The call for more rate hikes seems to be rapidly forming a consensus. Is that contrarian? I guess we will see. Nonetheless, Tim Duy makes a pretty compelling case, not for what should be done, but for what is likely. I agree with his analysis: as long as housing stays reasonably strong, the FED will keep hiking.
Here is Mr. Duy’s bottom line conclusion:
In short, regardless of the possibility of a recession in 2006, I still see the Fed as laying the groundwork for continued monetary tightening, even as they see the possibility that financial markets are not entirely prepared for that outcome.
I agree with Duy that the markets just are not prepared for such continued tightening. Here are the implications, if he is correct:
- I think it will invert the yield curve
- I think it will lead to a recession sooner rather than later
- It will be bad news for equity markets.
- It will be bad news for housing
- It will be bad news for commodities in general
- It should be bad news for gold and silver
- It should be good for longer dated treasuries
- It should be good for bets on continued tightening of the yield curve
- It should be good for the US$
I guess we will soon get to see soon enough just how far Greenspan is willing to go to salvage his miserable legacy of blowing bubble after bubble. Popping this bubble is long overdue, but the real problem was letting things get completely out of hand in the first place as the Greenspan FED did. This next recession is going to be a killer for anyone over-leveraged in debt. Long term, I think history will see Greenspan for the charlatan that he is. That will of course be Greenspan’s ultimate and final legacy.
I have a few final comments.
- The markets have likely not yet felt the full ramifications of the 10 hikes to date.
- IF the FED gets in three more hikes they will be well above “neutral” IMO.
- The FED has a history of over shooting both ways and is overshooting right now.
- Once the FED pauses, housing will likely be complete toast.
- The FED will believe that that can revive housing but they will be wrong.
- When the FED pauses, buy gold and hang on for dear life.
- The FED is going to eventually take back nearly every one of these hikes to fight the upcoming housing and debt deflation. It will not help.
Mike Shedlock / Mish/