The Fed is in a particularly bad spot. As Paul Price and I wrote in August this year,
[A]ny increase in rates this year will be small, perhaps around 0.25%. Apart from a short-lived reaction by day traders, a small increase in rates is unlikely to have a major effect on stock prices. Even post-rate hike, absolute rates will be low. Income producing alternatives will still be scarce. The lack of risk-free returns drove indexes to higher than average P/E ratios in the first place. A small rate increase won’t change that.
When “safe” investments yield next to nothing, “risky” investments, like stocks, become more appealing, even when the S&P is near its all-time high.
The price of the SPY alone does not determine the best place for new money. The attractiveness of alternatives is also important. And as for new money, many central banks are in “printing” mode. Due to the lack of alternative investments, the demand for stocks has kept US equities almost constantly moving higher. The demand has also lowered the risk of holding stocks. Huge corporate buybacks, using cheaply borrowed money (available due to ZIRP) has further diminished supply while boosting demand.
Only significantly higher rates would break this pattern. But there’s a problem with that.
America’s greater than $18 trillion, and growing, national debt suggests that significantly higher rates are not coming anytime soon. A 1% nominal increase on the average coupon rate that Washington pays would add about $180 billion per year to US’s annual debt service expense.
Raising money to pay off growing government debt, exacerbated by rate hikes, would force the issuance of even more debt. The US, unlike Greece, can and will continue printing money. The money printing (issuing more debt) would inevitably lead to much higher inflation. As many have said more succinctly, we cannot cure an unpayable debt load by issuing more and more debt. The cost of servicing that debt would become a true budget buster.
Financial Instability & The Fed
Courtesy of Martin Armstrong
The argument that the Fed should do nothing – for it will be harder to correct a rate rise than to do nothing – because there is no bubble anywhere, demonstrates that we have the most serious BUBBLE in history. Retail participation in markets is still off by 50% from 2007 highs. People have invested in fixed income and now there is a crisis is fixed income hedge funds.
The BUBBLE is in low interest rates (GOVERNMENT) rather than the markets. This is what our computer has been projecting for 2015. It is right before everyone’s eyes, yet they cannot articulate what they cannot see.
The crisis has been created by the ZERO interest rates. Zero interest rates have wiped out the elderly and destroyed the so called American Dream.
The middle class has been collapsing while the government taxes them under the pretense that Social Security is a savings for their future, when in fact it is just a tax.
Pensions have have chased long-term rates driving them lower and lower trying to meet their future obligations.
China poured more concrete in 3 years than the USA did in nearly a century. This had driven the commodity markets, but it has come to an end. China thus is blamed for the slow down and for the decline in its currency [which some people call] war and manipulation. The trend has simply changed.
Combining these elements does not speak well of the future.
The FED is between a rock and a hard place. It will be blamed no matter it does. Nobody seems to understand the dynamics of the trend in motion.
