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December Is Not The 'Done Deal' The Market Thinks

Tyler Durden's picture




 

Via KesslerCompanies.com,

We genuinely don't think the Fed is raising rates in December or next year, but we have been asked several times, "what if you are wrong?" Given how vocal certain members of the Fed have gotten, we know it is hard to stomach this phase of the roller coaster and we certainly don't blame anyone for feeling queasy. Listening to the mainstream media would imply that the Fed has made the decision already; but Fed Funds Futures are priced (as-of 11/10/2015) for only a 66% chance of the Fed raising to 0.25%-0.50% in December. It isn't the foregone conclusion you would think after watching CNBC. But, despite us making a social issue out of it, we don't rely on it. In other words, there isn't much risk to holding positions at the long-end of the yield curve whether they raise rates or not and here are the main reasons why.

 

First, in the low-inflation era we are in, and will likely be in for some time, the sensitivity of the world's borrowers (individuals, companies, governments) to changes in interest rates is much higher than it was back in the days of 3% and 4% inflation in the late 1980's and early 1990's. This is because interest payments, on a percentage basis, can more easily double or halve from 1% than from 5%. Said another way; the volatility of interest rates has some stasis throughout the continuum of what rates can be, but is not at all linearly correlated with how rate changes feel to a borrower. We don't think the Fed can raise back to the 4%, 5%, or 6% that many hope for (i.e., the globalized world is a persistent deflationary force because the supply of skilled emerging market labor rises every day.)

Secondly, by historical precedent, the Fed generally raises rates in a proper tightening cycle until market forces invert the yield curve (long rates lower than short rates). For example, the 30yr UST yield fell below the Fed Funds rate in 1989, 1998, 2000, and 2006-2007. Inverting the yield curve then gives the Fed cover to stop raising. With the current market's Fed raising ambitions to about 3% (see expectations chart above), we merely mention that the 30yr UST is already there (3.09% as-of 3:00pm ET 11/10/2015). If the Fed were to raise rates to say 3%, well the 30yr would probably be lower in yield then than it is now (see chart below) Any raising of rates by the Fed in this 1.3% inflation world, would tend to lower inflation further and raise the unemployment rate higher. Is there really a party that needs sobering? 

 

 

We want to repeat that we do not think the Fed will have enough time of relative solace to raise even once before a global slowdown/recession is obvious in the U.S. (see our last piece). In our expectation, we think the yield curve will bullishly flatten (i.e., long-term rates falling down nearer to the Fed Funds rate at 0%). Yet, we recognize the value in exploring what would happen if we are wrong. We think that the more hawkish the Fed is (even raising rates once or twice), the more it ensures a US recession, but it seems like an awful lot of global pain that could be avoided.

 

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Wed, 11/11/2015 - 12:21 | 6777463 Hopeless for Change
Hopeless for Change's picture

I am Jack's complete lack of surprise...

Wed, 11/11/2015 - 12:24 | 6777488 Mr Pink
Mr Pink's picture

never.....going......to.......happen........ever........

Wed, 11/11/2015 - 12:52 | 6777600 PlayMoney
PlayMoney's picture

2 chances of a rate hike.... zero and none. Then we start the war chant of "60% chance in Jan" In between Yeller makes the same statements and the same fools pop the market up briefly again. After no hike in Jan even the sheeple start to figure out she is full of CaCa

Wed, 11/11/2015 - 14:00 | 6777919 Cheduba
Cheduba's picture

3% by 2024?  Slow down there hoss - at this rate, it will be the 22nd century before rates are above zero.

Wed, 11/11/2015 - 14:06 | 6777958 Kaervek
Kaervek's picture

They already delayed the hike for 55 meetings, so I wager the sheeple will never figure it out

Wed, 11/11/2015 - 12:31 | 6777512 BullyBearish
BullyBearish's picture

My CHASE credit card cash advance interest rate is going up from 19.24% to 24.99% on December 9...do you think Jamie Dimon knows something?

Wed, 11/11/2015 - 12:57 | 6777610 Ham-bone
Ham-bone's picture

Not surprising that a 99.5% drop in the cost of credit since 1981 has resulted in a 1,200% increased utilization of that cheapening credit in America. However, the 1800% increase in debt among the federal government shows true Congressional "leadership".

Since 2008, with the implementation of ZIRP, 96% of all net new US credit and debt has been thanks to the federal governments takeover of the student loan and car loan markets, mortgage backed securities, and federal deficit spending.  Come December, somehow we are to believe that by raising rates those who didn't want credit at ZIRP will want it at higher rates???  The economy is doing soooo well that making credit more expensive and constraining spending is prudent??? 

