NY Fed Dudley Says - "I'm Concerned..."

Headlines this morning –

“NY Fed’s Dudley Is Worried About – ELEVATED ASSET PRICES and Sees Real Risk of US Overheating, Hard Landing” - OK – can we just come back to this in a bit?  Is he kidding?  And he had plenty more to say at the SIFMA conference here in NY……

“Wal-Mart Raises Minimum Wage, Plans Bonuses After Tax Overhaul” – Starting wages to be $11/hr or $21k/yr for a 40 hr week. 

“ECB Minutes Signal Pivot on Stimulus, Sending Euro Higher” – European mkts surging on the back of this story…. Euro strengthens vs the $

“Merkel’s Bid for Fourth Term as Chancellor Hangs on SPD Vote” European mkts surging on the back of this story…. Euro strengthens vs the $

 “US Stocks Rebound as Energy Shares Surge” – mkts once again close at a new record making this 7 out of 8 trading days in the new year…. Energy Shares steal the spotlight (XLE) – surging 2.4% yesterday…. adding to the excitement about their coming earnings…

“Fiat Chrysler to Move Some Truck Production to Michigan from Mexico”

“The Robot That Takes Your Job Should Pay Taxes” – Bill Gates & I did tweet about this yesterday as well…. I mean is it me?  And if they move those robots to India, or the Philippines or even Mexico – we should tax them double or triple…just for being a wise a*s….

And if that is not enough……before you woke up Blackrock (BLK) reported 4th qtr earnings that (guess what?)  BEAT THE ESTIMATES…. here we go sports fans…. They reported a stunning $6.24/she vs. the expected $5.98/she – 4th qtr. Revenue of $3.47 bill vs. expr $3.31 bill.  4Qtr Ishares (ETF) inflows = $54.8 bill, 4th Qtr. long term inflows = $80.58 bil vs. $75.8 bil…Assets under management explode to $6.29 TRILLION (yes that is a T) …. and while there have been no early trades (yet) the stock is being quoted UP between $6 and $10 share…. CNBC scores and has BLK CEO Larry Fink all dolled up and sitting nice and pretty on set with Becky first thing this morning……

Next up is JPM….and does anyone really expect that Jamie is going to disappoint at all?  Hardly….The ‘guesstimate is for them to report $1.69…... T minus 15 mins and the fun will start……And they reported $1.76 easily beating the estimate but lots of headlines about implications of the TAX bill…..a $2.4 bil charge, Fixed income trading revenues fell by 27%  vs. the 19% expected…..there is more analysis to come….and remember – we told you this….JPM is up 17% in the last qtr….in anticipation of earnings….so any small pullback is nothing to get all worked up about…..in the end – it all depends on how Jamie spins it….and he has already said ‘that 2017 was a record year on so many measures….’

Soon after watch for WFC to report and they are expecting $1.02/sh…. Now yesterday the XLF (financials ETF) really marched in place – not doing too much, but remember this ETF is up 10% in a month and 5% of that coming in the last week….as investors (algo’s) anticipate ‘blow out’ numbers……Financials expected to grow earnings by 12% as a group vs. the 11% for the broader mkt….and it’s all good…

Energy shares stole the spotlight yesterday…I mean with OIL trading in the mid $60’s and Brent dancing with $70/barrel, while demand from China for EVERY commodity out there is helping to support this move….

A Bloomberg story this morning details how the Chinese economy is soaring, the EU is on the verge of an explosion (See the ECB comments), the US is going into overdrive and that demand for every commodity is expected to remain strong in 2018…..Watch the whole commodity complex surge….as the global economies begin to overheat…..and central banks scramble to try and control the mess that they created by leaving rates artificially low for WAY to long……The pendulum swings both ways…and now it’s about to swing way too far to the right……Hold on…..

And BOOM….US futures are UP again…. currently +6 pts as we are about to tease 2800 on the S&P…seems that the algo’s can’t get enough of the good times…. In fact – futures yesterday surged AFTER Dudley painted that worrisome picture about his concerns for the economy…. Is this Jay Powell’s way of ‘leaking’ future FED policy announcements……Have Dudley paint the worrisome picture and then he can reference that speech and say –

“Hey, why is the mkt surprised that rates are going up 50 bps?  ‘The Dud’ all but told you that the economy is overheating”

Now back to Dudley’s comments yesterday at the SIFMA conference….in his keynote speech yesterday – he had the b***s to say that the US economy is at risk of overheating in the next few years and that he is ‘slightly worried about financial market asset valuations’ – which he called ‘elevated’…. DUDE!  really?  And who’s fault is that?  Who has kept rates at near zero for a decade?  Who has allowed this to go on? (Come on…. you know the answer…).     But in a more positive statement – he did say that he is ‘less worried’ about the mkts because they are more robust today than a decade ago….and that

“If financial asset prices declined significantly – which presumably would occur if the economic outlook were to deteriorate – I don’t think such declines would have the destructive impact we saw a decade ago”

OK – here’s a tip – if financial assets decline significantly and that would be defined as better than say 25% - it WILL have a destructive impact on the economy.  Period.  The end…and that would be more because of the speed that it will happen……mkts will collapse before you open your eyes….Unlike the recession of the late 70’s or the 90’s or even ‘00’s when humans were at the center of the action – with the ability to reason and slow down - today the mkts are controlled by computers that have zero sense of destruction, for them it’s a sterile environment, it is just numbers – they don’t ‘feel’ the destruction and because the speed will allow it to happen in a flash – it will once again destroy the human psyche and cause the capital mkts to be viewed as a casino…something that SHOULD NEVER HAVE HAPPENED. 

The US capital mkts (as well as global developed capital mkts) should be viewed as places where people go to invest money, create opportunities, and build and generate wealth for a lifetime, they should NOT be viewed as a casino in Vegas or Macau……and that my friends is my fear for the broader long-term health of capital mkts…. We have ‘CASINOIZED’ them….

. Eco data today includes:  CPI – exp of +0.1%, EX Food and Energy of +0.2%, Retail Sales of +0.5%, ex Autos of +0.3%. 

FED speakers include Philly Fed Pres – Patty Harker is due to out at 12:30 while Boston’s Eric Rosengren is due out at 4:15 pm.

Take Good Care



Break out the Popcorn…. Time to watch the show…
Buon Appetito.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.