If the Fed raises rates what would the follow through look like?
We chat with Rick Ackerman about the concept of what will happen after the Fed does go ahead and raise rates. We have a couple of different opinions on this topic.
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@Gabriel +1, yes, exactly!!!
They are way late: dollar has already taken off. They should have tried it in 2013 when dollar index was around 80.
I agree with you Rick – it’s now a flawed loop in that the more they talk hike, the more the spoos get hit and the less likely they hike. It’s all stupid and they can not raise rates unless they want to crash the markets and have to lower. Not gonna happen.
Rick always has the best insights for these difficult times.
I second that.
I sense you will not have Rick A around much longer!
You think he is getting brassed off – actually he is asking the questions in this interview!
Bite your tongue Marty, Ricks awesome.
Nothing derogatory towards or concerning Rick. People just happen to move on when a catalyst presents itself. Just MHO.
Yeah, maybe he can maybe retire on his gold short position winnings!
I only wonder when it occurs to people(machines notwithstanding) when it’s discovered that the whole debate only exists as propaganda in the media space, and that without central banks willing to engage in a liquidity trap, markets as a whole would be illiquid. From that perspective, concern over a rate rise seems a little preposterous.
Just to clarify, I’m not saying they WON’T increase, by 25bps or any other amount, just that it will NOT be meaningless
And, frankly, while not trying to sound dramatic, it would probably cause a crisis that makes 2008 look like a church picnic.
The financial system (not talking about the real economy of people who make useful things) just cannot support a revaluation of all financial assets downward because the assumed discount rate going forward is rising.
All the algos, banks, hedge funds, etc. are run by MBAs from top schools (I’m a recovering one and know the like) who use the discounted cash flow model with an assumed discount rate to value assets
If the assumed discount rate rises, the value of assets falls, simple as that (all else equal)
It’s not bad. In fact a reasonable discount rate is good for all because it provides incentives to save, disincentives to make dumb investments and more disciplined management of investments that are made
However, when the entire system is so financialized, a change to an increasing discount rate reduces the perceived value of relevant assets and the people/ institutions holding them act accordingly…either selling them or only buying them at a lower price.
With all the financial “assets” in the system, a reduction in their calculated value (again because of a belief we would be in an increasing rate CYCLE, NOT because of a single 25bps rise itself), due to the insane situation we’re in, would be extremely dangerous and unpredictable in its consequences.
The Fed knows this, but I don’t think they know how uncontrollable the consequences would be and those in the media and institutions don’t get it either….they all think central banks can “manage” things, but, especially at the extremes, they’re powerless against the market as a whole.
They may still increase rates, ONCE, to prove something or whatever, but I think the consequences over the following few months would be enormous.
We have been expecting a rate rise for over a year. Come one, guys. It’s priced in. If anything, we will be relieved that it’s finally over.
This is my thoughts about the conventionals.
I am hoping for a few days of rate rise panic next week in the conventionals as I think that will be the buying opportunity. Then, when they do raise rates in Dec the market will say “Oh, we priced that back in the second week of November.”.
1044.50!!!??
Hhmmm…THAT number sure sounds familiar. I wonder where I’ve heard that number before?
Haha, I thought of you as soon as he said it!
Thanks Matthew! 🙂
ditto
How about a “dotto”?
that would be a dido………
Dang…thought I invented something new 🙁
Yes, Dido, good memory Frank. 😉
🙂
these smiley faces remind me of a lap dog…………
GREAT MUSIC…….enjoyed……..thanks Matthew…….
Hey Mark Alan,
As you know I have also been discussing $1044.70 as and area I could see Gold bottoming since March of this year in multiple posts.
On March 12, 2015 at 11:54 am,
Shad says:
Since gold has had a downward tendency for a while now, with the counter-trend leg up from Nov – Jan, then it stands to reason the next down leg will break through the old lows at $1137 or $1130.
My best guess would be the $1044.70 target (from Oct 30th, 2009). I think the $1048 area also matches a Fib retracement level. That area between 1050-1044 should be good support. This move down will coincide with the commodity cycle bottom and top in the dollar, so that is why I think it is the upcoming “Major Bottom” and around 4 years of the Bear market.
Ah guys, guys, guys… Rick laid out a wonderful glimpse of the future re the raising of rates and then possible easing again… and had built things up to a climax worthy of any great stage actor…. but you didn’t let him deliver the punchline. 🙂
I think Rick has just made an excellent point – something which I certainly had not thought about – re what happens if they do the token 0.25% rate rise in December and then shortly afterwards have to turn around and start easing. What would happen?
I would have loved to hear Rick’s thoughts on what he thinks would happen?
I am sat here now trying to think of the possibilities. USD down but would that mean commodities up? Or would people see it as a crisis? What about conventional stocks – how would they respond? Fascinating.
Sense a bias overhere …
“Japan raised rates one time in August 2000 from 0.0% to 0.25%, yet almost immediately, term interest rates crashed as the economy faltered.
