The Markets Call "BS" on the Fed's Hawkishness

The Fed wants us to believe that it remains hawkish, that it will begin the process of unwinding its $4.5 trillion balance sheet next month and that it will hike rates again this year.

The markets aren’t buying it, even for a second.

The top performing asset class after the Fed concluded its announcement on Wednesday was… TREASURIES: the asset class that should DROP hard if the Fed intends to raise rates.

Apparently bonds didn’t believe that Fed Chair Janet Yellen was going to hike rates again for more than a few hours. As a result of this, the long-Treasuries ETF (TLT) actually OUTPERFORMED the S&P 500 as well as the NASDAQ post the FOMC.

Again, LONG-Treasuries beat Tech stocks after the Fed FOMC. The market doesn’t believe the Fed will be hiking rates again this year. Heck, the market doesn’t even believe that the Fed has a clue anymore.

As for the Fed’s proposal to unwind its balance sheet… does anyone remotely believe this will happen to any significant degree?

We know from Fed transcripts that Janet Yellen was worried about a balance sheet unwind as far back as 2009 when the Fed balance sheet was just $1.0 trillion. Somehow that same woman is now fully confident the Fed will be able to do this now that the balance sheet is the size of a G-7 country’s economy at $4.5 trillion?

Give us a break.

The reality is that the second the stock market begins to take a nosedive, the Fed will begin walking backs any talk of balance sheet normalization. Indeed, the only reason the Fed is even floating this idea is because stocks are at nosebleed levels. And with the Fed having failed miserably to generate economic growth, job creation or anything else, stock levels remain the one area of success to which the Fed can point.

Are they really going to jeopardize that, especially since Fed Chair Janet Yellen openly admitted the Fed considers “asset price levels” for its rate hikes (asset prices in Fed speak means stock levels)?

Nope.

The second stocks drop, the Fed will end its hawkishness. Indeed, judging by the looks of the $USD, the markets already know that the Fed will probably be talking about easing within 12 months time.

Put simply, the markets have called “BS” on the Fed this week. The one clear takeaway is that the Fed is no longer in control and that the markets smell “money printing” in the future.

This is going to be like rocket fuel for Gold and other inflation trades. Already the precious metal has broken out of a seven-year downtrend. And once the Fed stops walking back all talk of balance sheet reduction in the coming weeks, Gold is going to go THROUGH. THE. ROOF.

If you’re not taking steps to actively profit from this, it’s time to get a move on.

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Graham Summers

Chief Market Strategist

Phoenix Capital Research

In "Watershed Moment" Merkel Says Germany Can No Longer Rely On America

One day after Donald Trump infuriated Angela Merkel and the rest of his G-7 peers, when the US president refused to endorse the Paris climate treaty, prompting the German chancellor to say  that “the whole discussion about climate has been difficult, or rather very unsatisfactory... here we have the situation that six members, or even seven if you want to add the EU, stand against one", Germany"s prime minister made what many have dubbed, an "era-defining" statement.

Speaking at a CDU election rally in Munich, Merkel said that Europe "must take its fate into its own hands" or as the AFP put it, "Merkel warns US, Britain no longer reliable partners."

Video: Merkel"s speech in Munich saying Europe can"t rely on the US & UK anymore & "must take destiny in own hands"pic.twitter.com/ikfbjhcxUG

— Rob S (@RobPulseNews) May 28, 2017

Faced with a western alliance divided by Brexit and Donald Trump"s presidency, Merkel said "die zeiten, in denen wir uns auf andere völlig verlassen konnten, sind ein Stück vorbei", or loosely translated "the times in which we could completely depend on others are on the way out" and added that "I"ve experienced that in the last few days."

Merkel today: "The times in which [Germany] could fully rely on others are partly over. I have experienced this in the last few days."

— Mathieu von Rohr (@mathieuvonrohr) May 28, 2017

Merkel then said that while Germany and Europe would strive to remain on good terms with America and Britain, "we have to fight for our own destiny" and she also said that special emphasis was needed on warm relations between Berlin and newly-elected French President Emmanuel Macron.