We truly are in a backwards, upside down world.

http://econimica.blogspot.com/2015/11/interest-rate-cycles-in-review-are-we.html

Wed, 11/11/2015 - 12:21 | 6777466 Hohum
Hohum's picture

Good news!  We're in a "low inflation" era!

Wed, 11/11/2015 - 16:35 | 6778683 Climb
Climb's picture

Yeah... and it's  great time to sell all your gold to buy a new home in freedom land

Wed, 11/11/2015 - 12:21 | 6777468 Grandad Grumps
Grandad Grumps's picture

To make the most people whole under the current economic system, it would be best if the banks were not dependent on the Fed and were more dependent on the people who produce value added wealth.

Wed, 11/11/2015 - 12:39 | 6777557 KnuckleDragger-X
KnuckleDragger-X's picture

That's against the law. If we had independent banks, even small ones, the Fed and the mega-banks would be exposed for criminals they truly are.......

Wed, 11/11/2015 - 12:22 | 6777472 Carpenter1
Carpenter1's picture

The market has in no way priced in a hike. If it had, the S&P would be down 400 points by now.

Wed, 11/11/2015 - 12:23 | 6777480 Hopeless for Change
Hopeless for Change's picture

They can't even sell the possibility of a hike any more.

Wed, 11/11/2015 - 12:35 | 6777529 TheFutureReset
TheFutureReset's picture

More tricky rhetoric to come. Something like,

Yellen: "our target rate is now 0.1%, up from 0%."

Me: "wait, what? Wasn't the target 0-0.25%? This is a DECREASE!" 

Yellen: "Our mystical data shows quickening in the economy. So we are withdrawing the possibility of 0%. This is an increase."

Me: "yeah, quickening its collapse. So the top rate in your target is down from 0.25% to 0.1% and that's an increase?"

Yellen: "yes."

Wed, 11/11/2015 - 12:23 | 6777478 Thisisbullishright
Thisisbullishright's picture

I love the commentary that we are in a "low inflation environment"!

Maybe for gasoline RIGHT NOW but everything else is sky high!  Have ANY of these fucks been to a grocery store lately??  My god!

Wed, 11/11/2015 - 12:38 | 6777548 unplugged
unplugged's picture

- watched their bill for kids college jump 1000's every year
- watched their medical costs jump 100's/1000's every year
- pay for a transmission repair
- pay for a routine brake job
- pay $3 for a cup of coffee
- seen people walk by dimes & nickels laying on the street (used to be pennies)

Wed, 11/11/2015 - 12:25 | 6777489 Dr. Engali
Dr. Engali's picture

Sure, raise rates when the rest of the world is cutting like mad. Fed funds will never be above 1% again. Any "sell off" in treasuries is an opportunity to buy end enjoy he ride to zero bounds. NIRP, not higher rates is in our future.

Thu, 11/12/2015 - 21:18 | 6784786 TBT or not TBT
TBT or not TBT's picture

Nuance. Interest rates on debt denominated in fiatscoes will never rise above 1%    Though at some point they might unofficially go to the moon. 

Wed, 11/11/2015 - 12:28 | 6777500 two hoots
two hoots's picture

Credibility.  They must, at least, pretend they know what they are doing, talk vs action. 

Wed, 11/11/2015 - 12:31 | 6777514 Yen Cross
Yen Cross's picture

  They have to pump before they can dump. If rates aren't lifted the markets will track sideways for the next century.

Wed, 11/11/2015 - 12:54 | 6777524 unplugged
unplugged's picture

it is a done deal

it is a lock

the Fed is almost completely naked and if they don't raise, they'll be standing in front of the whole world on a tall pedestal, bare-ass necked

the whole system is based on nothing but confidence

confidence is the most important parameter and must be maintained at all costs

sacrafices have to be made in order to maintain the baseline fundamental confidence

besides, do you really want to see yellen and the rest of those beasts bare-ass necked ?

Wed, 11/11/2015 - 13:13 | 6777699 TheFutureReset
TheFutureReset's picture

One day the Fed will have to choose between trying to save the dollar and trying to save the economy. But that day isn't here yet. They think they are so smart with their rhetoric, they will change it up and pretend they have raised. 

Wed, 11/11/2015 - 13:23 | 6777745 DonutBoy
DonutBoy's picture

The comments from Fed governors recently, to the effect of "we don't understand what's going on" and "there's inflation we're not measuring" are the first hints I've seen that the Fed itself is losing faith it can hold the zero-bound forever and be a relevant institution.  The question is not whether they have to raise rates to save the dollar, the question is whether they have to raise rates to save the Fed - and I think they do.

Wed, 11/11/2015 - 13:35 | 6777801 AGAU
AGAU's picture

There could be some 'event' that will take place between now and then that will mean no rate hike - the MSM will beg for NIRP in order to save the world and everyone will agree and we will be rolling our eyes here on ZH asking: 'what will be next?'