Within 7 months, the Bank of Japan had to lower short-term rates back to 0.15% in February 2001.”
Wanders off to see how the NIKKEI did during that time.
Thanks – dropping rates back down didn’t stop the NIKKEI tanking did it. Interesting.
Rick is dead on. So they tighten (and get away with it), then what? If they didn’t follow up with more tightening as they ALWAYS have, then confidence, and therefore their game, would be in much worse shape. The implosion would not be linear as even a good chunk of the dumb money would grasp the change.
The current Fed funds rate target is 0 to .25%. This means that a .25% hike would be a MINIMUM increase of 100%. THAT is what matters and makes a quarter point hike significant.
Great point about the actual magnitude, as absorbed by the system, Matthew.
We get up to 100% rate rises by flooding the secondary market with treasury bills on any given day, but rates decline with the rush into liquidity as the short term money market expands temporarily. But flooding the market is becoming ineffective, like spinning your wheels in the snow. The money continues to pile up in the banking sector, requiring a negative rate regime.
You will have lots of foreigners buying US paper for the yield and currency appreciation alone. Commodities will get crushed slowly from here, but they are going much lower if the Fed follows through with a rate hike.
We’ll see what happens, but the Fed really does have your back in the conventional market. You will never suffer more than a 10% correction. In all likelihood the US stock market is ready to go higher.
Until a country is willing to stand up and break with bretton woods, this will continue. The US is like one of the BRICS circa 2000 and will continue to suck up global capital.
The Fed shouldn’t raise any rates until they can get the deficit under control and stop the debt from growing but they don’t even want to talk about this burden which is the real problem and frankly neither does Washington and\or the presidential hopefuls. Where does all the money come from to support all the various government programs, it really is scary when you start to think about how much money they need each and every day.
Gold dropped from 1900 to 108.8 so 104.4 is back up the truck, Rick, you mixing the gold price with something else? gld is my guess, don’t know ,I don’t look at gld.
Could someone tell me what 108 and 104 in a gold price is?
hum … ~ 1083 and 1124
thx Gabriel, not sure how 104 is higher than 108.
Guess I would just have to subscribe to understand it. lol
He must have meant gold has fallen from $1900 to $1088, which is about right. His target is $1044 and that is his potential buy trade. Rick usually talks about gold futures as his price points. He is just giving the numbers as “1-0-8-8”, etc here.
However he did make a verbal typo when he said he put his short position on at 1076. I think his short position was from 1176 and that is why he is pleased with himself! And so he should be.
It would be good guys if people interject if someone makes a mistake and misquotes a number because it is a little confusing and does happen quite often. There was an interview recently where Chris or someone else interjected and a number was corrected. Actually, that didn’t spoil the flow of the interview but it did prevent confusion.
Good point and advice taken Dave
If they raise, there will be a HUGE currency flow into the US. Maybe that will be enough to keep the stock and even bond markets going ever higher and perhaps much much higher.
Who the hell knows?
GLD x 10.37 = Gold.
Gold x 0.0964 = GLD.
GLD:Gold ratio.
Gold:GLD ratio.
Now, weren’t some people popular on the internet with goldbugs saying for years that that particular ratio of gold to GLD would move big time in favour of gold when the “cash settlement” comes?
OI though t I wold check out the chart of the ratio and it looks quite interesting. There has been a very gradual rise for 7 years, maybe longer. I have no idea what that means.
http://stockcharts.com/h-sc/ui?s=%24GOLD%3AGLD&p=M&yr=10&mn=0&dy=0&id=p84715185119&a=422997387&listNum=1
Rises over last 0 years roughly:
Gold:GLD ratio from 9.9 to 10.4.
Silver:SLV ratio from 0.99 to 1.04.
An article I read says the Fed will go to 2-3%.
Now Carney at the Bank of England was talking about normalising rates in a spech a while ago, maybe eariler this year. it sounded like he was going to raise anytime soon perhaps by Christmas. Now we learn that there will be no rate hike in the UK until 2017.
Here is the article on the Fed:
http://www.kitco.com/news/2015-11-04/USD-To-Keep-Climbing-As-Fed-Raises-Rates-More-Than-Expected-Capital-Economics.html
“The analysts explained that they expect rates to be range-bound around 1.75-2% before heading north to a range of 3.25-3.5% by the end of 2017.”
HI Rick, I always like to listen to your segments. At what price point for gold does your £817 target become a slam dunk?
Great comment here on Rick’s own website from John Jay:
http://www.rickackerman.com/2015/10/how-blowoff-tops-are-made/
Recovery ?
Part time job and workers aged 55 and over: +378,000
workers aged 25-54: -35,000
I do not think the Fed can afford to sustain this stronger dollar, especially since they are looking for an excuse to raise rates for policy reasons.
They want to get off ZIRP so they can cut rates in the future when their latest paper asset bubble ends in yet another financial crisis, without having to resort to negative rates.