A Warning to San Francisco and Silicon Valley.
In this week’s podcast:
San Francisco and Silicon Valley companies without profits and high valuations will crash, bringing their real estate markets and economies down with them.
The Fed will strongly signal interest rate hikes claiming the economy is strengthening.
The underlying reason for interest rate hikes is to combat de-dollarization initiatives.
The Federal Reserve and Interest Rates
4:19-9:25 The Fed has been insisting with main stream media support that the economy is recovering and that “underlying strength” will allow the Fed to raise interest rates. The false narrative of a strengthening economy will be used to justify an increase in interest rates. The real reason the Fed needs to raise rates is to protect investment demand for U.S. Treasury Bonds. De-dollarization initiatives have reduced transactional demand for the dollar. Higher interest rates will support sorely needed foreign investment demand for U.S. Treasuries.
The change in the amount of treasury bonds held by foreign governments is discussed.
Russia and “Belgium” recently sold large amounts of U.S. Treasuries.
The June FOMC Meeting
9:25-16:11 The Federal Reserve upcoming June meeting is discussed. The Fed will claim that the job market is solid and that while other economic data is weak (weather!), the Fed will project accelerating job and wage growth and extrapolate from that an increase in consumer spending that will drive the economy later in the year. On that basis the Fed will indicate strongly that absent data to the contrary they will raise rates in September (if they don’t raise them in June).
Waiting longer will give the economy time to prove that it is not recovering and take away the Fed’s ability to say they are raising rates in a strengthening economy and will damage the Fed’s credibility.
The media continues to provide the cover story for the ‘recovery’ narrative even when there is bad news:
Reuters: “U.S. industrial production unexpectedly fell in May, likely as a strong dollar and energy spending cuts continued to weigh on manufacturing and mining output, bucking signs of an acceleration in the broader economy.”
The media treats bad news as an anomaly when all the economic new other than the jobs numbers are good.
Top Foreign Holders of U.S. Treasuries
The latest U.S. Treasury holdings of China (steady), Belgium (way down after being way up), Japan (down) and Russia (inexorably down) are discussed. The overall decline in US Treasury demand is discussed. Much of the U.S. deficit spending is done from issuing bonds to foreigners and until recently having the Federal Reserve buy them under three quantitative easing programs.
Russia has been selling their U.S. Treasury Reserves and increasing their gold reserves.
The Fed realizes that they can’t continue to buy US Treasuries lest it undermine the dollar. The Fed has managed to print $4.3 trillion dollars over the past six years and to buy $2.5 trillion of U.S. Treasuries with out a reduction in the value of the dollar vis a vis other currencies. The dollar is strong today than it was when QE started in 2009.
A rate hike is already baked into the bond market and the supposed derivatives bubble won’t burst because the Fed has telegraphed the upcoming rate hike long enough to give traders time to readjust/close out their positions on the basis of higher rates.
The Fed will give strong signals at their June FOMC meeting that, absent data to the contrary, they will raise rates in September.
The Fed and The Real Estate Market
16:11-21:00 the Fed and the status of the real estate market is discussed. The Fed will continue to telegraph their rate hike intentions after the initial rate hike. They won’t, however, raise rates to normal levels-just higher than most other central banks.
QE 4 AFTER Rate Hikes?
21:00-24:50 the possibility of QE4 after rate hikes is discussed. Rate hikes provide the Fed with credibility to enable them to do QE4. The Fed can claim that the US economy was doing really well in 2014 and 2015 by pointing to all the positive media stories written the past couple of years.
Main Stream Media, Wall Street and Alternative Media Views of the Federal Reserve
24:50-27:45 different perceptions of the Federal Reserve are discussed.
Startup Bubble Companies, Home Builders, Auto Sales and Consumer Credit
27:45- 41:06 venture capital startup companies with no profits are discussed and compared to other small businesses. Homebuilder sentiment and home buyer incentives as a way of boosting sales (but not profits) are discussed. Record auto sales and prices are discussed in the context of sub prime auto loans. High consumer debt in the form of credit cards, auto and student loans as well as higher food, energy and insurance expense are putting a lid on home sales and consumer spending (and in turn GDP growth).
Consumers can’t spend what they don’t have.
Is QE just for the rich? Janet Yellen and Ben Bernanke’s comments on this question are discussed.
Home and Stock Prices
41:06-44:06 Home prices of 2004-2005 are compared to today’s home prices and share prices. Home prices are restricted by ability of buyers to pay. Stocks in contrast have no such limitations.
2016 Presidential Elections and Hillary Clinton
44:06 Hillary Clinton’s prospects are discussed. Age of presidential candidates, Ron Paul and the Federal Reserve are discussed.
Dow Jones Industrial Average Chart From Yahoo! Finance
The Dow Jones Industrial Average has hit new highs. Will new lows follow?
A Warning For San Francisco and Silicon Valley
47:15- an analysis of the San Francisco Silicon Valley economies and why they are destined to crash.