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The Fed Will Raise Rates Only Insofar As They Are Irrelevant
Submitted by Bill Bonner via Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),
Woe, Deceit, and Conceit
The Dow fell notably at the end of last week. Investors were reportedly out of sorts about lower commodity prices and the threat of higher rates from the Fed. The first concern is real; as for the second… investors need not bother.
Woe is us! Assorted heirs trying their best not to let on they are thinking about the will
If the Fed raises the short-term interest rates next month, it will do so only as a token. And it will continue doing so only as long as it has no negative effect on asset prices. Higher rates, in other words, will only happen as long as – and only insofar as – they are irrelevant.
DJIA daily – a slight disturbance in the farce – click to enlarge.
Should higher rates begin to do the work of tightening credit, as they are supposed to, the Fed will back off and fly to the aid of Wall Street and fellow bankers coast to coast.
They have rigged the system to function on fraudulently low interest rates; now the fraud has gotten into its bones. The economy – especially the Wall Street economy – depends on cheap money. It will fall in a heap without it.
All of which will probably happen anyway – but despite the Fed, not because of it. Commodity prices are another matter…
“Fresh wave of selling engulfs oil and metals markets,” proclaims the top headline in this morning’s Financial Times. Copper has reached a six-year low, the paper tells us. Behind the falling commodities is a big story, a real story… something the feds don’t control.
CRB Index weekly – back to late 1990s levels – click to enlarge.
China is slowing… along with the rest of the global economy. China’s white hot growth of the last 30 years – caused by huge exports of dollars from the U.S. – is now cooling off.
Americans no longer buy from China the way they used to. China no longer builds so many factories to supply them. We see evidence for this not just in commodity prices but also in falling shipping rates, falling foreign exchange currency reserves, and falling credit growth.
With less money going into China, less is coming out, too. As one dear reader pointed out, there was more than a coincidental relationship between U.S. trade deficits and U.S. federal budget deficits.
The U.S. sent dollars to China in return for gadgets and gizmos. The Chinese central bank sent them back to the U.S. to buy Treasury bonds. With the U.S. budget deficit comfortably financed by foreigners, Wall Street could use its own money to bid for stocks!
It is a long tale of woe, deceit, conceit, self-deception, and foolishness. And not one that we have time for today. We’ve got bigger fish to fry – the slithering, slimy cold-blooded black beasts from the “Deep State.” More on that anon…
In the meantime, here’s something we wrote a few years ago. It not only looks at why we can never know the future… but also why we’re better off that way.
* * *
A Bedrock of Ignorance
Rules are what we turn to when we don’t know what to do. Most often, we don’t know what to do. Hence, our investment approach – like our philosophy of life – is founded on a bedrock of ignorance. Sure. Constant. Unyielding. Ignorance is something you can count on.
A man is wise (and here you may quote us) only to the extent that he is aware of his own ignorance. The wiser he is, the more he sees himself as an ignorant fool. The real fool, on the other hand, thinks he is wise. He thinks he knows things he cannot possibly know.
Socrates sitting around in Athens, thinking. The lightly clad garden gnome with the lyre is Apollo. Socrates is credited with recognizing that he knew nothing and saying it out loud.
Photo via thaiza.com
It is not given to man to know his fate, said the ancients. We can never know what the future will bring – neither in our investments nor in our private lives. Since we cannot know the future, we cannot hope to improve it… except in the most marginal, modest ways.
“We will be better off,” we say to ourselves, peeking ahead just a few seconds, “if we don’t step off the curb quite yet; let us let the bus pass first.” But will we be better off next year if we buy Google today? Will the world be a safer, better place in 10 years if we bomb Tehran today?
The Gift of Clairvoyance
The gift of clairvoyance is not something you can give at Christmas. But what an awful gift it would be. Yes, you could read tomorrow’s newspapers today…and yes, you could see what direction the gold price is heading and adjust your investments accordingly.
You could read about natural disasters… strikes… revolutions… and make sure you are somewhere else! But what a boring life it would be. There would be no pleasant surprises. And no chance to improve or achieve. You might win a Nobel Prize. But so what?
It was foreordained. All of your striving, sweating, and stretching would make no difference; the whole thing was in the bag even before you began. And imagine the tediousness of it. Day after day, going through the motions of life without the serendipity… the sheer chanciness… of it.
Every action… every word… every event… already written out for you in bold relief. And you – just muttering your lines like a brain-damaged celebrity, not even bothering to think about what they mean; for what does it matter? The show would go on anyway with or without you… you are just playing a bit part in it.
