- Yesterday, the Federal Reserve finally met market expectations and increased interest rates to .25%
- Actually, the official rate was 0 – .25 and now, the official rate is .25 to .5
- The actual rate was always in the middle between zero and .25
- Assuming the Fed tries to keep the rate closer to .25 than .5, the actual increase in rates could be less than 25 basis points
- The initial reaction to this rate hike is to proclaim the end of the era of “cheap money”
- .25% is still cheap money. Alan Greenspan never went below 1%.
- Some people are saying “Peter Schiff was wrong” because the Fed did raise rates
- Actually, in a recent podcast I noted that the Fed changed their narrative away from “data dependent” to an expression of faith in the economy, opening the door to a symbolic rate hike unsupported by data
- I was alone throughout the year believing that the Fed would not raise rates prior to this change in narrative
- The Fed was afraid that to not raise rates this year, it would be a vote of “no confidence” in the economy
- Ultimately, the Fed felt that even though the data didn’t justify it, they had to raise rates because of psychological damage to the markets
- If the economy were really sound, we would not need Janet Yellen to express confidence in the economy – a strong economy creates its own confidence.
- We don’t need propaganda in the form of a symbolic rate hike
- The Fed did not even have the last recession in their forecast until we were well into the recession, so who cares about the Fed’s level of confidence?
- In an earlier podcast, I referred to Ben Bernanke’s comment that he felt he was a representative of the administration
- Janet Yellen is creating a sense of confidence in the economy for the same reason
- The Fed is now pretending that we will have more rate hikes in the future, forecasting 4 more hikes during 2016
- I believe the economy is not strong enough to accommodate these rate hikes and neither does Janet Yellen
- The ultimate irony is the data that came out the morning of the rate hike
- Industrial Production: they were forecasting a drop of .2, which is still bad, instead, we got a drop of .6
- The PMI Manufacturing Index was the lowest in many years, 51.3 down from 52.6
- More bad news: The Philadelphia Fed last month showed an increase of 1.9, so 1.2 was forcasted – instead we dropped 5.9
- These numbers show an economy that is decelerating
- If you look at a chart, these numbers are about to crash even lower
- These numbers are flashing recession, recession, recession
- If you’re a Keynsenian, the prescription for the condition this economy has would be stimulus, not an interest rates
- The air was coming out of this bubble anyway, all the Fed did was increase the hole for the air to come out
- The market was up just before the hike, which was interpreted as a green light to raise rates. I said in an earlier podcast that that would be a mistake, because the market would then tank, and that is what happened today
- Transports have been the weakest of all, despite oil prices
- We continue to see weakness in the high-yield bond market as the air is coming out of that bubble
- It is probable that the stock market is going to get a lot worse between now and the time the Fed is supposed to hike rates again
- But the problem for the Fed now, is if the market starts to tank now, they can’t do anything until the jobs numbers begin to show weakness
- Janet Yellen actually referred to this move as “ahead of the curve”, meaning that if she waited any longer, she would overshoot on her objectives:
- One was unemployment. How can that get too low? Especially with so many people out of the labor market, is she worried about the economy creating too many jobs?
- She is talking about the outdated Phillips Curve, which states that too many people with jobs creates inflation
- Then she said we might overshoot on GDP – meaning that if interest rates didn’t go up, the GDP would be too strong. GDP is not even going to be 2% this year!
- Meanwhile, evidence shows we might have a recession, with negative GDP
- Of course, GDP can’t be too high
- We will overshoot on her inflation goal because the economy is going to go into recession, unemployment will spike and the Fed will go back to the QE well
- This time, they might go to negative interest rates
- If the next recession starts, they might have to go negative interest rates
- Paul Krugman always said we didn’t spend enough, so they may go all in on Quantitative Easing
- There has never been a cycle like this, with 7 years of zero interest rates
- This time the Fed waited so long to raise rates that the recovery is basically over
- Normally the Fed raises rates into a strengthing economy
- Now the Fed is raising rates in a weakening economy
- The Fed is adding weight as the economy is sinking
- During the 2001 recession, the Fed rates after about 3 years, it didn’t wait 7 years and it only got to 1%
- This cycle is off the charts compared to Alan Greenspan’s monetary policy
- The market is going to read 4 hikes in 2016 as too much
- The dollar had a delayed reaction
- Gold also dropped down to the lows of the year
- Silver was down today but up yesterday
- The weakness in this economy is going to show up in inventory, jobs
- Everyone will know that the Fed will not be able to continue to raise rates, and when this happens we will see the big unwind
- The most crowded trade out there is long on the dollar
- The opposite side of that trad is short gold
- I think these trades are going to blow up
- The people on the right side of the reality of the market, rather than opinion are going to come out ahead