Will the Fed's Higher Rates Destroy 'ZIRP Age' Investments?

Dec 22, 2015


Poitou, France

It doesn't look as though investors will get much Christmas cheer in their stockings this year.

Last Wednesday, the Fed raised interest rates - as expected - by a token amount...

At first, there was a little rally in stocks. But in the two trading days since, the Dow lost 621 points.

Trading will be thin this week, as the big day approaches and more and more people turn from Mr Scrooge investors into Mr Fezziwig revellers.

But this morning, the Japanese stock market sold off - a bad start to what could be a bad day...a bad week...and a bad year.

Faded, Tired, and Shredded

Investors looking at what happened on Thursday and Friday might think they see a trend.

They might decide to spend the holidays 'safe and sound' - on the sidelines.

Falling prices might create a panic...who knows?

We would run our 'Crash Alert' flag up the pole. But the old flag is in tatters. We felt sorry for it, and put it into retirement.

Each time we thought a panic might occur, we hauled it out and sent it up. Each time, it hung there...fluttering in the breeze...warning investors. And each time, there was no crash to give meaning to its life.

Faded...tired...shredded on the edges, the poor flag is out of service - and maybe just when we need it most!

Whether the top is in or not...we don't know. But it's bound to come sometime. And if not now, when?

So much of what happens in the world is such an absolute mystery - including the magic of holiday season - that we hesitate twice before making any forecast at all, much less a market forecast.

  Equitymaster Conference 2016  
23rd January. Mumbai, India
  It gives us great pleasure in extending you an invitation to join us at the Equitymaster Conference 2016. This is going to be one of our most important Conferences ever! And I strongly recommend you attend it.

At the Equitymaster Conference, our best ever line up of speakers, starting with Ajit Dayal (Founder, Equitymaster) and Bill Bonner (Founder, Agora Inc.) will aim to address all your questions about the current investment environment, thereby help you in planning your next steps. Including...

»  Where are the stock markets headed?
»  What should be your investment strategy for Indian stocks?
»  Is it finally time to get bullish on real estate?
»  Is the Gold story over?
»  What's next for India's economy, and the Indian Rupee?

Plus, at the Conference you will get an opportunity to rub shoulders with not just our speakers, but also like-minded investors from across India (Last year we welcomed guests from 33 cities, and 3 countries).

So if you are serious about your investments, The Equitymaster Conference 2016 is something you cannot afford to miss. More details about the Conference and our speaker line up are available here.

We suggest you move very fast on this invitation.

Reserve your seat under our 'Early Bird' opportunity!

But investors are probably best off believing that the top is in...even if it turns out to be wrong. There can't be much life left in a bull market this old...this expensive...and at this late stage in the credit cycle.

An Abnormal World

If the Fed could control the stock market, there would be nothing for investors to worry about.

But it can't. It can fiddle with the price of credit. But it has no way of making people borrow.

All it can do is use heavy-handed gestures - such as ZIRP and QE - to try to influence the markets and 'fix' problems. These policies create distortions, which invariably lead to more problems.

The big problem now is that there are too many people in too many situations that depend on more of the Fed's EZ money.

The Fed says it wants to bring interest rates more in line with 'normal' levels. But it has created a very abnormal world - where trillions of dollars of assets in stocks, bonds, real estate - need abnormally low interest rates to survive.

The Fed says it will raise short-term rates gradually, giving the economy time to strengthen and adapt. But dinosaurs couldn't adapt to the Ice Age. And 'ZIRP Age' investments are not likely to survive the frost of higher rates.

It wouldn't be totally out of character for investors to look ahead...see the storm clouds forming on the horizon...and decide to get out of stocks while the gettin' is still good.


Then what?

Then, the Fed backtracks.

Ambrose Evans-Pritchard, writing in the London Telegraph:

  • The global policy graveyard is littered with central bankers who raised interest rates too soon, only to retreat after tipping their economies back into recession or after having misjudged the powerful deflationary forces in the post-Lehman world.
  • The European Central Bank raised rates twice in 2011, before the economy had achieved 'escape velocity' and just as the Club Med states embarked on drastic fiscal austerity. The result was the near-collapse of monetary union.
  • Sweden, Denmark, Korea, Canada, Australia, New Zealand, Israel, and Chile, among others, were all forced to reverse course, and some have since swung into negative territory to compensate for the damage.

We don't think the Fed has raised rates too soon. We think it has raised them far too late.

Too many bad decisions were made based on ultra-low interest rates. Now, we wait to see what will happen next.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Will the Fed's Higher Rates Destroy 'ZIRP Age' Investments?". Click here!