Her comments came after Trump said during the G-7 meeting he needed more time to decide if the US would continue backing the Paris climate deal, which has frustrated European diplomats. A subseqent report by Axios, Trump privately told multiple people, including EPA Administrator Scott Pruitt, that "he plans to leave the Paris agreement on climate change" which will likely further infurate his European allies.

During his trip, Trump also echoed his past criticism of NATO allies for failing to meet the defensive alliance"s military spending commitment of two percent of GDP.

Observers noted that he neglected to publicly endorse the pact"s Article Five, which guarantees that member countries will aid the others they are attacked. The omission was especially striking as he unveiled a memorial to the September 11, 2001 terrorist attacks against the US, the only time the mutual defense clause has been triggered.

On Friday, Trump also described German trade practices as "bad, very bad," in Brussels talks last week, complaining that Europe"s largest economy sells too many cars to the US.

Reactions to Merkel"s striking comment came pouring in from the likes of Edward Snowden who called her speech an "era-defining moment":

This is an era-defining moment. https://t.co/01NpEriRvv

— Edward Snowden (@Snowden) May 28, 2017

... the president of the Council on Foreign Relations. Richard Haass, who called it a "watershed moment"

Merkel saying Europe cannot rely on others & needs to take matters into its own hands is a watershed-& what US has sought to avoid since WW2

— Richard N. Haass (@RichardHaass) May 28, 2017

... and many others:

Unprecedented fighting talk from Merkel as she says last few days have showed her that Europe cannot rely on US anymore. Wow. pic.twitter.com/bId3wNOTFj

— James Rothwell (@JamesERothwell) May 28, 2017

Wow. "Merkel warns US, Britain no longer reliable partners" https://t.co/dfvD8FAm3a pic.twitter.com/Up5WI8ReQn

— Eric Geller (@ericgeller) May 28, 2017

US Deploys Third Aircraft Carrier Toward North Korea

One month ago, when we first discussed that in addition to the CVN-70 Carl Vinson aircraft carrier group, the US was deploying two more carriers toward the Korean peninsula, some took the Yonhap-sourced report skeptically: after all, what"s the incremental symbolic impact of having three, or even two aircraft carriers next to North Korea when just one would more than suffice. Then, two weeks ago, the report was proven half right when US officials announced that in addition to the first US carrier already on location, the US Navy is moving the USS Ronald Reagan aircraft carrier to the Korean Peninsula, where it would conduct dual-carrier training exercises with the USS Carl Vinson.

Aircraft carrier CVN-76 Ronald Reagan

After completing its maintenance period in Yokosuka, Japan, the USS Ronald Reagan departed for the Korean Peninsula on Tuesday, according to the Navy. "Coming out of a long in-port maintenance period we have to ensure that Ronald Reagan and the remainder of the strike group are integrated properly as we move forward," Rear Adm. Charles Williams said in a press release.  Once it arrives in the region, the carrier will conduct a variety of training exercises but primarily focus on certifying its ability to safely launch and recover aircraft, the service said. In other words, training for combat missions involved the North Korean capital.

We concluded our report from mid-May by saying that the US Navy may soon "further deploy the CVN-68 Nimitz, which was the third carrier reported to be eventually making its way toward Korea."

We didn"t have long to wait, because on Friday the Kitsap Sun confirmed what we reported initially over a month ago, namely that the USS Nimitz will depart Naval Base Kitsap-Bremerton on Thursday on its first deployment since 2013. Official details of the deployment were hazy, with spokeswoman Theresa Donnelly saying that The Nimitz-class aircraft carrier is expected to be in the western Pacific for six months with visits to the Middle East and Asia-Pacific, "though plans could change in response to world events."

However, a subsequent report from VOAnews confirms that the ultimate destination is none other than the country the US will almost certainly attack next, North Korea:

The United States is sending a third aircraft carrier strike force to the western Pacific region in an apparent warning to North Korea to deter its ballistic missile and nuclear programs, two sources have told VOA. The USS Nimitz, one of the world’s largest warships, will join two other supercarriers, the USS Carl Vinson and the USS Ronald Reagan, in the western Pacific.

The Nimitz will lead Carrier Strike Group 11, which includes guided-missile destroyers USS Shoup and USS Kidd from Naval Station Everett, guided-missile destroyers USS Howard and USS Pinckney and guided-missile cruiser USS Princeton from San Diego, and a conglomeration of aircraft squadrons that comprise Carrier Air Wing 11, including Naval Air Station Whidbey Island-based Gray Wolves of Electronic Attack Squadron 142. 