 

Wed, 11/11/2015 - 14:16 | 6778022 Kaervek
Kaervek's picture

Markets are going to crash before the meeting if they don't start talking about delaying the hike again. You got it right!

Wed, 11/11/2015 - 12:34 | 6777525 ebworthen
ebworthen's picture

"Historically" and charts going back 20 years are meaningless - we are in the uncharted waters of "the new normal" of the New Rome.

It's been a mere 43 years since the U.S. unhinged completely from the Gold Standard, and the result has been the construction of a house-of-cards Ponzi pyramid of epic proportions.

It doesn't matter if the FED raises rates or goes into -1% NIRP insanity, it is "game over" and just a matter of time.

Wed, 11/11/2015 - 12:38 | 6777550 Hohum
Hohum's picture

44 years, but who's counting?  But it is just a matter of time--be patient, though.  The Fed, for all of ZH's hate, has kept the balls in the air.  Its goal is a narrow one, keep stock and bond prices up.

Wed, 11/11/2015 - 12:44 | 6777567 ebworthen
ebworthen's picture

The FED has pummeled main street while rewarding Wall Street - where did that get the French nobility?

They punish labor while rewarding corruption and immoral mammon luster's - the only balls they have in the air are lead cannon balls.

Wed, 11/11/2015 - 12:45 | 6777575 Seasmoke
Seasmoke's picture

That's fine and dandy. But then shouldn't that mean Gold is going up just as much ?????

 

Fraud and manipulation is all they have left. can't wait until I see it collapse and they all die.

 

 

Wed, 11/11/2015 - 13:32 | 6777788 Hohum
Hohum's picture

Its goal isn't to keep gold prices up.

Wed, 11/11/2015 - 12:38 | 6777555 insanelysane
insanelysane's picture

The actual plan and book it.

Step 1: Raise rate 0.25% in mid-December.

Step 2: Witness global market carnage.

Step 3: "Raise" rate to -1.00% on 31-December.

Wed, 11/11/2015 - 12:51 | 6777596 the grateful un...
the grateful unemployed's picture

to put it another way raising rates only gives more momentum to deflation, (at the long end of the yield curve, and just to prove the point that we aren't in KS anymore) if they are worried about creating NIRP in an election year this might give them some wiggle room, unless of course the entire yield curve goes underwater. 30 year bond negative yield? yield curve inverts and that sets off a panic.

Wed, 11/11/2015 - 13:13 | 6777701 insanelysane
insanelysane's picture

The FED really wants NIRP.  Raising rates helps them get to NIRP because they are counting on public outcry to do something.  It is also a great opportunity for the rich to finish the year with a bang as they can BTFD between HIRP and NIRP.

Wed, 11/11/2015 - 13:14 | 6777705 sbenard
sbenard's picture

Another aspect of tightening that I never see mentioned: it will raise the deficit!

How? This writer aludes to it in his article. As the Fed raises rates from zero (ZIRP), even the slightest rise in rates will magnify the interest cost to the US Treasury. If the 2-yr treasury is paying .25% now, and they raise it to just 1%, that quadruples the interest cost to the US Treasury! If they raise rates even by small amounts, the interest cost could double, triple, or even quadruple! That would drive the deficit even higher, just in time for the next recession, which would drive the deficit over the cliff anyway. It may very well be the trigger for the biggest financial crisis since Tulipmania!

Wed, 11/11/2015 - 13:36 | 6777804 PeeramidIdeologies
PeeramidIdeologies's picture

You know I think there is a more accurate way to map the Feds actions to decipher possible outcomes then trying to compare historical scenarios.

I also believe the FED has already developed a new narrative that I expect to continue for at least a couple of quarters, possibly longer

And to top it off there seems to be what I think to be a very plausible scenario that will allow them to cover all the bases and I can not understand why no one has even mentioned it

But here's the thing, people get paid pretty good money to speculate on this market moving information, and I don't see why I shouldn't.
Other then my lack of institutional miseducation that is.

Wed, 11/11/2015 - 14:07 | 6777966 Lmo Mutton
Wed, 11/11/2015 - 14:28 | 6778079 Consuelo
Consuelo's picture

 

 

All this talk about 'saving the $USD', when the horse of alternative choices left the barn a long time ago?   I think it bears reminding that China hasn't been buying gold at pace for 7+ years running, to adorn their populace with jewelry... 

Wed, 11/11/2015 - 15:07 | 6778248 Who was that ma...
Who was that masked man's picture

There is simply no way the Fed will raise rates this December, next year or maybe ever.  Ain't gonna happen.  Period.

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