|»Vivek Kaul's Diary|
Fed Interest Rate Hike is a Recipe for Disaster
21 DECEMBER 2016
Once upon a time, the prospect of rising rates spooked the share market.
We became accustomed to bad news being good news.
The Fed raised the cash rate 0.25% yesterday, and telegraphed another three 0.25% increases in 2017.
What was the market's response?
Dow closed up 80 points overnight.
The US 10-year bond rate edged higher to 2.6%
Gold continues to be unloved. Falling to US$1130.
According to Bloomberg the reasons for the Fed's rate decision and forward guidance is:
If in fact the Fed's improved outlook for 2017 is correct, it's been a long time coming.
The Wall Street Journal put the latest rate increase into perspective with this graphic.
An interest rate hill followed by a barren stretch of near zero-rates.
For eight long years, the only 'saving' the Fed's been interested in, has been saving borrowers. The Fed has deliberately and wilfully sacrificed savers to achieve this objective.
Asset prices, along with debt levels, have soared from this warped and twisted economic policy.
During the US Presidential campaign, Donald Trump called it correctly on September 26, 2016 when he said, 'Believe me. We're in a bubble right now. We are in a big, fat, ugly bubble.'
We've seen the two previous movies in this a big, fat, ugly bubble trilogy - the tech bubble and the housing bubble. Both were directed and produced by the Fed.
The Fed's (and all central bankers') actions are driven by one objective and one objective only: do anything and everything to encourage consumption (preferably debt-financed) over productive investment.
Savers must be punished, borrowers are to be rewarded, instant gratification encouraged (buy now, pay later!), and the illusory wealth effect maintained in order to keep consumer confidence readings in the positive.
This is the central banker game plan...pure and simple.
When this big, fat, ugly bubble bursts, this is what the review might say:
Oh wait, my apologies. That review has already been written.
In fact, this is an extract from the IMF research paper Initial Lessons of the Crisis published on 6 February, 2009.
What's been learned from those initial lessons?
Is it a comedy or a tragedy that absolutely nothing has been learned from the hardship of the last bubble's bursting?
And 2008/09 was no ordinary garden variety recession. Don't take my word for it, this was from a speech made yesterday by President Obama:
The worst recession since the Great Depression...got that.
Call me silly but if I had a near death experience, I'd make damn sure not to repeat the mistake that caused it again. But here we go.
The same ingredients are at play today as existed before 2008 - seven years of low interest rates; investors searching for yield in high risk investments; overoptimistic assessments of future risks; more derivatives; more collateralised offerings; fudged earnings figures to drive short term profits up, to trigger bonuses.
These ingredients do not bake a different cake. They bake the same big, fat, ugly bubble cake that was shoved down investors' throats in 2008. Only this time the cake is bigger, fatter and uglier than it was then.
The Fed and Obama tell us 'the labor market is tightening'. In part this is due to the participation rate - people working or actively looking for work - steadily falling since 2008...from 66% to 63%.
People have given up looking for jobs and migrated to welfare. That takes care of 3% of the unemployment problem.
As for the rest?
For those participating in the workforce it's a mixed bag of winners and losers. The Wall Street Journal delved into the data and concluded:
Compared to the depths of the 2008/09 recession, employment prospects have improved slightly...but you'd hope that'd be the case, after all the extraordinary stimulus measures and increased borrowings.
However, when compared to the pre-2008 period, there's been a noticeable shift towards lower-paid, part-time employment.
The same trend is happening in Australia.
The Australian August 20, 2016:
The headline numbers may show an improvement, but the detail reveals a deterioration in the overall quality of employment and level of remuneration. More losers than winners.
And there's more bad news coming for those underemployed and underpaid workers...
Those left in the workforce are going to shoulder a much greater welfare burden than previous generations.
The other reason for the Fed raising rates this week and possibly next year is inflation expectations.
Perhaps there might be a temporary inflation spike as a result of debt-funded Government spending, but it will be countered by very powerful and persistent deflationary forces.
We have been living a big, fat, ugly lie.
Given the Fed's appalling record in reading the economy correctly, I suspect the recent rate rise is a case of way too little, far too late.
2017 could well be the year the truth is exposed.
Please note: This article was first published in The Daily Reckoning Australia on December 17, 2016.