at only 0.95%) and unemployment (thanks to Covid-19) is at 11.1%. Not quite on target.

The Taylor Rule model using an aggressive specification suggests that The Fed lower their target rate to -8.58%.

Of course, Congressional spending is out of control with mandatory spending (entitlement programs, such as Social Security, Medicare, and required interest spending on the federal debt) since the days of George HW Bush and Bill Clinton. And especially post financial crisis.

Of course, mandatory spending on Medicare is soaring out of control.

Defense outlays are projected to grow with non-defense outlays declining,

Of course, the TRUE dual mandate of The Federal Reserve is propping up the S&P 500 index and NASDAQ.

Good luck to everyone trying to cope with out of control Congressional spending and Fed money printing.

The question is … will Congress and President Trump/Biden reign in their prodigious spending after Covid-19 passes?

Here is my answer. Where are the Budget Hawks when we need them??

Fed’s Muriburiland: Fed Keeps Pumping Air Into Asset Prices (S&P 500, Commercial Real Estate)

“In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects— if it did not, it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

William McChesney Martin, Speech to Investment Bankers Association of New York, October 1955

Perhaps The Fed removes the punch bowl in Muriburi Land, but The Fed certainly didn’t remove the punch bowl in the USA. The S&P 500 index and commercial real estate have both exploded with the perpetual punch bowl.

“We’re not even thinking about thinking about the consequences of our actions.”

Jerome Powell, Chairman, Federal Reserve

Apparently, Chairman Powell lives in financial Muriburiland.

Thanks to Jesse at Jesse’s Cafe Americain for the quotes!

Limbo Rock! US Treasury 10Y Yield Falls 12.6 Basis Points To 0.926% As Dow Drops 800 Points

The Washington Post had a howler of a story yesterday: “U.S. markets post big gains as Joe Biden’s Super Tuesday surge offers coronavirus respite”

It that was true, it was a very short-term effect given that the Dow dropped 800 points this morning.

dowdrop800

Or was it something else … like the IMF throwing $50 billion at the Coronavirus. And more stimulus from Central Banks like The Federal Reserve? But those effects were short-lived too.

The US 10Y Treasury yield fell another 12.6 basis points this AM to 0.926%. The lowest in history.

sovfriday

And Freddie Mac’s 30Y mortgage survey rate (green line) continues to follow the 10Y Treasury rate down the rabbit hole.

tdrop

How long will rates go?

letslimbo

I want to thank Rick Sharga for remembering that I was one of the few that predicted what is happening today with interest and mortgage rates while most others predicted mortgage rates would rise above 8%.

Death of Small Firm Effect? FAAMG (Tech) Index Is Killing Small Firm Index (With The Help Of Uncle Jay)

The small firm effect is a theory that purports  that smaller firms, or those companies with a small market capitalization, outperform larger companies.

However, since 2019, larger cap firms have been outperforming small cap firms with small cap firms having trouble beating Treasuries!!

deathofsmallfirmeffect

The FAAMG index, Facebook, Amazon, Apple, Microsoft, Google, Alibaba, etc. has been skyrocketing in price.

faamgfed

The recent surge in FAAMG corresponds to the reversal in Federal Reserve tightening.

Of course, Apple (AAPL) just issued a warning Monday that it may fail to meet this quarter’s sales guidance thanks to slower production and weaker demand due to the disease known as COVID-19.

aapl

That is why we diversify!

Oobie-doobie!

 

 

70% Chance Of Recession In Next Six Months (According To MIT and State Street Study)

According to a new study by MIT and State Street, there is a 70% chance of recession in next six months.

The researchers created an index comprised of four factors and then used the Mahalanobis distance — a measure initially used to analyze human skulls — to determine how current market conditions compare to prior recessions.

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Using this principle, the researchers analyzed four market factors — industrial production, nonfarm payrolls, stock market return and the slope of the yield curve — on a monthly basis. They then measured how the current relationship between the four metrics compares to historical readings.

This recession measure is at odds with other recession probability forecasts which forecast a recession in the next twelve months at only 28% or less.

bloombergrec

Recession is defined as two consecutive  quarters of negative GDP growth.  Well, it is possible that the coronavirus will damage China GDP and maybe US GDP, but the MIT/State Street study is based on Industrial Production, Non-farm payrolls, the stock market and the yield curve slope. Only the yield curve slope (orange line) and Industrial Production (yellow dashed line) are showing recession-like trends. 

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Unless of course, MIT/State Street are saying there is a stock market bubble that will burst.

Here is a visualization of the impending recession and Mahalanobis skull measure.

recessionskull