(MENAFN- Khaleej Times) Janet Yellen's farewell FOMC press conference bought a tear to my eyes. This elegant and dignified lady, one of the world's top monetary economists since the death of Milton Friedman, a central banking rock star in the Paul Volcker, Montagu Norman and Ben Bernanke league, she finally retires from the world stage and joins the immortals in Wall Street Valhalla.
Even though I admire Dr Yellen, I cannot fathom her monetary smoke signals. She raised the GDP forecast, agreed the US was in full employment, expected tax reform and fiscal deficits but glossed over her inflation call. Wall Street and the world are now skating on dangerously thin ice as the regime change in the Fed brings hard money apostles like Jay Powell and Marvin Goodfriend to the 2019 FOMC conclaves. The implications for interest rates and financial markets are seismic and every UAE investor should be extra vigilant, since the UAE dirham is pegged to the US dollar and Jay Powell will shape the business, liquidity and interest rate cycle in the Gulf with his decisions in the Fed's white palazzo in Washington's Constitution Avenue.
First, the facts. One, the US economy is not at but beyond full employment. Chronic labour shortages now plague industries as diverse as Manhattan luxury hotel (Pedro has returned to Mexico) and Silicon Valley (Chindian software dudes and dudettes must now go home once the H1B visas expire. Another Trumpian gift to America). Wage inflation is 2.5 per cent now - yet it is headed to four per cent next autumn. Powell and the Trumpian acolytes at the Fed will go ballistic. So will the bond market. There could be five FOMC rate hikes in 2018, not two. This means Fed Funds trade at 2.50 per cent and three month LIBOR trades at least three per cent. My call? Listen to Paul Simon, as I did on September 15, 2018, the morning Dick "Gorilla" Fuld's Lehman died. Hello darkness my old friend.
Two, a House and Senate tax cut deal is certain. This will not be revenues neutral. I have never heard of fiscal stimulus in a $18 trillion economy with a four per cent unemployment rate, the lowest since Papa Bush lost his bid for reelection after Desert Storm. This is high octane fuel for Wall Street's bond vigilantes. The bloodbath in the bond markets is inevitable. The safe haven bids will resurrect King Dollar. My call? At least 1.06 euro by next June. I could be wrong. But what if I am right. What then?
Three, every bank strategist I met tells me 18 times forward earnings is hunky dory for the stock market. Rational exuberance? Post tax reform earnings upgrades? The FANGS rule the world, as Fu Manchu once did? Bull merde. Even Janet Yellen demurred and said economists mostly got valuations wrong. Profound, Madame Chairwoman, yo! - but then entire world knows the Pope is a catholic and dawn will come again tomorrow, barring a hundred sigma asteroid hit of the scale that did in brontosaurus 50 million years ago.
Four, the yield curve is flattening ominously fast. The two year Uncle Sam note is now 1.80 per cent, while the ten-year US Treasury puppy sinks to 2.35 per cent, coveted by the world's long duration pension/sovereign funds. Is four per cent wage inflation priced into the Evil Empires of Bondola? No way, never, nunca.
Five, even Dr Yellen conceded risk asset valuations were "elevated", Fedspeak for loony tune ballistic. Heed her warnings. Listen to the inflation SOS flashed by crude oil, commodities, 15 year highs in consumer confidence. Get big, get real - get out.
Six, the US and the GCC are in an ominous currency peg disequilibrium. The GCC desperately needs lower interests rates but the Powell Fed will inflict five rate hikes and King Dollar to the regional property markets. This is a formula for a free fall in property values akin to 2008.
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