False Premises: The Biggest Myths About The Fed's Rate Hike

Tyler Durden's picture

Submitted by Bill Bonner via Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

False Premise

The Fed did as expected. It announced it would raise its key rate by a quarter of a percentage point to 0.5% and gradually raise it up over the next three years.

Reports the Financial Times: “Historic gamble for Yellen, as Fed makes quarter-point rise.” If all goes well, we’ll be back to “normal” in 2019 – 10 years after the long emergency began!

 

esmeralda-candy-palace--large-msg-117815948689

Esmeralda, one of the many forecasters known to be superior to the Fed (a lot cheaper too).

But wait …

 

Effective FF rate

The daily effective federal funds rate, a volume-weighted average of trades arranged by major brokers. It is now at its highest point since late 2008, ending seven years of “ZIRP” – click to enlarge.

 

How does the Fed know what a normal rate will be in 2019? Won’t conditions change? Besides, there are sidewalk astrologers and mall palm readers with a better record of market forecasting than the Fed.

To borrow a phrase from George Soros, our mission at the Diary is to “find the trend whose premise is false and bet against it.” Is it true that the Fed is really going to follow through with its promise to return interest rates back to normal?

Is it true that terrorists are out to get us? Is it true that Donald Trump is a fool? Of course, we are all fools… but some more than others. The wise man is the one who knows he is a fool. For our part, we deny it. And we resent readers who remind us.

But we admit to being wrong, from time to time. (Any man who has been married for as long as we have must be accustomed to this kind of admission.) And since investors so heartily endorsed the Fed’s move, we will reexamine our position.

The premises of the rate increase are several:

…that the Fed knows best what interest rate is good for the economy…

…that a recovery is sufficiently established to permit an end to the emergency micro rates of the last seven years…

…and that otherwise everything is more or less hunky-dory.

 

The “Dollar Recession”

And they are all false? We dismiss the first one as poppycock. No serious economist – if there are any left – would believe that the Fed can do a better job of setting the price of credit than willing buyers and sellers.

As to the second premise – that the recovery is solid – we present evidence to the contrary practically every day. Today, we submit to the jury some additional facts:

  • Last month, U.S. industrial production fell more than any time in the last three and a half years. This marks the eighth monthly decline in 10 months. This slowdown is shadowed overseas by what Deutsche Bank describes as “a huge global dollar nominal GDP recession – the worst since the 1960s.”
  • According to the Fed, there are now 61 million people of working age in the U.S. who don’t have jobs. That’s out of 204 million people between 15 and 64 years old. So, if you pass five people on the street, the odds are that one and a half of them is jobless.
  • The “labor participation rate” – the amount of people in the working-age population either employed or looking for work – is at its lowest level since 1977. For men, it has never been lower.

If it were true that the economy was in good health, how is it possible that men would have a harder time finding a job than ever before?

 

yellen_cartoon_ben_garrison

Everything is awesome, unless it isn’t. In terms of a lagging indicator the construction of which obfuscates more than it reveals, everything is fine. Most other indicators (especially the leading kind) say it just isn’t so.

Cartoon by Ben Garrison

 

When the Going Gets Tough

Now, we turn to the third premise – that everything else is more or less hunky-dory. Supposedly, in this wide world of everything that is not directly under the Fed’s control, or included in its inventory of conceits and fantasies, there is nothing that poses a serious obstacle on the road to normalcy.

If this were true, we are wrong. Because our guess is that the Fed is trapped and that it cannot continue down this road for long. It is only a matter of time until it runs into trouble. What kind of trouble?

You can get any kind of “facts” you want. But on the road to normalcy, the Fed is bound to encounter a normal stock market sell-off or a normal recession. Ms. Yellen has dismissed worries of a recession. But unless the Fed has triumphed over the business cycle – which we doubt – a recession will appear sooner or later.

