Last August, Runnymede Capital warned our readers that a financial hurricane was coming. Over the past six months, the stock markets around the world tumbled and the US has followed suit in 2016. Our clients, who gave us permission to raise cash reserves, were fortunate and their assets were protected.
Is the Fed rate hike a big mistake?
The FOMC is set to meet on December 15-16 and the market is finally buying the rhetoric that a rate lift off will begin this month. While Fed chair Janet Yellen has been hinting at a potential rate increase for much of the year, the financial markets are now pricing in the reality. Economists can argue whether it is the right or wrong decision, but the fact remains that the Fed is now highly likely to raise rates for the first time since June 2006. As you can see the 90 day T-bill rate is moving up sharply in anticipation.
3 Reasons Why the Fed Won’t Raise Rates and Is More Likely to Ease
Back in March 2015, we wrote that you shouldn't count on the Fed to raise rates in 2015 because of deflation and slowing growth. In September, we wrote that recession is just around the corner in the US.
Therefore (unlike the street), we were not surprised by Friday's weak job report where job growth was less than expected. Not only that, wages disappointed, revisions to August's report were bad, and the participation rate fell to a new 38-year-low.
It's time for investors to stop listening to the media noise and if you look at the the actual data, you can only reach one conclusion: the Fed will not raise rates in 2015 or 2016, but they will soon turn 180 degrees and start talking about the next round of QE (quantitative easing) and/or negative rates.
Let's take a look at 3 reasons why the data dependent Fed can't raise rates anytime soon.
They Say Recovery, We Say Recession
How is the economy doing currently? Not well. The United States has had two recessions in the 21st century, in 2001 and 2008/9. Our prognosis is that the US economy is losing steam quickly and the third recession is getting near. Let’s look at the cost of money, raw material and labor. Due to a lack of demand, all current indications are that interest rates, commodity prices and real wages will continue to fall.
Central bankers are giving out easy money
“”I want the easy
Easy money
Easy money
I want the good times
Oh, I never had
I want the easy
Easy money
I want the good life
I want it bad”” — Billy Joel
Will the Fed raise rates in 2015? Don’t count on it
Yesterday, the Federal Reserve removed its “”patient”” language, as expected, but Fed Chair Janet Yellen delivered her best quote yet:
Just because we removed the word ‘patient' from the statement, doesn't mean we're going to be impatient.
With many investors still expecting a first rate increase in 2015 (perhaps in September), you shouldn't count on it. Why? It's actually quite simple. Yellen repeatedly tells the market that the Fed's decision is data dependent on whether it will raise rates or not. So if you look at the data, there is nothing in the data telling us that a rate increase will come in 2015 at all. Let's look at the numbers.