2 Scenarios To Understanding Interest Rates

Understanding Interest Rates

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Here are 2 scenarios that can happen that will help you understand interest rates. Visit: http://www.golvercard.com/blog/understanding-interest-rates-part-1

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• Publié par: interestrates
• Publié le: 25 juillet 2015
• Nombre de lectures: 1
• Langue: English

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UnderstandingInterestRates 2 Possible Scenarios

GolverCard.com | @GolverCard

Understanding Interest Rates

When it comes tounderstanding interest rates, there are 2 scenarios that can happen.

It’s unfortunate that the place to start if you want to understand a lot of what’s going on in the markets is the Fed.

In fact, nothing is more important — and we wish that weren’t true.

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Central Banks

We wish the central banks could go back to just being boring, opaque, marginal institutions that took care of money supply and acted as a lender of last resort instead of monstrosities that seem to manipulate and invade every corner of every market in the world.

But unfortunately, that is what we have today.

When the Fed manipulates the dollar and dollar interest rates, they are directly and indirectly affecting every market in the world — equities, gold, real estate, other commodities, junk bonds, corporate debt, etc.

So even though we wish it wasn’t the case, understanding what the Fed will do next is the big question.

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2 Scenarios To Learn From

WE WILL TAKE TWO SCENARIOS AND BREAK THEM UP INTO A 2 PART POST SERIES.

Part 1: What if they raise rates? Part 2: What if they don’t?

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Scenario 1

What Happens If They Raise Rates?

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Feds Signals Rate Hike

We’ll address both of those directly but first, let us give you some background to help you understand what’s behind the debate.

The Fed has certainly signaled that they intend to raise rates and it’s what the markets expect.

Securities around the world are priced as if the Fed were going to raise rates. I’ve never seen anything more trumpeted and more advertised. There’s good reason for that. The last time the Fed raised rates was 2006.

In terms of cutting rates, they hit bottom in late 2008 when they got to zero — and they’ve been at zero ever since. It’s been seven years at zero. But you have to go back two years before that to find the last time they raised rates, so it’s going on nine years at this point.

That’s a long time without a rate increase and people may forget how nasty they can be.

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It Happened In 1987 and 1994

Back in 1994 when the Fed raised rates, it was a wipe out. That’s when we had the bankruptcy of Orange County, California, and other dealers went out of business. There was a bond market massacre.

The same thing happened in 1987. A lot of people recall the crash of October 1987 when the stock market dropped 22% in a single day.

In today’s market, that would be the equivalent of over 3,000 Dow points. Imagine the market dropping not 300 points, which would get everyone’s attention, but 3,000 points.

That’s what happened in October 1987.

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The Problems are…

But before that, in March of 1987, there was a bond market crash. The bond market crash preceded the stock market crash by about six months.

The BIG problem is...

• nobody in economics • nobody on Wall Street • nobody on the buy side • nobody in academia

Nobody I’ve seen has a worse forecasting record than the Fed.

We don’t say that out of spite or to try to embarrass anyone; it’s just a fact.

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High Growth Forcast

Year after year they produce these very high growth forecasts, and every year they’re wrong, they’re not just wrong by a little bit; they’re wrong by orders of magnitude.

So when the Fed says, well, we think the economy is healthy enough for a rate increase, that’s the first sign that it’s not.

Now besides that, there’s a lot of data. We’re seeing auto loan defaults go up, real wages are stagnant to down, labor force participation continues to be very low, our trade deficit is getting worse partly because of the strong dollar, emerging markets are slowing down, and China and Europe are slowing down.

And it’s nonsense to believe that the US would be closely coupled on the way up but somehow the rest of the world is going to go down and the U.S. won’t be affected by that.

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Close To A Recession

Growth is weak, so not only would we expect some disruption from a rate increase, but we think the Fed’s got the economy wrong and they’re going to increase rates into a very weak economy.

But why does that matter?

Because this could probably make the U.S. economy to come close to a recession, more deflation, and disruption in equity markets.

Read full post: http://www.golvercard.com/blog/understanding-interest-rates-part-1

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