Higher interest rates will ultimately trigger the next recession as the entire debt construct will be weighted down by the burdens of cost of carry. And today’s inflation and correlated weakening retail sales data suggested that there’s price sensitivity already at these, historically speaking, still very low rates:
The Fed may find itself horribly behind the curve and this will have consequences.
Yamada say’s in equities we will not be buying the dips but selling the rally’s
Rates are on the rise, as the 10-year yield nears a four-year high. Trading Treasuries now, with technician Louise Yamada.
If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.
- Officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December.
- The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term.
- The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year.
- The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.
10 year Treasury Yields are spiking to the ever-present danger level of 3% after a hotter than expected inflation report, and the dollar index is plunging. Showing us perhaps the first signs of a potential stagflationary crisis. Bottom line – markets are not long for this world if yields pass 3% and the falling dollar provides yet another excuse for faster interest rate hikes.
The Federal Reserve is going to let markets crumble in 2018. They are going to continue raising interest rates and reducing their balance sheet faster than originally expected. They will not step in when equities crash. And, they don’t really need to. Trump continues to set himself up as the perfect scapegoat for a bubble implosion that had to happen eventually anyway. Now, the central banks can sufficiently avoid any blame.
In some ways, it’s difficult to blame individual investors who don’t understand that the stock market has been artificially supported and propped up by the Fed for coming up on two decades without interruption. Who believe, truly, that when they rant about the glory of “the free market” they’re talking about the US stock market of today.
Not reality. There have been a variety of puts, or downside risk delimiters, in the form of Fed chairpeople and their actions for 20 years running:
- The “Greenspan Put,” named after Fed Chairman Alan Greenspan, was exhibited in September and October of 1998 when Greenspan cut interest rates twice in three weeks, including an emergency rate cut not at a scheduled FOMC meeting, to control the damage from the collapse of hedge fund Long-Term Capital Management.
- The “Bernanke Put,” named after Fed Chairman Ben Bernanke, was exhibited on numerous occasions, including the launch of QE2 in November 2010 after QE1 had failed to stimulate the economy and the delay of the taper in September 2013 after the emerging markets meltdown resulting from Bernanke’s “taper talk” in May 2013.
- The “Yellen Put,” named after Fed Chair Janet Yellen, was also on display many times. Yellen delayed the “liftoff” in rate hikes from September to December 2015 or order to calm markets after the Chinese shock devaluation and U.S. market meltdown in August 2015.
As the Dow Jones industrial average fell over 2,600 points between Feb. 2 and Feb. 8, 2018, a decline of over 10% from the all-time high of 26,616 on Jan. 25, and officially a market “correction” as defined by Wall Street, one question kept repeating in investors’ minds: Where is the “Powell Put?”
This investor view is delusional.
All of these puts are predicated on precipitous, disorderly declines. If markets exhibit a slow, steady decline over months and years, the Fed put will not apply. In that world, the Fed’s response function would depend solely on inflation and job creation, the so-called “dual mandate.” Stock investors will be on their own.