Rate Hike Ahoy!

"If ye thinks ye be ready to sail a beauty, ye better be ready to sink with her!" - Pirate saying  

There is so much talk about the next rate hike.  According to the “experts” there is a low probability of a rate hike in November but a high probability in December!  I guess at some point they will get it right but the last time the Federal Reserve raised rates was a year ago and by now we were supposed to have had four more.  Furthermore, they have not raised rates other than that once in a decade!  Their European, Chinese and Japanese brethren continue on with measures that should ensure that their yields continue to fall even though they are below zero in many instances.  The reasons for the continued “stimulus” is due to a continued weak global economy which is hurting the revenues and profits of multinational companies around the globe.  S&P 500 revenues and earnings have been shrinking for more than a year but somehow with more “stimulus” there will be a magical hallelujah moment that will magically reverse years of perverse policy decisions.

As you can tell I am not at all in favor of the measures being taken and when you factor into the equation the choice of bad or worse presidential outcomes I find it incredibly hard to see any chance of a rate hike this year.  In fact should they throw one out it will be much like a life raft from the Federal Reserve to show their independence more than due to economic strength. 

So let’s assume that they do raise rates another 0.25% to 0.50% I would have to imagine that the markets will take it on the chin.  How ridiculous that a second quarter point move twelve months removed from the last one is so feared.  At that level we will have interest rates at 0.50% people!  If half of one percent can cripple an economy, how weak is that economy?  Well as I have mentioned above, the world economy is in dire straits.  China (although they will not admit it) is on the brink of a recession and Europe, post Brexit, has massive problems of its own.  Japan may remain stagnant forever particularly when you factor in the ever growing government intrusion into business and the markets.  So yes a mere quarter point move when the world has a massive hunger for yield will cause a huge spike in the dollar undermining revenue and profits further and could easily drag the economy into a recession.

To me the obvious place to look for reasons why things are so weak almost a decade after the Great Recession is the Federal Reserve itself.  They have been on a massive debt binge and have managed to convince their cohorts around the globe that this is the only way to stimulate.  Pile more debt onto the world economy and viola everything will be fixed!  Anyone who has read this last sentence can immediately see the folly in that but for some reason they cannot.  Amazingly neither can their peers who not only have embraced the policies but have expanded “stimulus” beyond our wildest imaginations by taking rates to below zero and concocting ever more ludicrous ideas.  Why not start paying all the unemployed to not work, now that would be a winner!

In fact it is not too bad of an idea as it would stimulate demand for products which is what the world needs desperately.  The current use of “stimulus” has crowded the private sector out of markets and is manipulating global markets that used to be free to correct on their own.  The drag created by the overzealous central bankers is now a noose around the neck of global growth and until it is removed it will continue to slow to a halt.  At that point, and it is not very far away, no matter how much more “stimulus” is thrown at the problem all it will do is drive it further into the quagmire.  It is at this point that markets will lose faith in the central bankers of the world and watch out below.

For these reasons I am very comfortable staying out of the markets and waiting patiently.  Once the markets are at a level where there is true value, I plan to jump in and ride the wave of euphoria that will be the relief to be rid of the shackles of the Federal Reserve.  Where that number is will be seen at some point in our future but if I had to place a bet I would say that the lows of 2008 will be taken out.  Take this as a warning and position yourself accordingly.