As of this morning the odds of a Fed hike today are 18%, up from an unusually steady 15% for a week.
At this point, what difference does it make? A 1/4 point hike will not start a recession (but it might get blamed for one). A 1/4 point hike cannot undo the bubble in equities and bonds the Fed and central banks have blown.
The economic data at this point does not even support a hike, so if the Fed hikes it will be because they want to.
Credibility Questions
Supposedly the Fed wants to maintain its credibility. But what credibility does it have? What credibility did the Fed ever have?
- Did the Fed see the dotcom bubble?
- Did the Fed see the housing bubble?
- Did the Fed see the great recession?
- Did the Fed see any recession, ever?
The Fed is not fighting to preserve its credibility. The Fed is fighting to preserve an illusion of credibility so the mainstream media puppets and stock cheerleaders can all go “ohhhhh, ahhhh”.
I Expect to hear the word “vigilant” today. If so, the market will go “gaga” over it. And media will latch on to the word, as if it is a guaranteed signal a hike is coming in December. But it will be no more meaningful than this Tweet.
Yesterday I predicted the Fed won’t hike. For discussion, please see Hike Tomorrow? Two Foreign-Based Fed Primary Dealers Bet Against Consensus
I prefer to be wrong. Why?
Because I am tired of the endless debate and meaningless focus on when the Fed will hike. So please Fed, hike.
The sooner the Fed hikes, the sooner we can move on to the real discussion: when the Fed cuts.
Mike “Mish” Shedlock
Brilliant!
It is getting tiresome watching and waiting for these rates to climb or do something. Americans are getting killed by low rates. It does not take terror to kill Americans – low rates will do the same to our wallets. I read we must now worry about Terror Drones talkmartin.com
Mish: You are so right with that headline. All the best, Bert
Here we go again with ‘bubbles’ are created by low interest rates. Bubbles are a side effect of a market economy. If a sector is ‘irrationally’ going up in price by 10%, 20% or more every year, you would happily borrow money to buy into it. If interest rates are 4% instead of 0% that would hardly blunt your desire to borrow to get into that a market growing irrationally ast.
“If interest rates are 4% instead of 0% that would hardly blunt your desire to borrow to get into that a market growing irrationally ast.”
Brian, how old are you?
This is a blog site for grown ups, even if Shedlock doesn’t explicitly say so.
If you are wealthy enough that interest rate swings of 400 basis point magnitude make no difference to you, I can’t see why anything being posted on this blog site would make much difference to you. Moreover, you calling of something as “irrational” would make no sense to the rest of the viewership that posts here.
Brian is correct though. If assets were going up by 20% a year, one would not care if they borrowed at 4%.
wrldtrst, sure Brian might have made a valid point, but you were supposed to have been distracted by Diogenes of Sinope’s Trump-like response: skirting the issue, proclaiming all others stupid, and only he, himself, as smart…
SO smart, he theorizes what should make a difference to Brian AND what should make sense “to the rest of the viewership that posts here”.
Ironically, Diogenes of Sinope’s namesake was “notorious for his philosophical stunts such as carrying a lamp in the daytime, claiming to be looking for an honest man.”
Look CR, I never called anyone stupid, much less did I “proclaim all others stupid”. I did call into question the maturity of someone who thinks borrowing at zero is no different than borrowing at four percent. Try to upgrade your hamfisted attempts at sarcasm it would make for easier reading, but either way, do not misquote other people.
As for Brian, it hasn’t occurred to him that the market’s participants that are so happily buying into the bubbles are the banks themselves. These bubbles aren’t side effects, but are being driven by the CB intervention taking place all over the globe.
They cannot raise rates even just a bit as their manipulation is now required if they want to keep all the balls in the air. If Brian has other aims here then fine. He should offer supporting data, anecdote, policy shift, precedence, etc. instead of expressing exasperation with the idea that low interest rates cause bubbles.
Diogenes,
With all due respect, the problem appears to be your reading comprehension/or understanding as to what Brian was saying. His was most certainly not an immature comment. If Delta P > borrowing cost, money should/will flow positively in that direction. My only objection to what he said was ‘irrationally’, but I think he parenthesized that for that exact reason. I really hate that word.
Thanks wrldtrst. I think it’s a pretty simple question which people here refuse to answer:
If the CB started adding to the money supply, why would all those funds go into one particular asset creating a bubble rather than be spread out among many types of asset?
Imagine if someone said tax cuts cause bubbles. You cut everyone’s taxes $1000 per year and they run out and buy dot-com bubble stocks. Why would they do that? Why wouldn’t some just spend it at the mall? Why wouldn’t some buy different types of stocks? Why wouldn’t others buy bonds or bars of gold?
Of course you could kill an asset going up 20% per year by raising interest rates very high. But that would also kill a huge amount of other investment that no one thinks is anywhere near a bubble.
