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Five Things You Need to Know: Fed Love, Co-Dependency, July 14, Creep, Do Fries Go With That Shake?

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What you need to know (and what it means)!

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Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. People Who Love Too Much and The Fed They Love

According to the National Mental Health Association, co-dependency is a form of "relationship addiction" that is often one-sided, emotionally destructive and potentially abusive. But we don't care, because the Fed needs our support.

  • Yesterday the Fed raised rates 25 basis points and changed the FOMC statement to acknowledge us!
  • Well, they didn't use our name, not specifically anyway, but that's what they meant. We just know it.
  • The Fed also said: "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
  • Can you believe it? Read it again. That is sooo sweet of them!

Good grief. This whole thing smacks of co-dependency; the Fed and, judging by a 3% pop in equities, the people who love them. Evidence? Characteristics of co-dependency:

  • Inability to know what "normal" is. (What is the "neutral" rate? We have no idea.)
  • Difficulty in following a project through. (The Fed is now 50-50 on whether to continue their "inflation-fighting" program with additional hikes.)
  • Belief that others cause or are responsible for their feelings. (Everything depends on what the Fed does next!)

But perhaps all central banks and the people who love them, almost by their very nature, form some kind of co-dependent relationship. Check out the facts:

  • Some symptoms of codependency are:
    - Controlling behavior (this incessant exertion of power over key interest rates)
    - Distrust (secret meetings behind closed doors)
    - Perfectionism (over-focus on the exact wording of eight sentences; go on, count 'em, eight!)
    - Avoidance of feelings (excessive dependence on economic data)
    - Intimacy problems (inability to publicly share private deliberations)
    - Caretaking behavior (the Fed knows best!)
    - Hypervigilance (The ECB is "permanently alert"!)
  • The Fed. You gotta love 'em. Literally.

The 3% solution

2. July 14

Why July 14? That's when the Bank of Japan meets to determine the fate of their zero interest rate policy.

  • The news from Japan is increasingly "all good."
  • The core consumer price index, which excludes fresh food costs, rose 0.6 percent in May from a year earlier, data showed today.
  • Core CPI in the Tokyo area, seen as a leading indicator for nationwide prices, was up 0.3 percent in June from a year earlier.
  • Japan's seasonally adjusted unemployment rate fell more than expected to 4.0 percent in May, its lowest since April 1998.
  • Next week the closely-watched quarterly Tankan survey of corporate sentiment is expected to show growing corporate confidence in the country's economic recovery as well.
  • All of this paves the way for increased expectations that the July 14 BoJ meeting will result in a rate increase. Something to keep in mind during celebratory U.S. Fed rate pause market action. After all, excessive liquidity has been a global phenomenon.

3. Creep

Who is The Creep of the Street?

  • According to Minyanville Professor Bennet Sedacca writing on the Buzz & Banter this morning, The Creep of Wall Street is the lagging effect of crude oil moving from $30/bbl to $73/bbl combined with short-term interest rates rising from 1% to 5.25%.
  • The effect of The Creep on consumers lies at the heart of many of the bull/bear debates.
  • If the consumer is simply "leveraged" then the effect of The Creep may be more drawn out. If the consumer is "over-leveraged," then the results could be more dramatic.
  • Just this morning The Creep made an appearance in China, which raised energy prices to households and business for the first time in more than a year to help power companies pass through increasing energy costs to customers.
  • According to Professor Sedacca, The Creep doesn't just affect consumers. "It affects corporations as well," he said. "They pay interest and use fuel like the rest of us."
  • But corporations have mountains of cash they've been socking away in buybacks. Won't that cash carry them through The Creep?
  • Professor Sedacca turned that question around. "What I want to know is why dividends aren't higher? Buying stock doesn't return anything to shareholders, dividends do."

4. Role Reversal

China, the world's most populous nation which has built its economic strength on seemingly endless supplies of cheap labor, may soon face manpower shortages, the New York Times reported this morning.

  • Mirroring global trends, people in China are living longer and having fewer children, a combination that is putting strain on the country's wobbly pension system, the newspaper said.
  • China currently has a household registration system that restricts internal migration, effectively preventing workers from ex-urban areas to migrate to cities where there are labor shortages.
  • The NYT speculates that as labor becomes increasingly scarce China will face pressure to move away from the labor-intensive manufacturing and assembly work that has been the bread and butter of the country's economic ascent.
  • Beneficiaries could be countries such as Vietnam and Bangladesh, as well as India which has a much younger population.
  • According to the CIA factbook, the median age in China is 32.7 while India's median age is 24.9.
  • By contrast, the US has a media age of 36.5 and Japan has a media age of 42.9.
  • You know what would be totally weird? What if the U.S., thanks to relaxed Mexican immigration policy, sees a sharp influx of new citizens? (Mexico median age 25.3).
  • We predict that in 10 years the U.S. will begin importing Chinese manufacturing plants, utilizing the relatively cheap labor we have available due to an influx of immigrants, and boldly refuse to remove our currency peg to the Chinese yuan!

5. Fry Day. Really.

Hey baby, do fries go with that shake? Yes.

  • A research firm looked at 30 years of data on what Americans eat and discovered that the most popular thing ordered by women is french fries.
  • The most popular item for men? Burgers.
  • NPD Group says they have asked 3,500 people every day since 1976 if they have gone to a restaurant and, if so, what they have ordered.
  • The results were published, ironically, on the Web site of China Daily, which is struggling with its own "hefty" diet problems.
  • Apparently, fries do go with that shake, so stop asking.
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No positions in stocks mentioned.

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