Janet Yellen and the Feds


Tell me that Janet Yellen and the Feds doesn’t sound like a totally groovy band. For the past few months they have been singing that they will be raising interest rates this year sometime. Don’t ignore their music just because you might not like it. It’s an important sound man.

It is more than hard to know exactly when interest rates will be raised, it’s impossible. However, I am moving up my 4th quarter expectation to 3rd quarter and it wouldn’t surprise me to see a June 1/4% hike in the Feds Funds rate.

There are some, my quant analyst Rick among them, who believe that the Fed will not raise interest rates this year. Rick’s logic is actually sound, he believes there is deflation in the economy and that the Fed wouldn’t dare raise rates in the face of that. I also believe there are deflationary pressures, however, I think there is so many moving parts here, we have to go beyond deflation. 

I have been saying for years now that the world was in a depression that was driven by demographics and debt. Google “Kirk Spano depression demographics” and you’ll get a few hits. Let’s understand what a depression is. It is a sustained period of below trend growth. We have that. It’s structural. 

The structural nature of lower aggregate demand is where central banks have erred. They think that monetary stimulus can fix it. It can’t. Take a look at some of the charts in my free report “Avoiding the Next Crash and Investing in the Next Boom” (if you want the report, just put in a name and email, but leave all the boxes unchecked) and you’ll see that demographics just don’t support the growth that we had from the 1970s to the early 2000s. 

The central banks have driven up debt so much that there is no way for growth to rebound even when it should – which would have been in the 2020s. There are a few nations that will be exceptions that we will cover here in this service, and the U.S. will be one of them, but most of the world is now condemned to at least one generation of flat economies and probably two. Europe is in that group. Japan might be worse and I think it is only a matter of time before they go the way of Greece.

Moreover, debts have become so overwhelming because politicians have failed for over a generation to do the courageous and smart things that would have let the markets correct and then heal. Had those corrections been allowed to happen and left alone, we would have seen slow organic growth over time. Instead, we panicked and bailed out the folks who caused the financial crisis, rather than putting together programs to help folks who were doing things about the right way – you know, the people who go to work, pay their bills and try to be good neighbors.

On top of bailouts which were done very badly – I’m not saying there didn’t need to be lifelines, I’m saying the lifelines went to the wrong people – we then spent money very stupidly. Special interests have been soaked with cash. Even Obamacare, which at it’s core has some great goals and ideas, isn’t what it should be and needs to be reformed. Unfortunately, we have one side to proud to admit it needs revisions and another that doesn’t recognize the good in it. So, they use it as a campaign issue, rather then making it what it could be – but I digress. 

So, here’s an example of a stupid project with no benefit. In Milwaukee, our Mayor is obsessed with putting a trolley in downtown Milwaukee. He thinks it will drive commerce and be good for the economy. He’s wrong. He thinks people will use it. He’s wrong on that too. He thinks it’s good for the environment. That’s not actually true either when everything is considered, since huge demolition needs to happen and the electricity that will be needed to run it comes from a coal power plant that was built within the past decade so has no chance of being replace soon. 

What’s so monumentally stupid about the crowd that wants the trolley is that it is such bad technology. Heavy vehicles can run on natural gas now and we are a few years away from very good electric vehicles. Milwaukee could buy a fleet of smaller buses that run on natural gas and use them to go anywhere – remember a trolley has a set route that can never be changed – and then give way to electric vehicles in the next century. 

If the Mayor and his advisors really wanted to help the local economy, they’d cut a deal to replace all of their buses with natural gas vehicles and require a service center be built in Milwaukee. And then, they’d take all the money – over a hundred million dollars – and put it towards water infrastructure that needs to be upgraded. Right after that, they could call Pepsi or Coke and say, “hey, we hear you’re having water problems at your southern bottling plants…we have a solution for that…we happen to have some water…” 

Anyway, I bet you live near a stupid project. If you do, write about it, rip it, call politicians out. I have struggled my whole life and have just started to get ahead so it really bothers me that I’m fairly convinced that even with a boom in natural gas revenue coming to the country starting later this year and probably lasting a few decades, our government will just screw that up and keep doing stupid things and soaking special interests with cash skimmed from what should be a citizenry that is much better off. 

Ok, so I ranted off the rails a bit. Normally I’d just delete that and move back into the subject of the letter, but it’s a pretty good rant so I’ll leave it. It’s also a bit on topic. Back to the central banks.

There was an article today on MarketWatch titled “The Currency Wars have Begun.” Good grief. The currency wars are almost over. And you know what, one reason I still have some hope, is that if Yellen and the Feds actually do raise rates, then America wins that war. 

Why? Because in a world with slower growth, a strong currency is a winner. That’s why Yellen and the Feds will raise rates. Yes, there will be a stock market correction, but it won’t be a crash. We only get another 2008 or 2000 or something that bad if Yellen doesn’t raise interest rates and they let the bubbles continue to grow another year or two. If they do pass on raising rates and claim it’s due to growth concerns, well then I misjudged her and will go beyond net short sometime next year, I’ll go leveraged net short a whole bunch of things, not just stocks.

As I mentioned on MarketWatch almost 3 years ago now, the stronger dollar will help us in a lot of ways. First of all, it keeps our cost of living lower and standard of living higher. In a slow growth world where making investment gains will be harder, that’s very important. It will also make the natural gas we are on the verge of exporting more profitable, which will generate more tax revenue. Natural gas investments will be the subject of next week’s letter and private posts for subscribers who will get the updated “Last Great Chance to Buy Oil and Gas Stocks” next Sunday. There’s a lot of value developing in natural gas heavy oil and gas stocks. Subscribers know I am buying my favorite now, but there are several others that are going to make a lot of money the next decade.

Kirk Spano