So as you read this, the result of the Fed interest decision of 9/17/15 will be out. As I write the market has decided that interest rates are not going up, so the Dow is rallying, the dollar is falling, gold is up.
So if interest rates go up, the Dow will slump, the dollar will rally, etc.
A strong market move before an announcement is normally a sign of leaks. These days it’s called guidance, but it a corporation guided important market participants this way, they’d soon end up in the penitentiary.
This hand holding is to avoid market shocks of course, we should be ever so grateful for such direction. If only I could get some of that too.
Even without ‘guidance’ I’m cynical about the security of this kind of ‘news’ in any event, as there are just too many people holding the info to keep the ‘surprise’ a surprise.
This is a good thing to bear in mind when the market moves big, in two to three days you’ll know why.
Underlying the Fed interest rate decision, which you would have thought was pretty minor seeing how it has been sign posted for months, is a bigger unknown, a question no end of leaks can answer.
Is the Fed for real, is the era of near zero interests coming to a close, or will there be QE type operations and associated interest rate negation forever?
Zero interest rates are a lovely new invention as far as government is concerned. It means they can borrow near infinite money. As much money as they like to spend on their big ideas is hard to resist.
If only QE could be a permanent state of affairs govenment could support a 300% debt to GDP. The closer you can get interest rates to 0%, the better. At 0% you can be zillion percent in debt, as long as you can keep borrowing for free.
The other key to nil interest rates is that inflation must be near zero too, otherwise people won’t lend you cash for almost the sheer hell of it.
As QE has been going for years now, all around the world, it would seem clear QE doesn’t make old fashioned inflation, at least not the way inflation is counted at present and right now there is no problem borrowing money for practically nothing either. The conditions seem in place to keep interest rates at nadda.
So why put up interest rates? What is not to love keeping them where they are now? Stocks up, houses up, why threaten to spoil the picture.
Wouldn’t going back to the old pre-QE system be a step backwards? Shouldn’t unorthodox monetary now be the new orthodoxy.
GDP growth might be sluggish but corporate profitability has never been higher. Who needs GDP growth with no profit margins like China?
The answer as to why zero interest rates will come to an end: No one really trusts the magic to hold.
The old text book rules need to be reinstated.
You have to have old style 3% growth; you have to have free markets, not ones manipulated by central government for a perceived common good.
Then there is the moral outrage: People recall, there is no such thing as a free lunch, somewhere our lunches are getting secretly munched by QE and we all risk waking up to a very rude outcome. Those deadbeats bailed by unorthodox monetary policy from the bankers at the apex to the spendthrifts living high on their mortgage rate bailouts and low interest borrowings, they should get their just deserts now rather than later, letting them live off this false economy is an insult to good people.
It has to be admitted QE seems to be a violation of all that was righteous in old school economics. It’s a slap in the face to all the worshipers of money. Borrowers get paid, savers get exploited, that’s the wrong way around. The fiscal grasshoppers in their profligacy laugh in the face of the hard working ants who toil and save and stack.
If the tide is going to be turned back towards the hard working savers by a rise of interest rates, then the grasshoppers and their asset value inflation business model are suddenly going to be on hard times.
A rise in interest rates now will show the Fed has the stomach to begin a return to old school economic, a world like 2006 where there were 4-5% interest rates. An interest rate rise will sound the alarm that a new era is opening up where the asset carry trades of the last few years are coming to an end.
Then those banking on Zero interest rates forever will kick off a market adjustment and blame their panic on the Fed calling an end to their party.
If there is to be QE forever then that’s going to be an interesting development one that would seem can only end with a giant dislocation. How far away would that be? It could be years, it has already been years. Only the Chinese have hurt themselves with QE, for everyone else its been clear sailing.
I’m backing an interest rate rise this side of Christmas.
Better a couple of thousand Dow points of the Dow now than another 2008 in a couple of years time. However I doubt many will agree.