There’s no doubt about it anymore — the Federal Reserve has ventured into the Twilight Zone! Chairman Ben Bernanke has loudly declared that he will print, print, and print some more in an effort to bolster employment.
He went even further, in fact, basically admitting in his post-meeting press conference that he WANTS to create new asset bubbles in things like real estate and stocks. He claims that will make everyone feel wealthier, causing them to go out and spend and bring the happy times back.
But even as Bernanke keeps trying to TALK a good game, we keep getting concrete, irrefutable evidence that all the past money printing efforts — from QE1 and QE2 to Operation Twist 1 and 2 — aren’t working. They’re failing to do anything good on the jobs front, while simultaneously driving up the price of “bad” assets like commodities.
Bottom line: The great “Funny Money versus Fundamentals” battle continues to rage, with epic consequences for your wealth! Here’s how I expect it to shake out …
From Growth to Inflation, the Economy Is in Trouble!
Let’s start with the growth outlook. Just in the past few days, we learned that industrial production plunged 1.2 percent in August. That was far below forecasts and the worst reading since March 2009!
The first of the regional manufacturing indices we’re getting for September look nasty, too. The Empire Manufacturing Index for the New York area plunged to -10.4 from -5.9 a month earlier, while the employment subindex plunged to 4.3 from 16.5!
What about spending? Well, retail sales — excluding autos and gas — rose a paltry 0.1 percent last month. That was far below the 0.4 percent gain economists expected. Another “core” sales number — one that goes into the government’s GDP calculations — FELL 0.1 percent!
That’s not much of a surprise considering job growth stinks and real (inflation adjusted) incomes are suffering. The latest on that front? Average hourly earnings plunged 0.7 percent in August, the biggest decline since the summer of 2009.
So clearly all the Fed’s monetary horses and all the Fed’s men aren’t doing anything for jobs or growth. But what they ARE doing is causing more inflation!
Producer prices? They shot up by the most in three years in August! Consumer prices? They rose 0.6 percent, the biggest monthly jump since June 2009. And a key index that tracks inflation expectations in the bond market just surged to a six-year high!
Bottom line: The Fed’s money-printing policies are driving commodities sky high, helping Wall Street speculators. That’s causing the real income of average Americans to plunge, siphoning off growth from the real economy. Yet somehow, in Fed-land, this is considered progress.
So What Can You Do to Protect Yourself?
In an environment like this, it is very easy to lose sight of just how troubled the real economy remains. After all, Bernanke can point (is pointing, actually) to the stock market and say that its recent rally shows his policies are “working.”
But how much longer can that keep up? How much longer can the massive divergences between the real economy and the market persist? And how much longer can the huge divergences between corporate earnings and equity prices last?
FedEx (FDX) is a company I’ve harped on before because I believe it’s an excellent microcosm for the sorry state of corporate America.
The worldwide shipping firm first cut its forward earnings guidance in June due to waning demand for its services worldwide.
Then it cut its guidance for a second time in early September.
And then, just this Tuesday, it cut its future guidance AGAIN. That’s three warnings in four months, a sign that business is deteriorating at a rapid, and unexpected, pace.
Diversified manufacturing firm 3M (MMM) piled on this week, too, saying its goal of 7 percent to 8 percent revenue growth was likely unattainable. The company makes everything from Post-it Notes to electrical connectors to stethoscopes to tape, and it operates in every corner of the world.
Weak results from Bed, Bath & Beyond (BBBY) — which was forced to cut prices to lure tapped-out consumers, hurting profits — spooked investors even more on Wednesday. So did an epic warning from Norfolk Southern (NSC). The leading railroad firm said declines in coal and merchandise shipments will slash revenue by $120 million, causing it to miss quarterly profit targets by as much as 28 percent!
These are just some of the reasons why outside of select, targeted companies and asset classes, I still don’t want to take on too much risk. It’s also why I recommend maintaining downside hedges against the distinct possibility the funny money rally has carried us about as far as it can!
Until next time,
Do You Own Gold?