By:
Peter Schiff
Tuesday, March 10, 2015
With the economy now clearly losing steam, based on the drop in GDP from 3rd to 4th quarters, and general macro data coming in very weak (Zero Hedge, 2/18/15), I believe the Fed wants desperately to move those goalposts. But after a series of seemingly strong jobs reports, culminating with a strong 295,000 jobs in February, the market expects that "patient" will soon disappear from the statement. The Fed wants to comply, thereby signaling that everything is fine. But at the same time it doesn't want the markets to conclude that rate hikes are imminent when it does.
In other words, they are searching for a way to drop the word "patient" without communicating a loss of patience. What? This is like a driver telling other drivers that she plans on engaging her turn signal before making a left, but then wonders how to hit the blinker without actually creating an expectation that a turn is imminent. This seems to be a question for psychologists not bankers. Perhaps it is looking for a new word to replace "patient"? Something that implies a slightly less patient outlook, but that certainly does not imply imminence. "Casual" or "nonchalance" may fit the bill. How would the markets react to a "nonchalant" Fed? Time for a focus group.
The business cycle tells us that recoveries do lose momentum over time. The current recovery is already five years old, and is, statistically speaking, already well past its prime. And since low rates encourage the economy to take on more debt, the longer the Fed waits to raise rates, the more debt we will have when it does. This means that the debt will be more costly to service when rates rise, which will throw even more cold water on the "recovery."
The Fed's real predicament is not how to raise rates, but how to talk about raising interest rates without ever having to actually raise them. If we had a real recovery, the Fed would not need to couch its language so delicately. It would have just pulled the trigger already. But when its communications and its intentions are different, credibility becomes a very delicate asset.
Yellen Sends Odds of Any Rate Increase Below 50% Until December
The likelihood that policy makers will lift their benchmark rate from near zero in September fell to 39 percent from 55 percent on Tuesday, according to calculations by Bloomberg using federal fund futures contracts. Futures traders have wiped out the chance of an increase in June, assigning it an 11 percent probability.
Eurodollar futures, which are used to speculate on the path of the Fed’s policy rate, signal that traders estimate the policy rate reaching a peak rate of 1.93 percent by the end of 2018, down from 2.14 percent priced-in on Tuesday. Fed officials project the long-run policy rate at 3.75 percent.DYI Comments: DYI's time line for debt deleveraging to conclude is five to seven years from now or around 2020 to 2022. Only then will the Fed's move to reduce their balance sheet and allow rates to move upward in any meaningful fashion. The nosedive in commodity prices has deflationary implications which will stretch out our central bank time line for raising rates including many other central banks, as exampled European Central Bank, Bank of Canada, Bank of England, and Bank of Japan. On balance there is significant pressure for rates to stay low or decline for years to come.
It is unfortunate that with sub atomic low interest rates our ability to generated profits in the securities markets has been hampered significantly. Institutions and citizens alike now have a zeal for yield mentality (desperation) and have "jacked up" prices way beyond their historical averages. It is now nothing more than a speculator's market for the past two years. So far the speculators are the winners with the value players appearing to be out of step. The old expression, "they don't ring a bell when the market tops." Not to worry these gains of the last two years will be transitory as any value player will point out (that bell has been ringing for two years). The return of your capital today is far more important than the return on your money.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 3/1/15
DYI
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