Tag Archives: raising interest rates

navigating the next twelve months (i)

June 8, 2015 By in Current Market Thoughts, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , 3 Comments

As I wrote on Friday, I think we’re at an inflection point in the US stock market.  It seems to me the market is now beginning to take seriously the idea that the Fed will soon be beginning to raise interest rates from the current near-zero.

In one sense, this is not Wall Street’s first rodeo.  There are plenty of times in the past when the Fed has been reversing emergency monetary accommodation applied during a recession.  The investment community has already sifted through them ad nauseam.

On the other hand, the extent and duration of the current monetary easing are both without precedent.  At the same time, the way the market factors new information into stock prices has changed considerably over the last decade.  The goals and risk preferences of the Baby Boom, the most powerful retail influence on stocks, have shifted as well, as that generation has aged.

Boomers are more interested in income than in capital gains.  Hedge fund managers and algorithm-fashioners seem to have very short time horizons–almost reacting to information as it hits the news media rather than anticipating it.  (I almost cringe to write this last.  It reads a lot like the criticisms made by elderly patrician money managers of the past (whom I made fun of at the time) who held stocks for decades at a time and were struggling to adjust to the faster-paced market of my early years on Wall Street.  Still, I think what I’m saying is correct.)

Therefore, I think, we can’t just blindly apply generalizations from the past to our present situations.

two types of tightening

It’s important from the outset to distinguish between two types of Fed tightening:

–restoration of the real rate of interest from negative to positive as the economy recovers from recession, and

–raising the real rate of interest substantially above inflation in order to slow down an economy that’s potentially overheating.

Today, we’re dealing with the first kind, not the second.

what the past tells us

During past periods of Fed tightening of the first type, stocks have been volatile but have generally gone sideways to up.  Bonds, on the other hand, go down.

This, in itself, has implications for stock market strategy.  Stocks that resemble bonds the most tend to do particularly badly; (at least some of) those that resemble bonds the least do the best.

More tomorrow.

 

 

the IMF request to the US–don’t start raising rates until 2016

June 4, 2015 By in Current Market Thoughts, economics, EU financial crisis, Federal Reserve, Recent Market Action, stock market Tags: , , , , , , 1 Comment

the report

In its annual review of the US economy, the IMF has included a request that the Fed postpone raising rates until the first half of 2016  (I’ve searched without success for the 10-page analysis on the IMF website, so I’m relying on the FT and Bloomberg for my information.)

To start with the obvious, this can’t be the first discussion of the idea of pushing back rate hikes between the IMF–dominated by EU interests–and the Fed.  The release isn’t the act of some nerdy economist (is there any other kind?) tacking the request on to a report that the top figures in the IMF didn’t review.

No, this is the IMF going on record as saying  it thinks the Fed beginning to normalize rates this year is a bad idea   …and that its request for delay has been rebuffed by the Fed.

the rationale

Its rationale seems to be that higher short-term interest rates might cause a sharp contraction in credit availability in the US and a consequent inadvertent loss in domestic economic growth momentum.  Given that the EU is counting on reasonable demand in the US for its exports, the follow-of effect of the US stalling might be disappearance of green shoots of recovery in the EU as well.

Higher rates might also cause the US dollar to rise.  While a stronger currency would slow the US economy further, it would also increase the attractiveness of foreign goods and services (including vacations) vs. domestic.  The latter factor would be an overall plus for the EU.  Companies would be the main beneficiaries, however.  Ordinary consumers would be hurt through a rise in the price of dollar-denominated goods like food and fuel.

the response

The consensus view in the US, I think, is that:

–official statistics understate the strength of the US economy,

–seven years of intensive-care-low interest rates in the US is long enough,

–a rise of .25% or .50% in rates would have no negative effect

–it might also be a positive, in the sense that the Fed would be signalling that the economy can at least partially fend for itself.

In short, the view is that prolonging anticipatory anxiety is far worse than raising rates a tiny bit and seeing what happens.

The EU economy, on the other hand, is maybe two years behind the US in absorbing the negative effects of the near collapse of the financial sector.  Instead of flooding the area with money–the US approach–it has relied on collective austerity to heal itself.   Sort of like leeching vs. antibiotics.

So the EU has less ability to deal with the negative effects of a US slowdown than the US itself has.  Dollar strength would be another blow to an already beaten-down EU consumer, fueling further politically disruptive far right sentiment, which to me already looks pretty ugly.

In the Greenspan era, the US would probably have accommodated the EU.  Post-Greenspan Fed chairs have made it clear, in contrast, that US interests come first.  The IMF comments reinforce that this is still the case.