Aircraft carrier CVN-68 Nimitz

After returning from its last deployment, the Nimitz underwent a 20-month maintenance and modernization period at Puget Sound Naval Shipyard that was completed in October. It has spent most of the past seven months at sea undergoing training and inspections in preparation for deployment. Now the ship and crew are ready to go, said commanding officer Capt. Kevin Lenox.

"I am so incredibly proud of the entire Nimitz team and the terrific coordination and support across the entire strike group, especially in such a condensed training cycle," he said in a news release. "The crew stepped up to the plate, and I"m confident we"re ready to meet whatever challenges lie ahead on our upcoming deployment."

While it is rare for the U.S. military to deploy two carriers in the same region at the same time, it is almost unheard of to have three aircraft carriers in close proximity to each other absent current or imminent military action. Which may be the case soon: as VOA notes, North Korea’s growing nuclear and missile threat is seen as a major security challenge for Trump, who has vowed to prevent the country from being able to strike the U.S. with a nuclear missile. 

Sitting alongside Japanese Prime Minister Shinzo Abe, Trump said on Friday prior to the start of the G-7 meeting in Sicily that world leaders would have a “particular focus on the North Korea problem.” The White House issued a statement on Friday which said the two leaders have agreed to “enhance sanctions on North Korea” in an attempt to prevent the further development of North Korea’s ballistic missile and nuclear programs.

Meanwhile, as reported on Friday, the U.S. military will test a system to shoot down an ICBM for the first time next week. It is intended to simulate a North Korean ICBM aimed at the U.S. The Missile Defense Agency said it will test an existing missile defense system on Tuesday to try to intercept an ICBM. The Pentagon has used the Ground-Based Midcourse Defense (GMD) system to intercept other types of missiles, but never an ICBM. The GMD has been inconsistent, succeeding in nine of 17 attempts against missiles without intercontinental range capability since 1999.

So, perhaps as a contingency plan, the US will soon have not one, not two, but three aircraft carriers in the proximity of the Korean peninsula "just in case." The trip from Naval Station Everett is expected to take several weeks. Meanwhile, here is the latest deployment of US naval forces around the globe as of May 25, courtesy of Stratfor.

UK Terror Threat Level Lowered To "Severe" As Police Tear Down Terrorist Cell

Four days after UK Prime Minister Theresa May announced on Tuesday the nation"s terror threat level was raised to the highest possible, "Critical" level in response to the Manchester suicide bombing which killed 22 people, and resulted in British troops being deployed on the streets of London for the first time in a decade, on Saturday Theresa May said Britain had lowered its security threat level to "severe" following a number of arrests and significant activity by police investigating the suicide bomb attack. As a result the British soldiers who were deployed earlier in the week to assist police, would be withdrawn from Britain"s streets from midnight on Monday.

Earlier in the day, police hunting the terrorist network behind the suspected suicide bomber, Salman Abedi, said they had made two further arrests overnight as they closed in on other possible cell members. May said this meant that the independent body which sets the threat level had decided it should be lowered from its highest rating "critical", which means an attack could be imminent, to "severe". As a result, the UK"s threat assessment has now been returned to the level it was at prior to the Manchester attack, with no imminent attacks expected, although as May also added an attack is still "highly likely".

"A significant amount of police activity has taken place over the last 24 hours and there are now 11 suspects in custody," May said. "The public should be clear about what this means. A threat level of severe means an attack is highly likely. The country should remain vigilant."

UK terror threat level reduced from CRITCAL to SEVERE. WATCH @Theresa_May statement HERE: pic.twitter.com/ZYqzv8wATD

— Darren McCaffrey (@DMcCaffreySKY) May 27, 2017

Elsewhere, Reuters reports, that UK police officers said they had used a controlled explosion to gain entry to an address in the north of the city where two men were detained on Saturday. Some hours later, police cordoned off a large area in the Moss Side area of south Manchester and houses were evacuated with a bomb disposal unit sent to the scene. A man working in a local shop, who declined to be named, told Reuters he saw three men being taken away from the address.

