This Is What The World Looked Like The Last Time The Fed Hiked

Trying to remember what the world was like the last time the Fed hiked rates on June 29, 2006? Take a stroll down memory lane with DB's Jim Reid, for a quick reminder.

Taylor Hicks - Do I Make You Proud, Nelly Furtado - Maneater, Click and The Fast and the Furious : Tokyo Drift. It's fair to say that the week of the last Fed rate hike at the end of June 2006 won't go down in pop culture history. These were the number one songs and films of the day in the US and the UK respectively. I've seen neither film and just about know the Nelly Furtado song. Apparently Click is an Adam Sandler film about him discovering a remote control that allows him to pause, rewind or fast forward his own life before said remote control somehow takes over and does it for him - likely to disastrous consequences! I think I may have to be very bored to want to revisit this gap in my collection.

 

Looking at equity markets firstly, the S&P 500 level was 1273 back then which is some 770pts below where it is now. 10y Treasury yields were nearly 300bps higher and all the way up at 5.194%. The EUR/USD exchange rate was back at 1.267 which compares to 1.093 now. Meanwhile in commodity markets Gold was down at $600/oz which is over $450 lower than where it closed yesterday, while Oil was up above $73.

 

If we look at what asset prices did that day the Fed last raised, the S&P 500 closed up +2.16%, 10y Treasury yields dropped nearly 5bps, the US Dollar weakened nearly 1%, Oil rallied close to 2% while curiously Gold was the standout, rallying over 3% (following up with a near 3% rally the next day also).

Some more color from Bank of America:

  • Back then US housing starts were booming (2¼ million per annum)
  • stock market bubble was taking place in Saudi Arabia, another one was forming in China
  • no one had heard of “Quantitative Easing”
  • there was no such thing as the iPhone.

Where are we today?

Today, US housing starts are moribund (around 1 million per annum), the Saudis have just been downgraded (a devaluation of the Saudi riyal is one of BofAML’s noted “black swan” events in 2016), Chinese debt deflation has reduced China’s “growth” opportunity set to babies, tourists & capital outflows, central banks have purchased a remarkable $12,400,000,000,000 of financial assets since Bear Stearns, and the iPhone now powers retail sales.

But, as we showed previously, the biggest different is the following: back then total debt/GDP was 61%, with total debt just over $8 trillion. Now, it is 104%, with the total US debt just shy of $19 trillion.