When in doubt, ask Zoltar
Photo credit: Pat Walton
Deathbed Scene
You could look ahead, too, and foresee your last gasp. You hope for (at least) a small crowd of weeping friends and woebegone relatives… gathered around your bed… as you bid them farewell.
Perhaps you will even get to do a grand death bed oration. (“The evil that men do lives after them,” you will remember from Julius Caesar, “the good is oft interred with their bones.”)
You will look at your children, grandchildren, your wife, your mistress, your creditors, your drinking buddies. And you’ll say: “Please remember the good that I was, the good that I did, and the affection I have had for all of you. And remember, I’ll be waiting for you all, with open arms, on the other side.”
At this suggestion, the grandchildren will get quizzical looks on their faces. They won’t know where the “other side” is. But they have no intention of getting there anytime soon. And the thought of grandpa’s hairy arms waiting for them will not make them want to hurry.
But what’s this? You turn to the future… you look ahead… and see yourself crushed by the same crosstown bus you avoided today! Or done in by a jealous husband in Santa Monica.
“Darn! No deathbed scene. I never get good scenes,” you complain to yourself. At that moment, you will be tempted to do a little rewriting. “Ah,” you say. “I think I’ll stay out of Santa Monica.” But could you?
Even if we could know what the future will bring, we probably still could not reach ahead and improve it before it happened. There are simply too many possibilities. Change one today, and tomorrow’s lines don’t make any sense.
Soon, the performance changes in ways even the fortune-teller cannot foretell. Even if you could look into the future as it will be… you couldn’t possibly look into all the futures that could be.
It is widely recommended to avoid getting hit by a bus for health reasons.
Cartoon by Dave Brown
Misled by Knowledge
As soon as you departed from the script, the ending would change in a way you couldn’t predict. You would have lost the power of clairvoyance and will pop right back into the same impromptu low comedy you’re in now – ad-libbing from one day to the next, ignorant of how things will turn out but hoping they sort themselves out better than you have any right to expect.
You will have your appointment with your maker, no matter how far you think you are from fate. If you look at the many mistakes and bamboozles of history, what you find is that the leading characters were misled not by ignorance but by knowledge.
What they thought was so… turned out to be not so. Hannibal knew the Gallic and Lombard tribes would rally against Rome. Hitler knew his master race could beat all the rest of Europe. Also, investors in 1929, 2000, and 2008 knew that stocks always went up in the long run.
No one has ever been let down by ignorance, on the other hand. Because ignorance forces upon a man a kind of modesty that rarely fails him. He has to retreat to the few things he knows best… and follow rules that keep him from getting into too much trouble.
“I always tell the truth,” Congressman Andy Jacobs once told us. “That way I don’t have to remember what I said.” Likewise, a man who follows rules neither has to remember what he did… nor wonder about the consequences.
Former Indiana Congressman Andy Jacobs: being truthful has its advantages
Photo credit:
“Did you kill John Brown?” the prosecutor asks him. “I don’t think so,” says our modest hero, “It’s not something I would do.”
“Why not?” the lawyer follows up.
“Because I would never know how it might turn out.”
No Histories of the Future
If you knew that you would be better off by telling lies or killing people, you would go ahead and do so. If you could look into the future – and if you had the power to improve it before it happened – why wouldn’t you?
Imagine that it was 1920… and you had the history of the 20th century in your brain. You are traveling in Bavaria and happen to be sitting in a railway car when a sullen young man, recently discharged from the German army, enters the car.
His name, you discover, is Adolf Hitler… and you have a loaded gun in your pocket. Pull the trigger? Why not? Whatever happens, it is not likely to be worse than what did happen.
Alas, we have no histories of the future – ignorance is all we can count on… and rules are all we have to go on. We do not kill… we do not steal… and we do not lie. We follow rules because we are ignorant. Nor do we buy investments that are overpriced. They might go up, of course. But we can’t know that.
So, we stick to the rules.
Between its 2002 low and its 2015 high, NFLX has risen by 37,470% (from 34.6 cents to nearly $130). It was a good idea to buy it on every pullback so far – but is it still a good idea? The stock has a P/E ratio of 276. It’s a successful business, but the barriers to entry seem not particularly great. It is always a good idea to invest in a good business of course – at the right price – click to enlarge.
