The majority of market observers presently consider it a foregone conclusion that the Fed will raise interest rates by 25 bps in December and arrive at a base rate of 1.25% to 1.50%. At the same time QT (Quantitative Tapering) is supposed to be progressing at US$ 10 billion monthly. More rate hikes are expected in 2018. As in the past such a Fed policy will probably result in a recession as higher interest rates and tightened credit will slow down growth.
The normal result of higher interest rates is negative for the stock market, but normality is no longer a trait of the market. Geopolitical events do not seem to have any effect on stock prices that continue to move higher for no apparent reason. Amazon stock continues to rise in price even if Jeff Bezos does not deign to pay any dividends. P/E ratios are extremely high with the result that investors buy stock on the assumption that capital gains will compensate for the lack of dividends. This is the case even for companies that continually register losses as is the case with Tesla.
The problem is that the Fed cannot raise interest rates and tighten credit while expecting the economy to continue to sport full employment and real growth. The socalled recovery has been slower than previous recoveries and has now lasted longer than most bull markets. It is our opinion that the withdrawal symptoms will be painful just as they are for heroin addicts. The fact that employment statistics fail to hide the lower rates of participation in the labor markets is an indication that the BLS provides the FOMC with what one could consider false news. The same holds for inflation figures that do not show that asset prices have enormously increased in price. In any case investors can look forward to higher income from bonds.
The low interest rates that have now prevailed for a decade have given the economy a chance to grow but have also produced side-effects that were perhaps not anticipated by the Fed intelligentsia. Corporations used the low interest rates to borrow large sums to finance share buybacks that pushed up share prices that made executives richer by far without their having prepared their companies for more difficult times. Capital expenditure has not increased at a pace that will make American companies globally competitive.
As for Bitcoin it is clearly a speculative operation: investors rush like lemmings into the digital currency on the conviction that the price can only go up even if there are no solid fundamentals to shore up the investment. It remains to be seen how central bankers will protect fiat currencies from Bitcoin.
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