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Fed Managing Expectations Only of the Ignorant


[This commentary originally aired in February. As you will surmise, little has changed. There are still many economists and pundits who insist the Fed will raise rates before 2016.  For our part, we continue to assert not only that there will be no rate hike, but that the central bank will start easing again within the next six months. We also are predicting that long-term rates are headed well below 2%. If this were to occur over the next 24 months, it would imply that there’s an opportunity for investors to reap spectacular capital gains from fixed-income instruments far out on the yield curve.  RA]

The Fed has done it again, purporting to manage our expectations with yet more, excruciatingly public dithering over the timing of a rate hike. The central bank is now saying there will be no policy change before June at the earliest. This latest little piece of kabuki can only add to the credibility of our own forecast, which is that the Fed will never raise rates. Okay, we were being facetious when we first made that prediction a couple of years ago; never is indeed a long time. But what kind of odds would you take to wager that there will be no rate hike for at least another ten years? You could probably get thirty-to-one from economists, editorialists, pundits and other useful idiots who never seem to tire of telling us that a rate hike is imminent. Realize that you would be within a year of collecting on the bet if you’d made it back in 2006, when the last rate hike was announced.

Things were different then, as readers will recall. For one, the danger of crashing the financial system with a small turn of the monetary screw was not as great. The dot-com crash was a distant memory, and, outside of the doomsday blogosphere, the gestating housing bubble was not a concern. These days, however, the banking system is as shaky as a drunk on a high wire. Still worse is that the drunk has much farther to fall, since the financial leveraging that has occurred since 2009 is so vast as to be almost beyond calculation. The derivatives bubble is estimated by some to be as large as a quadrillion dollars. But even if you accept more conservative valuations of around $300 trillion, you’re still talking about a highly flammable gas-bag of digital money that dwarfs global GDP fourfold. The clear implication is that the main business our planet, economically speaking, is creating financial instruments, not providing actual goods and services.

Too Many Dollars to Manage

Another factor that has added greatly to systemic risk is the dollar’s steep climb, a market-driven event that is putting increasing pressure on all who have borrowed in dollars, particularly for financial speculation. A strong dollar is incipiently deflationary, and nothing short of helicopter money can stop it at this point. Under the circumstances, why would the Fed risk provoking the Godzilla of All Deflations by gratuitously pushing up the fed funds rate by a few basis points? In any event, although the doomsday camp has obviously been premature in predicting a global financial crash, it was always foreseeable that the cause of the collapse would be some sort of dollar crisis. That’s because the market for dollars is many orders of magnitude larger than all other financial markets combined. Indeed, one could view the entire gamut of financial “products,” including stocks, bonds, repos, swaps, CDs, reverse floaters and all the rest, as mere hedges against currencies that are all being devalued more or less simultaneously. These investment vehicles do not even remotely reflect economic value – as how could they in a world in which money for speculative financial transactions is in almost unlimited supply? Small wonder, then, that stocks around the world are trading near record highs — or that the Fed would be skittish about doing anything that could end the delicately crafted illusion of good times that comes from rising share prices.

I have a theory concerning how the Fed has continued to fool the economic world into believing that a rate hike looms nonetheless. In practice, they only have to fool some of the people some of the time to make the ruse work. The two easiest groups to bamboozle are the news media and economists. The former are mostly economic imbeciles, too lazy to deviate from the official narrative they receive in the form of press releases from the Fed. The economists are equally stupid, at least where the dismal science is concerned, and because most of them tilt well to the left politically, they can be counted on to lend intellectual authority and a veneer of respectability to the Federal Reserve’s transparently idiotic ideas. Chief among them is the hare-brained notion that America can return to prosperity by borrowing and spending trillions of dollars that have been plucked from the air.

Please do not ask trading questions!

  • none October 13, 2015, 11:09 am

    Hi RA,

    If you ever get time, would you offer a comment on the $skew index hitting an all time high yesterday. Thanks and have a great one.


    I don’t track SKEW or any other volatility index because they only lull you into thinking that volatility itself is predictable. The spike in SKEW to its uppermost limit near 150 only confirms what we already know — that we are living in excruciatingly interesting times, especially for investors. It also tells us — no surprise here — that traders these days are paying more than ever for out-of-the-money puts and that market makers are not giving them away. Of course, the contrarian might argue that this is bullish, and so would I. But trading SKEW is another matter, and the only edge you can get comes not from directional plays based on extreme readings, but from hedging front spreads against back spreads when their implied volatilties diverge significantly.

  • none October 13, 2015, 5:39 am

    An analog of today’s equity market to the 1990 Nikkei market over the next 5-8 years, is in place because of it.

  • shawn brown October 12, 2015, 9:32 pm


    Looks like Snipp has completed another great quarter, potentially >$4mil in revenues. The stock hasn’t done well but appears to have been building a base somewhere around $.35 -.40. What do the technicals say about a potential move higher?



    The 8/25 low at 26.80 looks live the stuff of a v-shaped bottom, Shawn. Bullish prospects will brighten more decisively if SNIPF can take out the July 13 peak at 39.50, and another at 0.46 recorded on June 25, without pausing for breath. Yesterday’s encouraging leap missed exceeding the first by less than half-a-cent. Let’s see how bulls do on Tuesday.

  • pantrader October 12, 2015, 12:55 am

    Excellent article Rick, you and Bill Bonner share the same outlook.


    Bill and I have always shared the same outlook, Pan. Making the bullish case, he once told me, makes for a pretty boring professional life. RA

  • Shawn Brown October 11, 2015, 11:28 pm

    What ‘if’ the recent hot air about an imminent rate hike is designed to create a controlled exit by retail investors? Surely, Joe 6 Pack realizes a hiking cycle would end the 6 year bull run and has provided TBTF banks a great opportunity to make their year buying the uninformed investor selling what remains of their risk assets. The VIX is currently sub 20 after peaking above 50 during the recent slide and talking heads penned endless tripe about the end of the rally. I can’t imagine a sustained swoon leading up to the next election giving Trump and the GOP a real chance of being elected. Maybe I’m rooting for my own portfolio to hold the line a bit longer but this double speak from Fed Governors seems a bit too contrived. Kotcherlakota wants negative rates and Dudley sees liftoff as early as this month…c’mon man


    There are so few retail investors remaining in the market, Shawn, that their exit would barely be noticed. As for the Fed, once the federal funds rate came down to 0.25, there was only one strategic option left: talking the talk while doing nothing.

  • John Jay October 11, 2015, 11:19 pm

    If they are going to avoid another Real Estate debacle, they will need a thirty year mortgage at or below 3%.

    Real wages have been stagnant at best over time, and Big Business is still moving factories to Mexico, etc.

    And property taxes in States like Illinois, New York, New Jersey, and Connecticut go up every year.

    So, to avoid an implosion in home prices, ever decreasing mortgage rates are required.

    All the pieces fit, that is how a debt based currency rolls!


    The regulatory turn of the screw that made it significantly harder for homeowners to qualify has effectively negated the possibility of a sub-3% mortgage re-fi cycle, John. Another problem is that most homes have not appreciated enough since 2008 to provide ample collateral. Even it it were otherwise, the economy would take a fatal hit if new buyers and re-fiers raided their savings to come up with 20% downpayments.

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