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When the Fed began it's taper and subsequently ended QE, this was tantamount to starting the "new normal" rate hike cycle from peak "accommodation". I propose the Fed is already 18 months into this hiking cycle and in the later stages likely culminating in early 2016...prior to a new cycle of accommodation.
http://econimica.blogspot.com/
For better or worse, new lows in the 10yr treasury and new highs for equities are the likely imminent outcome of a negative interest rate policy that only furthers the great divide between slowing economic and ramping financial activity (corporations paid to take loans with which to buyback their own shares). I'd anticipate some dollar softening as the Fed finally admits the "new normal" is long on "new" and short on "normal"...but the impact to be muted for commodities as NIRP continues to incentive producers to bring new capacity online in a world of massive overcapacity and decelerating global demand. Unfortunately, the sustainability of such a system is premised on ever greater central control and diminishing free market price discovery...such is the price of the "new normal".
1 bps, ZOLTAR double dares you Fed.
Gotten into their bones?!?
Whad! They got da CANSA!?!
Zoltar says, "Fuck the French"
Yes, right up until the supply lines break. Such "let the majority eat cake" monetary experiments have been tried before, this one will end no differently.
"... it will continue doing so only as long as it has no negative effect on asset prices"
How can raising interest rates not have a negative effect on asset prices??????
The nanosecond that interest rates are raised bond prices DROP!!
There will be a stampede out of the bond market. Then the Fed will buy all comers and they will end up buying every single US Treasury which will lead to hyperinflation.
Whenever you see a photo of Janet Yellen think of the Godfather.
Fed can't raise rates.
If they did, dot gov would default on debt in a heartbeat.
The whole planet would get flushed down the massive debt hole created by every country trying to out print the Fed.
There ain't no financial dick big enough for the debt hole - not even Goldman Ball sucking Sachs.
I admit most of you guys are smarter than I, but tell me why when we gave the targets to France to hit, did no not already take them out?
What kind of idiotic tale is that to the american people?
zippy
It's complicated. Starts with "we aren't really trying to get rid of ISIS", ends somewhere around WWIII.
Understand that, is the american public that stupid to not realize this?
After writing this, i gave some time in silent thought, and realize they are that stupid and probably should have retracted my reply.
I admit most of you guys are smarter than I, but tell me why when we gave the targets to France to hit, did no not already take them out?
This was my very first thought. Unless that intel came in literally hours after the terrorist attacks, why were these training camps still standing? Shouldn't any ISIS target be neutralized IMMEDIATELY upon its discovery??? Yet the sheeple eat this stuff up as "The Revenge of the French"...
I found one article that claimed we knew about the targets but did not take them out because of civilians, but now France does not care. Still does not make sense to anyone with even a single electron firing in their cranium.
Nope...it's comin
FED can't raise rates, it's just another headfake to goose markets before Christmas so the Corporatists can siphon off more dough for Wall Street Hookers, and moar blow at this festive time of the year.
If it comes down to either the economy or confidence in the credit based money system.....Look out above for interest rates.
The economy is expendable. Fractional reserve banking and it's product, credit based currency; are the foundation upon which all power of the establishment rests. That system is not expendable and it will be preserved whatever the cost .
5 basis points
Maybe they can create a new rate on which there are no derivatives written, and then raise that rate.
Raise rates crash market..which leads to qe4 possibly or an sdr, you cant untaper a ponzi.
I can't wait until they chicken out and then asset prices crash anyway :-) Mr Market is stalking these motherfuckers like Jason Vorhees and lighting the boat house on fire and paddling into the lake has only left them on a boat, isolated with no options.
Wait What said everything in this article days ago. apparently mr. bonner has not been reading TD's 'market dependent Fed' posts.
Nice work!
What bends my mind also is that hindsight is nothing like "20-20," much as we like to imagine the contrary. No better than clairvoyance, if even as good.
the fed will remain permanently behind the curve (for all you Socrates haters out there, just 8 words)
GDP = F(debt)
Live like there is no tomorrow guys cause a SHITSTORM is brewing
Proposition: the real policy instrument now is the price of oil. Unable to lower rates further, Uncle Sugar and Europa need oil to sell below cost to keep the system from collapse.
Discuss.
The only number that matters is the IOER.
I ran across a 1956 Chicago Tribune newspaper online and saw mortgage interest rates were from 4% to 6%, just shows how unreal the rates are today
An essay on the level of the existencialists. We find ourselves on a moving train. We do not know how we got there. We do not know where the train is going. An excellent metaphor. But what has it to do with Netflix?
The FED will never raise rates.
esp. not now with all the sunni-muslims living in those EMs.
can you imagine a 2.0 Asian Financial Crisis of 1997 redux
Ref: http://www.pewforum.org/2011/01/27/future-of-the-global-muslim-population-regional-asia/
Bonus: China now has been officially granted "SDR" status,...? this means China will go from luke-warm to a red-hot economy.
Never is a very very long time