Is it just us, or are communications between the Federal Reserve and the Street starting to sound a lot like high-school gossip?
Yesterday, The Wall Street Journal quoted Atlanta Federal Reserve President Dennis Lockhart as saying: "I think there is a high bar right now to not acting, speaking for myself." Since Lockhart is considered more of a centrist, his comments shot the probability of a September Fed rate hike way up. Jeremy thinks Stacy is cute!
This morning, Federal Reserve Gov. Jerome Powell made a surprise TV appearance to reiterate that the Fed is pursuing a data-focused view of the economy. Jeremy may not be that into Stacy after all!
What's an investor to do?
The frustrating truth is that Fed consists of mere mortals with imperfect information, models and assumptions based on much of the same data that we all get. They've got less-than-clear insight, and are subject to the same human weaknesses of hubris and fear that we all are -- coupled with the problem of complex group dynamics.
We guarantee you that Janet Yellen isn't 100% clear today about what the Fed is going to do over the coming months, so how can you divine the future with even less information than she has?
So, let's focus on what we do know:
Despite headlines heralding joy over factory orders' rise from May to June, a look at the data from a broader perspective than just month-to-month shows a monthly gain that doesn't account for much relative to the falling trend. Does the chart below look like an economy that's gaining traction?
Last week, we also learned that U.S. wages and salaries rose at the slowest pace on record during the second quarter. The 0.2% gain also followed a seriously wimpy 0.7% first-quarter increase. So much for that labor-market improvement!
To add to the pressure, today's ADP private-payroll report came in well below expectations at 185,000 vs. 215,000. So, all eyes will be on Friday's payroll report from the Bureau of Labor Statistics.
The U.S. dollar has strengthened enormously against almost every other currency over the past year. The British pound is down 8%, the Chilean peso is off 19%, the euro is down 23% and the Norwegian Krone is 32% lower!
The Fed is contemplating a rate increase while nearly every other central bank is taking steps to weaken their currency through rate cuts. And that's on top of the "de facto" rate hike the U.S. economy is seeing from currency appreciation.
It isn't just currencies that are feeling the pain. Commodities have taken a beating across the board, from copper to palm oil and iron ore to sugar.
In fact, some the only commodities that have gained over the past year have been a handful of foods products, such as olive oil and tea (much to the dismay of Hawkins' Irish sensibilities). Eggs have also risen -- good news for Cal-Maine (CALM). So has uranium, thanks to the reopening of Japanese reactors.
The strong dollar has played havoc with U.S. exports, providing another headwind to economic growth:
The bottom line
Now why should you care about all of this?
Simple: About 45% of the world's GDP comes from commodity-producing nations. If those countries have less revenue from exports, they can't buy as much from the rest of the world.
Many of these same countries also borrowed heavily in U.S. dollars and are getting killed with their weakening currencies. If the Fed does raise rates soon (which we're still not convinced is going to happen), that will only further drive this trend.
And let's not forget that U.S. GDP grew during 2015's first half at the slowest rate since 2009. But just wait, the boom is right around the corner -- and we have some fantastic leather pants worn by a rock superstar in Stockholm that would look great on you! #LennyKravitz
What trades should you make out of all of this?
Well, commodities are likely to weaken further as global growth slows and the dollar will likely continue to strengthen, albeit with bumps along the way. That could translate into good things for the WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU). That's a play for a strong dollar vs. a basket of currencies that includes the euro, the yen and others.
We also wouldn't be surprised to see oil continue to weaken as more supply comes on the market thanks to Iranian crude coming online and Saudi Arabia adjusting to keep its export revenue up.
That's not good news for Exxon Mobil (XOM) or Royal Dutch Shell (RDS). This can be played either with puts on oil stocks, or through a short ETF such as ProShares Short Oil & Gas (DDG).
Lastly, for those who have the gumption for a serious contrarian play, Hawkins is eyeing the iShares 20+ Year Treasury Bond ETF (TLT). That's based on the strengthening dollar and her increasing belief that the Fed won't raise rates in September.