Except:
1) The Fed is an awful large player in the market, and
2) The Fed is affecting financial assets, not sectors.
Decades ago “housing” was considered a sector more than it was considered a “financial asset”. The opposite is true today.
Brian,
But, what if a central bank buys humongous amounts of debt at below market rates, continually and regularly, with the ADVERTISED, by them, intention of lowering rates in general – using printed money with no limits on the total amount issued. Plus they state they will continue to buy at below market rates, whatever the market says they are today, Plus the ECB. BOJ, Fed, and BOE get in on it with many minor central banks assisting using their printed currencies.
I assume markets will adjust and either front-run said purchases to make a profit or sellers will wait for the high prices the money printers offer, completely throwing interest rates in general into the toilet.
This is how the financial MARKETS work, today.Central bank collusion. Any one of the big ones can blow it up for all the others.
“This is how the financial MARKETS work, today.Central bank collusion. Any one of the big ones can blow it up for all the others.”
They are in a prisoner’s dilemma of incredible consequence. Any one can blow up the world, temporarily, by normalizing rates even a little.
None of you have explained how any of this would cause a bubble. So what if the Cb buys up debt at ‘below market rates’ (which is meaningless, of course, if the Fed is buying in quantities sufficient to change the price that becomes the market rate)?
Say I’m an investor who just sold some of those bonds to the CB at ‘below market rates’. Now I’m loaded with cash. Out of all the things I can buy I see one type of investment that has recently shot up 20% in price. Why would I not still ask which of the two possible cases was present? Why would I assume this particular investment must be super hot and would continue to increase at 20% rather than come crashing back down?
Here’s a short video to very clearly and very simply show that the economic theory and the models based upon it which they are using to “calculate” and thereby centrally plan the most important factor in any economy, the price of money, is SIMPLISTIC GARBAGE. We won’t go into the manipulated for political reasons garbage figures they’re plugging into their garbage models based upon a garbage theory. I call it G3 for “garbage cubed”:
https://www.youtube.com/watch?v=jIP7ES1lCGk
Here’s a great example of the results of the application of that trash:
http://static4.businessinsider.com/image/56cd9d646e97c61d008b9408-800-600/screen%20shot%202016-02-24%20at%207.05.40%20am.png
The emperors and empresses have no clothes… their track records prove that.
Are you a Tulip salesman?
“If a sector is ‘irrationally’ going up in price by 10%, 20% or more every year, you would happily borrow money to buy into it.” Maybe you would, but not me. Many fools did fall in that trap during the Great Real Estate Price Explosion of early 2000’s, created by the Fed and boosted by government demanding that banks lend to unqualified borrowers (not that some banksters did not take advantage of that). I was selling into it.
Brian, your “market economy” comment implies a free market. When was the last time there was a free market in the US? (Hint: look up when the Fed was created, by bankers, & for bankers).
OK you wouldn’t. Good for you, your medal is in the mail.
But the point is if you are saying a particular sector is in a bubble then someone is clearly buying into it at ever higher prices. Those people clearly believe that market will continue to grow exceptionally faster than anything else in the economy. That means they would happily borrow at whatever the current interest rate is to get into that market.
Look at yourself. You say even though interest rates may be low you would not borrow to buy into a bubble. Great so you are acting as a part of a market. While others buy into the bubble asset, you buy other types of things thereby dampening the price increases in the suspected bubble sector. If you’re smart enough to avoid the bubble why isn’t everyone else? Because they think you’re wrong about the sector being a bubble, they think the sector is undervalued and will go up. Why would higher interest rates cause them to change their minds?
So bubbles happen because they are a side effect of markets and markets exist everywhere there’s human interaction from Wall Street to prisoners in North Korean camps trading cigarettes between each other.
Brian,
Nobody cares about ‘bubbles’ in general. Theoretically, they are a normal market function. Today’s bubble creates a bust tomorrow that gives lots of people the ability to buy assets at reduced prices, some of which may be genuine bargains. I personally love them in concept.
The problem is when central banks lower rates to incredulous levels (yes, they do … they even brag about it openly and often) and remove normal investment as an unintended consequence … replacing it with junk investing and paper flipping. In the past, someone’s interest expense was my interest income and I spent it. Today, not so much. I hunker down somewhat and so do lots of others.
Central banks do this because they believe idiotic theories or are too afraid not to.
That’s the problem
Well Mish is citing bubbles as the key problem with low interest rates…in fact that seems to be the only thing he has articulated here as a problem with low interest rates.
This hasn’t been explained or justified by anyone here which is why I pound away at the question. If interest rates are ‘normally’ 5% and I see some asset going up by 20%, I might be skeptical that pace could be maintained and worry the asset is overpriced by the market. If interest rates are pushed down to 0%, why would that magically make my skepticism of that asset vanish?
