Analyzing The Impact Of Fed Rate Hikes On Markets & Economy

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,


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hedgeless_horseman's picture



The average stock market correction following the first rate has occurred 21.2 months later. If the first rate hike occurs in 2015, this would put the next market correction in 2016 which would correspond with my recent analysis...

2016?  SP500 will be at 4,000+ by then, so even a little correction to 4,600 puts us all way ahead.   Come on in everyone...the water is fine!



Greed kills.

disabledvet's picture

Fear kills far more effectively though.

Those that failed to see not only did the Treasury Department see the iceberg (or was it Anartica?) that Wall Street was heading headlong into in 2008 but the fact that they were fully ready, willing and able to steer that behemoth away from that Apocalypse have truly missed out on yet another epic bubble inflation.

Even I missed "year 5." Year six still looks like "Dawn of the Dead" though.

Again "if I'm running for Mayor of Detroit what am I supposed to say?" The taxpayer is only on the hook for ten trillion this go around?

Do we even have a Government right now?

daveO's picture

The writer didn't even account for the current Taper, which was first announced about 13-14 months ago.

Fuh Querada's picture

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gcjohns1971's picture

This analysis ignores the fact that Quantitafve easing is never economically neutral.

Printing more currency does not concurrently print more production to back it.

Instead it leeches away the value of existing production and redistributes it to the Primary Dealers, government and othe first recipients of the newly created cash.

For the Fed to print more, is for everyone who holds currency by way of production to have less.

It is a tax.   Nothing more.

In a healthy economy as the Fed leaches away the proceeds of production there is less production left to fund the next round of production, and wages.  For a short term surge in such QE businesses may approach banks for additional funding so that they can compete in the bid for factors of production against those entities bidding with leached funds.  In this way any expansion in Fed Base money in normally only a fraction of the total credit expansion.  The rest is made up of bank loans.  And the aggregate increase in credit bids up prices creating a more general price inflation.

In this case, however, both enterprise and Financial Services sector were already awash in debt.  When the Fed leached away funds by printing those funds could not flow back to businesses in the form of bank loans.  The banks didn't have sufficient balance sheet to lend.  And businesses were already heavily indebted, and disinclined to more risk.  So the funds that primary dealers absorbed went to where it could shore up balance sheets - assest and excess reserves.   And the funds that went to the government bid up certain factors of production - fuel, weapons, and other things government consumes.

Businesses have been becoming relatively poorer throughout the process.  Those who appear most healthy are those who have fed the most from the leached funds. 

That is a market that will disappear with a true halt in QE.  A raise in rates will specifically attack the markets that have been created and/or sustained by lower rates - homes, everything government, autos, consumer goods.

QE is like a sink-hole. It flow of printed funds leaches away the economic ground beneath our feet.   As long as the subterranean caverns remain full, all appears normal or only a little distorted at the surface. 

But when the funds dry up, the apparent economy is a hollow shell that cant support the weight of the surface, and will collapse.

GooseShtepping Moron's picture

That was excellent, Johns.

Your point about bank loans contributing significantly to credit expansion as the non-connected businesses compete for factors of production is especially well taken. In my humble opinion, that's the key to the whole stupid shit-show and the reason why fractional reserve lending and usury were historically considered crimes. Individuals and businesses who don't have ready access to the credit pipeline are forced to bid their hard-earned money against someone else's monopoly money, and the monopoly money will always win in a case like that. It's as if my neighbor just got a credit card with $1 billion limit and proceeded to buy up all the food in the store. If I want to be able to feed my family, I have to take out a loan myself so that I have something to bid against him with. This results in general price inflation and the expansion of debt beyond any rational limit.

Under such circumstances, money ceases to be a real representation of wealth and productive capacity, and becomes a weapon instead. It is a seige engine that allows the connected to sack and loot the unconnected who become, for lack of a better term, financially defenseless.

I still believe Janet will surprise the markets and the administration by raising rates sooner rather than later. She's not The Bernank, and she doesn't seem like she's in the mood to jack around anymore.

daveO's picture

If she does, she'll probably meet an untimely end. Car wreck or suicide by balcony?

Cattender's picture

Rate hikes???? where? when? LOL!

daveO's picture

In the current round, rate hikes are being called Taper. When free money disappears, costs increase. 

Bluntly Put's picture

No way, Fekete already nailed this one:

Burden of debt

The liquidation value of debt is the amount that would liquidate it here and now. It obviously depends on the rate of interest. The liquidation value of total debt is inversely proportional to the prevailing rate of interest. In particular, halving the rate of interest by the central bank is equivalent to doubling the liquidation value of total debt.

I have been writing about this Iron Law of the Burden of the Debt for many a year and have met with an almost total lack of understanding, judging by the feedback from readers. The lack is due to the reluctance of the mind to admit that cutting interest rates increases the burden of debt contracted in the past, because it contradicts one's intuitive expectation that it should decrease the burden of debt to be contracted in the future. To be sure, cutting interest rates does increase the burden of debt contracted in the past because liquidation value is calculated by capitalizing the stream of future interest payments. Since at the lower rate the present value of that stream is smaller, a shortfall is created that has to be amortized upon liquidation.

Ain't gonna happen without a blowout in interest rate derivatives.



SheepDog-One's picture

When Fed shitstorm troopers have no noire shitropes to cling to and the last shit hawk has flown back to the shit nest, then the real shitalanche will sweep across the land.

Youri Carma's picture

Complete and utter BS. If you like zero rates you also like zero capital building, higher insurance costs and zero GDP growth as direct result of that policy.