Written by Gary
Weekend Market Commentary: The Cause Of Raising Interest Rates
UPDATED: 0900 EST 2014-10-05
They're two camps regarding raising and not raising interest rates. Interest rates have been at zero since the 2008 financial crisis and it seems old habits are hard to change at the Fed. But will raising the interest rate send the markets spiraling down or is the Fed considering something more ominous, like QE 4 or 5?
Regardless, you can count on the Central Bankers to cause heartburn for the World, financial communities and you personally by the time they are finished.
One camp believes that NOT raising rates would be correct because many countries are in a recession or nearly so and would, or could, severely hurt their economies. The other side believes we should start raising rates now and some, 'doom mongers', suggest that inflation would soon be "out of control". An increase in rates, they say, will mean higher borrowing costs that will lead to lower profit margins for corporations, kill the housing markets and result in higher credit payments.
QE is all but done. This alone already has started a capital flight move away from emerging markets. The rising dollar will only make that worse.
That leaves interest rates. Given the recent Fed actions on QE and the dollar, why would it NOT raise rates?
The only reason US jobless numbers are not much higher is A) millions left the job market altogether and B) millions who were once account managers are now burger flippers, Wal-Mart greeters and self-employed.
The Fed will continue to do what it's done all these years: enact those policies that promise to bring the greatest profits to the banks that own it.
But of course down the line that's all theater. The rate hike is a foregone conclusion. As is the mayhem it will give birth to. Prepare yourselves accordingly. And from now on always keep in the back of your mind what the Fed really is. It is not your friend. Unless you too own a piece.
Some analysts are saying that the stock market is overpriced and the Fed is at a point they feel they have no choice but to raise interest rates. Others feel that the US's debt is an anchor dragging us into a deflationary period that will be a signal to the geniuses at the Fed that they must do 'something' even if it is wrong.
We believe that the excess debt, not only in the U.S. but globally will drive developed countries into a deflationary scenario that could be worse than the "great recession" we experienced in 2007, 2008, and 2009. We see the decline in commodities (corn, soybeans, hogs, sugar, copper, energy, and even precious metals), and the decline in interest rates throughout the globe to signal deflationary forces at work.
We have been worried about this for some time using the "cycle of deflation" to make our point. The cycle is still stuck in the competitive devaluation of currencies segment. We sincerely wish to be wrong about this, but that is our position!
So while we have two camps arguing over raising or not raising interest rates, you have another camp chiming in with a scary thought of continuing the addition to the US National debt. Call it what you want, but QE 4 or 5 is as good of a name as any.
Peter Schiff says, 'The job of a central banker is supposed to be the calibration of interest rates to achieve the optimal rate of growth for any particular economic environment. That's the theory. The practice is quite different.'
The Fed is making an even graver mistake now if it thinks the economy can handle a measured reduction in QE. The end of QE will prick the current bubbles in stocks, real estate, and bonds, just as higher rates pricked the housing bubble in 2006. And as was the case with the measured rate hikes, the tapering process will only add to the severity of the inevitable bust.
So while the market talks the talk on raising rates, the Fed will continue to walk the walk of zero percent interest rates. The action has switched to the next round of QE. In fact, since none of the Fed's prior QE programs were followed by rate hikes but by more QE, why should this time be any different? The most likely difference will be that eventually a larger dose of QE will fail to deliver its desired effect. When that happens, who knows what these geniuses will think of next. But whatever it is, rest assured, it won't be good.
What are your thoughts? I would love to hear from you.
"The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction. Where that is, I do not know." - Alan Greenspan, July 30, 2014
The markets are still susceptible to climbing on 'Bernankellen' vapor, use caution!
"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation inequities, they should try to be fearful when others are greedy and greedy only when others are fearful." - Warren Buffett
If you would like to get advanced buy/sell tweets, sign-up in the column to the right of this post by clicking on the 'Follow' button. Write me with suggestions and I promise not to bite.
To contact me with questions, comments or constructive criticism is always encouraged and appreciated:
Written by Gary