You seem to be shifting to some other story, not about bubbles in a particular type of asset but in terms of overall real investment. If interest rates go to 0% I might opt to make investments rather than consume because even an investment with modest returns (say 3% per year) suddenly starts to look interesting when it wouldn’t in a 5% environment. But is that the case? Are we building too many factories?
Please note that Brian is speaking about a market economy in general, not a free market economy. What Brian is describing is a managed market (mixed) economy as we have had in the United States since 1913. As someone above mentioned, the last period of time during which the U.S. economy could truly be referred to as a free market was from the late 1800’s through 1913 when the U.S. adopted both a central bank and a graduated income tax, both of which were put forth by Marx in his Communist Manifesto as a means to move the populace toward a socialist society. We are still a market economy insofar as private individuals can still technically own property and the means of production. It has simply become much further managed since 1913.
No, Brian has assimilated someone’s manifesto and is reciting from it. There’s something about him that looks salvageable. Maybe nothing is there and he’s nothing more than a fringer who writes long posts and believes in the Establishment and his place in it. Maybe he’s just messing with us and his posts are only cynical provocation. Time will tell. The teacher in me is an optimist.
I wish I could share your optimism, cdr, but I already asked the turnkey question earlier in this post stream when I intoned : “Brian, how old are you?”
I’m guessing he’s twentysomething and knows everything. These are the people I am observing with my laments over who will soon be running Korporate Amerika. They’re already everywhere in the ranks of mid-level management and yes, since you mentioned it, he does believe in his place within the establishment. By the way, that’s our problem, not his.
Marching right up into the C suites of without ever having spent a single day of their careers in anything but a ZIRP environment.
“free market economy” is just a weasel phrase in this context in order to pretend you have no obligation to address market dynamics because the entire market falls short of some idealized version.
You supported his argument when you said. “many fools did”
Very many fools. Many, many, many….
David Romer just published a scathing critique of current macroeconomic theory. Basically he notes that relentless bad calls based on assuming total private debt doesn’t matter is so risible at this point he’s, well, deriding it. After converting $trillions of private debt into public debt by QE etc. and thus blowing the most horrific Frankenbubble of all time, we still hear academic wags like Krugman saying banks don’t create money when they lend and banks don’t cause banking crises. Well:
If Steve Keen is right, Hong Kong, China, and Ireland (recently added) are about to blow up real good. When not if that happens expect go see the CB rule book go flying out the window. Our Fed will go into ludicrous mode along with the ECB, BOJ, BOE, etc.
I don’t expect a hike.
However, let’s assume one happens. A mere .25 hike.
Any bets on how far the DOW drops in this greatly exaggerated stock value bubble?
I say 450 points on day one, to be followed by subsequent diminishing drops over the next 2 months that will total over 1500 points.
Has anyone calculated the collective costs that a .25 hike would impose on the corporate kings and queens so deeply buried in debt?
Mish, that would be a nice project for you.
WHAT WE ALL NEED TO RECOGNIZE IS THE FEDS ARE IN DIRECT COOPERATION WITH THE WORLD LEADERS, AND THOUGH THERE ARE DIFFERENT LABELS, THEY OPERATE UNDER THE SAME UMBRELLA; ALTHOUGH, THEY WANT US TO THINK DIFFERENT.
https://acenewsservices.wordpress.com/2016/09/21/brussels-ttip-ceta-protestors-march-over-planned-trade-deals-whilst-all-the-un-members-are-in-new-york-behind-closed-doors-planning-their-next-move-in-implementation-of-such-acenewsservices/
That goes without saying.
There is a global network that makes the decisions in Washington DC.
Many call it the “New World Order” or the “One World Government”.
I used to laugh at those terms.
I don’t laugh any more.
Yellen has fallen and she can’t get up.
Trump wins = rate hikes ahead
Crook wins = steady as she goes
Book it!
Outstanding
The FED is never going to raise rates. Even if the effect of paying a higher interest should have no effect, with all the derivatives in the market, anything that might lead to swings can quickly become destabilizing. We’re balanced on a tightrope.
I heard a couple of weeks ago (from Bob Brinker) that we will likely never see a normalized rate world “again in our lifetimes” and I’m guessing Bob’s about 60. (?) He cited a lack of productivity gains as the main culprit.
Oh, Brinker must be older than 60. He’s been on the radio forever. I used to listen to him when he was on a run. But he lost his mojo and I stopped listening. Most of these investment advisors go on a run. That’s how they gain popularity. But all good things eventually come to an end. I’ve never known one who goes on a perpetual run and is worth following.
I tend to agree. In fact, he seemed too pat about his lack of productivity claim. Too simple to explain never seeing rates go up again. Lots of moving parts and Bob focused only on one. Still, I never thought we’d have been this low for this long already.