I guess it is the fault of the media that hardly anybody has noticed Janet Yellen's shapely legs and her elegant shoes. Besides that Wall Street bankers will be all too happy to see her since her accommodative monetary policy makes them lots of money and this may be even sexier than her legs.
Unfortunately a problem has arrived - the strong Dollar. The strength of the currency has certainly many good points. It keeps inflation low at a time of high fiscal deficits and record low interest rates. It also muffles the voices of critics who describe the US economy as being one gigantic money printing press with a gun shop attached to it. However there is a downside too. It becomes ever clearer that the dear Dollar has a negative effect on US corporate earnings. The US Treasury estimates that a 10% appreciation of the Dollar reduces real GDP by 0.5% in the first year and 0.2% in the next. Since early last year the Dollar has gone up by more than 20%. There are other less visible dangers. The overvalued currency essentially subsidises the efforts of foreign competitors to establish a US beachhead and expand from there. This is particularly acute in manufacturing. Is it a coincidence that the share price of General Motors has fallen 10% below the floatation price of 2011 of 33 Dollars? It appears to me that US manufacturing is being eaten alive by a pack of very hungry competitors, like some cattle in a Piranha infested river.
The impact of the strong Dollar coincides with a drastic slowdown in US growth. JP Morgan talks about 1.5% of annual GDP growth as being the new normal. What if it is lower? Bloomberg already worries about a new recession. At the same time analysts talk about a rate hike in September.
I understand why the Fed would like to raise interest rates. It would add a little bit to their empty toolbox whilst talk about rate hikes can deter speculators from hyping up the market to unsustainable levels. Unfortunately this Fed policy could very well be the trigger for the next recession. The current economic cycle that started in 2009 is getting old and statistically it is time for a downturn. It will be too late to prevent this if the Fed waited until the writing is on the wall. The Federal Reserve must be proactive and the time window is closing fast. If they don't change course before September it may be too late.
Are we prepared for another US recession? The world was never as much indebted in peacetime as it is now. A research paper by McKinsey, published this year shows that global debt has gone up by $57trillion since 2007. Almost all asset markets in the developed world are in bubble territory. US sub prime lending is booming again, anybody with a heartbeat can get a car loan. The junk bond market is heading for a massive correction, at the forefront are shale oil producers facing bankruptcy. 40% of US citizens live pay check to pay check, more than half of all households have not enough savings to cover an unexpected $1,500 shortfall. Almost 50 million US citizens live on food stamps and more than 90 million Americans of working age have dropped out of the unemployment statistics. The situation is dire.
What can the Fed do if it is faced with another recession? According to HSBC it looks like the Titanic without lifeboats. The toolbox is empty. There is only one thing left - the printing press.
How will the Fed stop a collapse of the bond market and a spike in yields? - By printing money to buy bonds. How will the Fed stop a rout in the stock market? By printing money to buy S&P futures. Printing money will become the panacea for everything. A collapse in the financial markets will also feed through to the real economy and cause new unemployment, bankruptcies and spiralling fiscal deficits, triggering even more money printing.
The US Dollar will fall one way or another. Either because of Federal Reserve and US Treasury intervention. Or as a result of a new downturn. Take your pick.