 

GDP

A long term chart of “real GDP growth” – as useless a statistic as GDP is, this chart does reveal two important facts: 1. the Fed has no control over the business cycle, and 2. its influence on the economy is thoroughly negative, as even in terms of this massaged and in many ways phony aggregate (inter alia it is designed to make things look better than they actually are), growth is in a persistent downtrend – click to enlarge.

 

In the face of such adversity, how likely is it that the Fed will persevere? The Fed’s future actions are “data dependent,” says Yellen. But imagine if Christopher Columbus had taken a “fact-dependent” voyage across the Atlantic.

Fact No.1: He ran out of food.

Fact No.2: His men were sick and dying of scurvy, malnutrition, and other diseases.

Fact No.3: India was not where he thought it was.

Any one of these facts, presented to him forcefully by his crew, would have been enough to cause him to turn around. When the going gets tough, “fact-dependent” travelers go home.

 

ChristopherColumbus

1492: Christopher Columbus and what’s left of his malnourished and scurvy-mangled crew arrives in “India”

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Takeaction2's picture

Look at the Canadian dollar, oil, etc......does everything just go to zero?  Everything just feels like a ticking time bomb...  Merry Christmas Bitchez

Escrava Isaura's picture

 

 

Fed rate hikes? Who cares if they are inserting cartridges back in the chamber. They will need missiles at the next meltdown.

 

Squid-puppets a-go-go's picture

yellen is just like esmerelda - fake, and even in automated animation, will only spring into action when raised a quarter

Winston Churchill's picture

Hope Yellen does'nt pick up the quarters the same way the strippers in Bangkok used to pick

up baht coins.

Demdere's picture

The insanity is to believe it is possible to control open, evolving, complex systems such as an economy.

There are NO examples of any country doing so over a few business cycles, and quite profound and fundamental reasons it is not possible.

That is possible to prove in several ways, e.g. this is a game-complexity argument ismomorphic with the economy.

https://thinkpatriot.wordpress.com/2015/02/06/high-dimensioned-games/

Other arguments are here :

https://thinkpatriot.wordpress.com/

CHoward's picture

I really want to be an optimist, but I'm pretty sure it wouldn't work out. 

ebworthen's picture

Head fake rate raise.  Markets will have a temper tantrum at the candy aisle; back to zero % and more QE called something else.

e_goldstein's picture

Mr Yellen is a gnome, Ben, not a fairy. If you want fairies, you need to stay out of the Eccles building and instead go to the White House.

gmak's picture

So how exactly does the FED set the rate without withdrawing liquidity?  What sort of con is being run here?

gatorengineer's picture

if you set a price for any commodity or financial instrument, and you have infinite resources to buy anything and everything at that price, then you dont need to withdraw liquidity to achieve the price.... Not sure what there is to understand. especiallhy if alot of your stock in europe waiting  for the carry trade and par valvue.

herkomilchen's picture

It's a closed system.  Your printed money goes out into the marketplace when you buy bonds and subsequently affects the price for money (interest rates).  "Selling" bonds (repos), aka soaking up liquidity, is the only way to raise bond yields.

Secret Weapon's picture

Do not bitch at Yellen.  She is the puppet.  Follow the strings.  Then punch the puppet master in the nose. 

luna_man's picture

 

 

Take the guess work out of it!...Audit the Fed!!

 

Any idea's who would be qualified to perform the audit?...GET IT DONE!!

 

just be ready for the CRIMINALS to attempt to go into hiding

Earl the Milkman's picture

Love the artist's rendering of Mr. Yellen, but her fairy dust is missing a few rainbows and a PPT.

DavyRoySixPack's picture

The rate hike will seperate the winners from the losers. 

 

Nice cartoon by Garrison

TuPhat's picture

Why is Bonner so worried?

asteroids's picture

Food for though. The FED and the boyz will be contemplating over the holidays how to control the flow and what the favoured trade will be in 2016. I think playing whack-a-mole with the market using the Japanese yen is over. The first few weeks of the new year will be interesting. Watch carefully and put on your thinking caps folks.