"As part of an ongoing search at a property in Moss Side an evacuation is currently being carried in the area," police said in a statement.

On Friday, Britain"s most senior counter-terrorism officer said police were confident that they had made "immense" progress and had apprehended a "large part of the network". However, extra armed officers will be on duty across the country with security stepped up at some 1,300 events over the long holiday weekend.

The scope of the response to the Manchester attack has been dramatic, with the Times newspaper reporting on Saturday that intelligence officers had identified 23,000 jihahist extremists living in Britain. Earlier this week a source with knowledge of the matter told Reuters the security services were managing 500 active operations involving some 3,000 people who were thought to pose a threat.

An armed police officer at Manchester Piccadilly railway station

A concern for the UK, and perhaps explaining the reduction of the threat level, is that over the weekend there are a number of high-profile events including soccer cup finals in London and Glasgow, and the Great Manchester Run. However, Assistant Commissioner Mark Rowley, the UK police chief for counter-terrorism, advised people to be vigilant but to "go out as you planned and enjoy yourselves".

Meanwhile, the traditional blowback to these kinds of events has emerged, with Greater Manchester Police Chief Constable saying there had been a rise in reported hate crimes, from an average of 28 to 56 incidents on Wednesday even as the police and politicians praised communities in Manchester for their reaction to the bombing.  "We can"t directly link these to the events of Monday night and are continuing to monitor the situation," he said.

Also on Friday, political campaigning for the June 8 national election which was suspended after the Manchester attack resumed with the bombing becoming a central feature. The opposition Labour Party, emboldened by a rise in opinion polls, argued that Britain"s foreign policy had increased the risk of attacks and criticized Conservative Prime Minister Theresa May for cutting spending on policing. May said Labour leader Jeremy Corbyn was saying Britain was to blame for the bombing.

"I want to make one thing very clear to Jeremy Corbyn and to you, and it is that there can never, ever be an excuse for terrorism," she said at the G-7 meeting in Sicily. A recent poll on Thursday put May"s Conservatives five points ahead of Labour suggesting a far tighter race than previously anticipated, sending the British pound tumbling..

Trump's Early Foreign Travel Schedule Unveiled

After two weeks of vigorously signing executive orders, 20 as of February 6, undoing Obama-era regulations, and engaging foreign leaders in often heated exchanges by phone, Trump is gearing up to make offshore visits to, as Axios puts it, "reedem himself as a diplomat" in coming months. According to the AP, his phone call readout reveal significant upcoming overseas travel, "and Europe is the destination."

Some details: "Trump has been burning up White House telephone lines calling his world counterparts and, during those talks, has committed to several trans-Atlantic trips."

He spoke Sunday with NATO Secretary-General Jens Stoltenberg and agreed to attend a NATO leaders" meeting in Brussels in late May. Trump once dismissed the trans-Atlantic military alliance as "obsolete."

Trump spoke with Italian Prime Minister Paolo Gentiloni on Saturday and promised to attend a late May summit of the Group of Seven leading industrial nations in Taormina, Italy.

In talks last weekend with German Chancellor Angela Merkel, the White House says Trump accepted her invitation to the Group of 20 economic summit in Hamburg, Germany, in early July.

Here is a quick summary of his key upcoming trips courtesy of Axios:

• Brussels: Trump agreed to attend a NATO leaders" meeting in late May, where he"ll have to live down his "obsolete" gibe.


• Italy: Trump promised Italian PM Paolo Gentiloni that he"d attend a late-May summit of G-7 industrial nations in Taormina, Italy.


• Germany: Trump accepted the invitation of Angela Merkel to attend the G-20 economic summit in Hamburg, Germany in early July.


• UK: Trump will attend a state visit extended by Queen Elizabeth II, expected this summer.

Additionally, Trump is expected to receive more foreign leaders in the coming days, starting with Japan"s PM Shinzo Abe on Friday, Israeli PM Benjamin Netanyahu on Feb. 15, and Canadian PM Justin Trudeau sometime this month. It remains unclear if and when Trump will meet with Mexican President Enrique Pena Nieto, who canceled his Jan. 31 visit over disagreement with Trump over who will pay for the wall Trump has pledged to build along the U.S.-Mexico border.