The Story of the Boy Who Cried Wolf

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to see if there are similarities between the story of the boy who Cried Wolf and the the talk of  the USA FED, who is telling us that they are going to raise rates.

THE FABLE:
The story dates from Classical times, but, since it was recorded only in Greek and not translated into Latin until the 15th century, it only began to gain currency after it appeared in Heinrich Steinhöwel’s collection of the fables and so spread through the rest of Europe.

The tale concerns a shepherd boy who repeatedly tricks nearby villagers into thinking a wolf is attacking his flock. When one actually does appear and the boy again calls for help, the villagers believe that it is another false alarm and the sheep are eaten by the wolf.

The moral stated at the end of the Greek version is,

“this shows how liars are rewarded: even if they tell the truth, no one believes them“

PGM CAPITAL ANALYSIS AND COMMENTS:

Is the USA Fed that cried wolf:

The USA Federal Reserve  (THE FED), needs Markets To Think They Will Hike interest rate this year, but if no one believes it?

The US Central banks has a habit of preparing markets for changes in monetary policy, which is why it stated that rates would increase 3-4 times in 2016. However, with eight months already in the books, the FED is looking a lot like the boy who cried wolf at this point.

It seems like the Fed has either an excuse or a pledge at each meeting.

Fed Chairwoman Janet Yellen brought more confusion to the markets on Friday, August 26, at the Jackson Hole summit in Wyoming by saying that:

“The case for an increase in the federal-funds rate has strengthened in recent months.”

This language is about as strong as a central banker could be to warn of a coming move.

For the first two hours after the speech, stocks moved higher and bond yields fell slightly, a reaction that seems to say, prove it!

Will the November elections prevent any rate hike?
The US Presidential election is in full swing, and this contest is like no other America has witnessed.

The chances are that the aftermath of the current election will present more animosity and ill-feeling than past contests given the two candidates. The bottom line is the election, and the consequence will likely become yet another compelling reason for the U.S. central bank to leave monetary policy unchanged.

Is the FED Chess-mate?
The Fed is suffering from a credibility problem, and it has itself partly to blame. Over the past couple of years, it has repeatedly signaled impending tightening, only to back away.

On Friday, September 9, Eric Rosengren, the head of the Boston Federal Reserve and a voting member of the FED’s policy-setting board said that a “reasonable case” can be made for a rate increase given the growing risk that the US economy and financial markets will overheat, this despite headwinds from abroad.

The Markets called Mr. Rosengren’s bluff with the DOW-Jones Industrial to shed on heavy volume, 394.46 points or 2.13% on Friday September 9, to close at 18,085.45 points as can be seen from below chart.

The  S&P-500 and the NASDAQ lost respectively 2.45% and 2.54% on Friday, September 9.

Investors by calling the FED’s bluff also dumped US-Treasuries, sending the yield of the 10-year note, on Friday, September 9, to 1.67% an increase of 3.47% as can be seen from below chart.

The Fed has let some golden opportunities to increase interest rates pass them by over recent months. There will be a price to pay for their inaction and consequently make them now the boy who cried wolf.

What’s Next?
We believe that Monday, September 12, will be a very interesting date for the markets, because after Friday’s sell-off, the stock-market weakness is now number 1, because the FED is going to ignore the weak USA economic data, because they are still talking rate hikes, than the only thing left to take the rate hikes off the table is the Stock-market.

The traders might force it to happen, because if the lousy economic data is not enough, than the trader would like to see how much pain the FED is going to tolerate from the stock-market and the bond-market.

For the rest of 2016, we believe that there are too many compelling reasons for the Fed to continue on its current course of inaction. All the while, gold, and silver are likely to make higher highs as these metals are not crying wolf but, are acting as the canary in the coal mine and are telling us that the inflationary wolf will be nipping at our heels before long.

Until next week.

Yours sincerely,

Eric Panneflek