5 Things To Know In Investing This Week: The Everybody Shut Up Issue

The Federal Reserve completed its May meeting and kept rates unchanged. So, why did the market rise? The Bank of Japan intervened to save the yen twice to no effect before getting bailed out by the Fed taper and a weak employment report. Irresponsible people in Washington are saying insane things. DKI’s solution:  Everybody stop talking! I get locked out of my Twitter/X account due to someone impersonating me. DKI invests in a biometric security company that can solve this problem. In the debate between the “the economy is strong” and the “we’re already in a recession” people, DKI explains how everyone is right (or wrong).

This week, we’ll address the following topics:

• The Fed went from hawkish pause to dovish pause.

• The Bank of Japan intervenes. It’s ineffective.

• More people in Washington DC saying silly things. Everyone should shut up!

• The practical case for biometric security.

• Weak economic indicators vs growing wages and growing GDP. Which is right?

Ready for a new week of too much talking in public? Let’s dive in:

• The Fed Moves from Hawkish Pause to Dovish Pause:

The Federal Reserve completed its May meeting and surprised nobody by keeping the fed funds rate unchanged. The text of the press release was more hawkish than the one from the prior meeting. (Hawkish means favoring higher interest rates. Dovish means favoring lower rates. Last month, there was intentional ambiguity in the language used. This month, the Committee reiterated it’s “strongly committed to returning inflation to its 2% objective” and admits there has been a lack of progress in recent months towards getting there. Yet, the market treated the release as if it were more dovish than expected.

The rate of decline in the Fed balance sheet is about to slow.

DKI Takeaway:  Starting in 2008 and accelerating during Covid, the Fed blew up its balance sheet to $9 trillion. It’s currently reducing the size of the balance sheet which is called quantitative tightening (QT). The reason the market reacted positively to the Fed release is they announced an intention to start to taper QT. Monthly net redemptions on Treasury securities are being cut from $60B to $25B. Monthly redemptions of other securities like mortgage-backed securities will stay at $35B. That will slow QT by $420B per year.

• The Ineffective Intervention of the Bank of Japan:

DKI has been writing about the dilemma faced by the Bank of Japan (BoJ) since October, 2022. Japan’s near-zero interest rates have caused the Yen to fall. The obvious solution of higher interest rates would blow out Japan’s budget as debt to GDP there is above 260%. This week, the BoJ spent $38B in foreign currency reserves defending the yen. When that didn’t work, they spent another $24B.

Two interventions with little effect. Graph from Yahoo Finance.

DKI Takeaway:  You can see the first intervention took the yen from 159 to the dollar up to 155 per dollar. Within two days, that intervention failed and the yen was back down to 158. A second intervention raised the value of the yen again, but effect of that was largely undone within a day. That’s because the BoJ’s intervention didn’t change any of the structural issues causing the yen to continue its multi-year slide. The strength in the yen at the end of the chart relates to the US Fed reducing its rate of QT followed by weaker than expected employment data in the US. Japan needs a weaker US economy leading to lower interest rates to get bailed out of its current dilemma.

• More People in Washington DC Saying Silly Things:

Treasury Secretary and former Federal Reserve Chair, Janet Yellen, said she is “concerned about the future of the American economy if the budget deficit continues to increase”. Yellen has previously said she regretted not causing more inflation while at the Fed, and also characterized our current inflation as “transitory”. Her actions have directly contributed to our current inflation problems and she and the Fed have contributed to our oversized budgets. Many thought some of her comments on risks to democracy were intended as indirect criticism of President Trump. Is that criticism fair?

We can always count on @RudyHavenstein to find the truth in insanity.

DKI Takeaway:  We’ve been critical of Yellen in the past, but think she’s correct here. In outlining his plans for a possible second term, President Trump has been talking about trying to change the Federal Reserve to be responsive to the policy goals of the White House. The Fed is intended to be politically neutral to avoid this exact kind of interference. The current White House has made clear its desire for lower interest rates and has decided to offset that lack of additional stimulus with huge spending and debt cancellation/transfers. Both the Administration Yellen serves and the one she opposes are taking us down a path of ever-increasing spending and inflation. Everyone involved should stop talking. Want our opinion? DKI is on team #EndTheFed. Let the market decide the price of risk and time; not politicians.

• The Practical Case for Biometric Security:

Last week, an impostor copied my name, photo, firm name, and the DKI logo, and set up an account on X (formerly Twitter). The impostor then reported me and got MY account suspended. Even with the quick help of X’s excellent support staff, it took me hours of effort over two days to regain full control of my account and to get the impostor’s account deleted. In addition to losing time, the impact of the impostor’s actions was significant. I was unable to join a live webinar (called an X Space) where I was to be one of the featured speakers. I know from others it sometimes takes months to resolve these kinds of issues. I’ve invested significant time in growing my following on that platform and fostering relationships. The instant loss of access to my account due to the fraudulent actions of someone else is a threat to my business. So, what should be done?

Not what you want to see an hour before you’re speaking on that platform. Also, I wasn’t the one breaking the rules.

DKI Takeaway:  Last week, DKI released a 20-page research report to premium subscribers. In it, we recommended a cybersecurity company that is focused on biometric authentication. The people at X support were helpful and responsive, but had X been using biometric authentication, it would have been possible to regain access to my account in minutes instead of hours. Even better, it’s likely that biometric authentication would have prevented the fruadsters from claiming my identity in the first place. This is the second time in the past 15 months that I’ve had someone pretending to be me create problems for my account. Some X users who have a larger following are impersonated on a weekly or daily basis. Biometric security, like the kind this company provides, would allow users to secure their accounts.

• Weak economic indicators vs growing wages and growing GDP:

This week, the purchasing managers’ index (PMI) came in below 50 again indicating contraction. It’s been below 50 for 17 out of the past 18 months. Consumer confidence of 97 was far short of the 104 expected. DKI has stopped writing on the employment data because it has proven to be unreliable; however, Friday’s employment report also came in below expectations and the unemployment rate was higher. I was a guest this week on @chigrl ‘s MicDropMarkets show, and some very smart panelists were talking about how the economy is in good shape. What’s going on here?

Below 50 again.

Down and below expectations.

DKI Takeaway:  I think we have a bifurcated economy. Massive government overspending/stimulus has ensured that GDP growth remains positive. Almost all of the new job growth in recent months has been in government or healthcare which is largely funded by government. That part of the economy is awash in liquidity. As we saw in last week’s 5 Things, government debt is growing faster than GDP. Government spending is pushing out the private sector and all new job growth has been in part-time jobs. More people aren’t working. The same people are working more to make ends meet, and much of that is due to inflation caused by government spending. The aggregate data shows a strong economy. The weak consumer confidence shows a lot of private citizens worried about their prospects.

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