The Chart The Fed Doesn’t Want You To See
Investment U | May 11, 2015 01:01AM ET
The folks at the Fed are getting desperate. Their patient is slowly healing, but he refuses to do it without a big dose of painkillers. It’s clear that if the money manipulators hide their pills now, our addict will throw an economic fit none of us is eager to experience.
On Wednesday, markets were shaken when the world’s top pill pusher Fed Chief Janet Yellen boldly told us that stocks are overpriced. It was a half-cocked assertion that Alex Green quickly overcame (read his argument here ).
Now the question is why Yellen would make such an irresponsible statement.
The simple answer is she’s testing the waters... seeing if her addict is ready to kick his habit.
There is no doubt the folks at the Fed have seen the chart below. It highlights why Yellen is so worried about what comes next - or, worse, what doesn’t come next.
The chart is really quite simple. It shows the so-called velocity of our money - how deep and quickly every dollar we spend flows into the economy. For example, when the ratio climbs above 2.0, it tells us every available dollar in a preset period is spent more than twice. When the ratio dips, we’re spending less.
And, mister (or missus), the chart tells us you’re not spending much... and neither is your neighbor.
In fact, the velocity of our money is the lowest on record. That scares Yellen and her troops.
It means that instead of quickly using all those cheap dollars the Fed is printing to buy cars, boats and hotel rooms, we’re holding onto them (which explains our seven-year bull market). They’re not flowing through the economy, stimulating growth.
Why? Because folks are scared. They know that without all that cheap money, the economy will falter.
They know that without the painkillers, our patient will be writhing in pain.
That’s why Yellen did what she did this week. By making her hyperbolic comments, she took the pulse of the patient... seeing what would happen if she slashed its dosage.
The reaction was what we’d expect and what she feared. Stocks and bonds fell in tandem.
Normally, that wouldn’t be too much of a concern for a Fed chief. But remember, American economic growth is downright anemic. First quarter GDP growth was a paltry 0.2. Worse yet, the market now expects the revised number to be south of zero - horrible news for somebody looking to raise rates .
Get The News You Want
The bottom line here is all of that free money the Fed is pushing into the economy is not having the intended effect. The chart proves it. It’s certainly stimulated the equities market, but it has yet to spark sustained economic growth.
It means Yellen and her troops have their hands tied. They can’t raise rates by any worthwhile amount.
Because of this fact, expectations for a rate increase have continually been pushed back over the last 24 months. Don’t forget, this time two years ago, most economists expected rates to be far higher than they are today. Instead, long-term rates are threatening to drop even further. And, worse yet, they’ve turned negative across the pond (a phenomenon once thought impossible).
The Fed very well could raise rates this year. But it will be a token move at best... a mere fraction of the original plan. It will not have a material effect on the economy or the markets.
Yellen has no choice but to keep the painkillers coming. We’re flat-out addicted.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.