Janet Yellen recently in a speech to the Economic Club of Washington gave us her view of the US economy, the effects of the FOMC actions over the past six years, and predictions regarding the future of the US economy and probable actions by the FOMC in the near future. A copy of her speech can be easily accessed under the Federal Reserve Bank tab on the right of your screen. If you received this by email, log into rneconomist.com and read her speech.
The Redneck cautioned the readers in a rant on July 14, 2014, following Yellen’s speech to the Michel Camdessus Central Banking Lecture at the meeting of the International Monetary Fund in Washington, D.C. regarding future actions of the FOMC in the light of significant events occurring overseas. I do not believe the FOMC predicted, at that time, the US Dollar would rebound to be the preferred currency of the world. In fact, many around the world were predicting the US Dollar would fall from the graces of the world economy. FOMC could not have forecast the rapid rises of ISIS and its control of Syrian and Iraqi oil fields and production. FOMC could not have forecast the decline of the economy in China and the devaluation of the Chinese currency. FOMC could not have forecast the rapid decline of the price of oil in 2015. The Redneck warned that each of these types of events would have an effect on the future US Economic growth.
The Redneck recognizes that the decline of the price of oil has made fuel prices lower for Americans and everyone in the world. This should increase consumer confidence and spending. Yet, we face significant failures in our regional oil and gas upstream developers due to high debts incurred by those companies in the development of oil and gas exploration over the last 3-5 years. What will be the cost of “defeating” ISIS? We see a decline in the amount of US exports due to the higher value of the US Dollar weakening the manufacturing sector in the US, including the decline in revenues by US companies from sales and business growth overseas. All commodities from corn to copper have declined in price by more than 100%.
On Friday, December 11, 2015, the US stock markets had one of the worst losses in the last two years. Today, December 14, 2015, it is being reported by the major business media networks that ETF trading on Friday contributed to over one-half of the volume and losses due to the announcement by several large EFT and Hedge Funds holding “junk bonds” had either liquidated their holdings or announced they were restricting withdrawals by investors from the funds due to failure of the bond issuers, mainly in the oil and gas industry.
The Redneck remains firm in the belief that any rise in the Fed Funds Rate will have a significant long-term impact on the US economy. If oil companies, and other companies, that borrowed at the low interest rates are going to have a tough go of it at the low rates, what will be the impact with higher rates? The mark-to-market accounting issue I ranted on must be watched with detail scrutiny. It was recently reported the SEC has opened an investigation into the revenue recognition policies of IBM. It is understood IBM changed its accounting method several years ago to the mark-to-market method for recognizing income on long-term contracts. A rise in interest rates will impact the valuation of all long-term contracts in addition to long term bonds and other negotiable securities. Please beware and follow your gut. This issue is not complicated. The pundits want you to believe it is complicated.
The Redneck, December 14, 2015