•  Yesterday, the Federal Reserve finally met market expectations and increased interest rates to .25%
  • Actually, the official rate was 0 – .25 and now, the official rate is .25 to .5
  • The actual rate was always in the middle between zero and .25
  • Assuming the Fed tries to keep the rate closer to .25 than .5, the actual increase in rates could be less than 25 basis points
  • The initial reaction to this rate hike is to proclaim the end of the era of “cheap money”
  • .25% is still cheap money.  Alan Greenspan never went below 1%.
  • Some people are saying “Peter Schiff was wrong” because the Fed did raise rates
  • Actually, in a recent podcast I noted that the Fed changed their narrative away from “data dependent” to an expression of faith in the economy, opening the door to a symbolic rate hike unsupported by data
  • I was alone throughout the year believing that the Fed would not raise rates prior to this change in narrative
  • The Fed was afraid that to not raise rates this year, it would be a vote of “no confidence” in the economy
  • Ultimately, the Fed felt that even though the data didn’t justify it, they had to raise rates because of psychological damage to the markets
  • If the economy were really sound, we would not need Janet Yellen to express confidence in the economy – a strong economy creates its own confidence.
  • We don’t need propaganda in the form of a symbolic rate hike
  • The Fed did not even have the last recession in their forecast until we were well into the recession, so who cares about the Fed’s level of confidence?
  • In an earlier podcast, I referred to Ben Bernanke’s comment that he felt he was a representative of the administration
  • Janet Yellen is creating a sense of confidence in the economy for the same reason
  • The Fed is now pretending that we will have more rate hikes in the future, forecasting 4 more hikes during 2016
  • I believe the economy is not strong enough to accommodate these rate hikes and neither does Janet Yellen
  • The ultimate irony is the data that came out the morning of the rate hike
  • Industrial Production: they were forecasting a drop of .2, which is still bad, instead, we got a drop of .6
  • The PMI Manufacturing Index was the lowest in many years, 51.3 down from 52.6
  • More bad news: The Philadelphia Fed last month showed an increase of 1.9, so 1.2 was forcasted – instead we dropped 5.9
  • These numbers show an economy that is decelerating
  • If you look at a chart, these numbers are about to crash even lower
  • These numbers are flashing recession, recession, recession
  • If you’re a Keynsenian, the prescription for the condition this economy has would be stimulus, not an interest rates
  • The air was coming out of this bubble anyway, all the Fed did was increase the hole for the air to come out
  • The market was up just before the hike, which was interpreted as a green light to raise rates. I said in an earlier podcast that that would be a mistake, because the market would then tank, and that is what happened today
  • Transports have been the weakest of all, despite oil prices
  • We continue to see weakness in the high-yield bond market as the air is coming out of that bubble
  • It is probable that the stock market is going to get a lot worse between now and the time the Fed is supposed to hike rates again
  • But the problem for the Fed now, is if the market starts to tank now, they can’t do anything until the jobs numbers begin to show weakness
  • Janet Yellen actually referred to this move as “ahead of the curve”, meaning that if she waited any longer, she would overshoot on her objectives:
  • One was unemployment.  How can that get too low? Especially with so many people out of the labor market, is she worried about the economy creating too many jobs?
  • She is talking about the outdated Phillips Curve, which states that too many people with jobs creates inflation
  • Then she said we might overshoot on GDP – meaning that if interest rates didn’t go up, the GDP would be too strong.  GDP is not even going to be 2% this year!
  • Meanwhile, evidence shows we might have a recession, with negative GDP
  • Of course, GDP can’t be too high
  • We will overshoot on her inflation goal because the economy is going to go into recession, unemployment will spike and the Fed will go back to the QE well
  • This time, they might go to negative interest rates
  • If the next recession starts, they might have to go negative interest rates
  • Paul Krugman always said we didn’t spend enough, so they may go all in on Quantitative Easing
  • There has never been a cycle like this, with 7 years of zero interest rates
  • This time the Fed waited so long to raise rates that the recovery is basically over
  • Normally the Fed raises rates into a strengthing economy
  • Now the Fed is raising rates in a weakening economy
  • The Fed is adding weight as the economy is sinking
  • During the 2001 recession, the Fed rates after about 3 years, it didn’t wait 7 years and it only got to 1%
  • This cycle is off the charts compared to Alan Greenspan’s monetary policy
  • The market is going to read 4 hikes in 2016 as too much
  • The dollar had a delayed reaction
  • Gold also dropped down to the lows of the year
  • Silver was down today but up yesterday
  • The weakness in this economy is going to show up in inventory, jobs
  • Everyone will know that the Fed will not be able to continue to raise rates, and when this happens we will see the big unwind
  • The most crowded trade out there is long on the dollar
  • The opposite side of that trad is short gold
  • I think these trades are going to blow up
  • The people on the right side of the reality of the market, rather than opinion are going to come out ahead