{"id":852,"date":"2015-03-04T01:29:27","date_gmt":"2015-03-04T01:29:27","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=852"},"modified":"2015-03-04T01:29:27","modified_gmt":"2015-03-04T01:29:27","slug":"get-set-for-fed-rate-hikessssss","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=852","title":{"rendered":"Get Set for Fed Rate Hikessssss"},"content":{"rendered":"<p><strong>Item: <\/strong>In a major new report, a blue-ribbon panel of economists estimates that if all the brain power expended over the past 20 years forecasting the next move by the Federal Reserve had, instead, been used for productive endeavors, U.S. GDP would be 12% higher today.<\/p>\n<p>So let\u2019s discuss the next move by the Fed. It is a no-brainer it should raise rates later this year, even if it upsets equity and bond markets, not to mention central bankers in emerging markets. It\u2019s not just that the ever-brilliant Larry Summers (if you don\u2019t believe me, ask him) believes Fed tightening would be a huge mistake. It\u2019s the anecdotal evidence that is most persuasive; the official data will catch up later. Consider:<\/p>\n<ul>\n<li>Wal-Mart is raising wages for most of its 550,000 employees. Many other giant retailers, such as TJX and Ross Stores, appear to be following suit.<\/li>\n<li>\u00a0Aetna has announced a major wage increase.<\/li>\n<li>The California dock workers went out on strike.<\/li>\n<li>Members of the United Steel Workers employed by oil refineries have gone out on strike.<\/li>\n<li>Disney raised the cost of a theme park 4-6%.<\/li>\n<\/ul>\n<p>These are not alarming headlines. They are typical headlines for an economy that is chugging along in the middle of an expansion, with the labor market getting tighter and workers having a bit more bargaining power. The economic expansion is maturing but shows no signs of tipping into a recession.<\/p>\n<p>The problem is that current monetary policy is wildly inappropriate for an economy that is \u201cchugging along in the middle of the cycle.\u201d The Fed is still in panic-mode, with zero short rates. It\u2019s way past time to start \u201cnormalizing\u201d rates. In twelve months we will start to see telltale signs of wage pressure and corporate pricing power pushing up inflation. At that time investors will conclude the Fed is way, way \u201cbehind the curve\u201d and must raise rates aggressively. Then we\u2019ll see really severe \u201cvolatility\u201d as investors wonder whether the Fed\u2019s tardy response to inflation pressures will tip the economy into recession.<\/p>\n<p>Of course, bumping up Fed Funds to 0.75% or 1% will have little impact on the economy. Once the rate hikes start, speculation in financial markets will quickly shift from \u201cWhen does the Fed hike rates?\u201d to \u201cHow far and how fast?\u201d Rising rates may spook global bond markets, which have become overly dependent on easy money.<\/p>\n<p>Inflationary risks have been exacerbated by the supply-side damage inflicted by Obamanomics. Fortunately Obama\u2019s attack on fossil fuels failed. But Obamacare and other transfer payments create disincentives for employers to hire workers full-time, and for employees to work too much, lest they lose benefits. Tax hikes on high earners curb incentives to work and invest. America\u2019s crazy corporate tax code continues to strand $1.5 trillion in corporate cash offshore, where it cannot be invested to expand U.S. economic capacity.<\/p>\n<p>Not unlike 1997-98, when commodity prices collapsed during the \u201cAsian Financial Crisis,\u201d plunging oil prices have given the U.S. a reprieve from inflationary pressure. But that is transitory. A year from now the underlying inflationary pressures in the U.S. will be all too evident. With the dollar strong and other regions such as China having over-capacity, those pressures initially will not be severe, but they will be enough to force the Fed to keep raising rates.<\/p>\n<p>Rising rates will weigh on the equity market. Stocks are no longer cheap, earnings growth is tepid, and rising wages will pressure profit margins somewhat. In a smart bullish report on U.S. equities, BAC strategist Savita Subranamian lists \u201c10 reasons to stay long the S&amp;P 500.\u201d Reason number 7 is that \u201cValuations aren\u2019t stretched.\u201d Maybe not, but of the 16 valuation metrics she lists, the only ones where equities look inexpensive versus history are metrics that compare returns from stocks with current bond yields. So if long rates rise 150 bps, one of the chief props for the S&amp;P 500\u2019s valuation will disappear.<\/p>\n<p><strong>How to Spot a Mania<\/strong><\/p>\n<p>Identify bizarrely inappropriate and unsustainable economic conditions that go on so long they start to seem \u201cnormal\u201d and irreversible\u2014the sky-high PE ratios of NASDAQ 5000, cab drivers buying $400,000 houses with no money down in 2005, and\u2014yes\u2014zero Fed Funds in the sixth year of an economic expansion. During a mania, anyone who says \u201cThis has to end\u201d is condescendingly reminded \u201cYou could have said that any time in the last four years and you would have been wrong.\u201d They forget that \u201cPast performance is no guarantee of future results.\u201d<\/p>\n<p><strong>Pointing Eastward with Pride<\/strong><\/p>\n<p>In an article titled \u201cChina cuts interest rates as fears rise over deflation and slowdown\u201d the <em>Financial Times<\/em> writes that China \u201cfaces the prospect of a much sharper slowdown than previously anticipated.\u201d Not by us. Nearly two years ago (July 12, 2013) I wrote, \u201cif you apply a little logic it is reasonable to conclude China growth will be much worse than current consensus.\u201d It was obvious then that China was swimming in over-capacity and could not keep growing via investment and exports; the transition to growth driven by domestic consumption looked difficult, to say the least.<\/p>\n<p>The new news since 2013 is that the crack-down on corruption is turning into a political purge that is A) scaring the Party elite, who are key economic decision makers, and B) freezing up the Internet, the central nervous system of a modern economy. Evidently Xi Jinping wants China\u2019s economy to look more like Putin\u2019s Russia.<\/p>\n<p>Copyright Thomas Doerflinger 2015. All Rights Reserved.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Item: In a major new report, a blue-ribbon panel of economists estimates that if all the brain power expended over the past 20 years forecasting the next move by the Federal Reserve had, instead, been used for productive endeavors, U.S. &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=852\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[82,465,157,360,373,158],"class_list":["post-852","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-china","tag-equity-valuation","tag-federal-reserve","tag-inflation","tag-manias","tag-monetary-policy"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/852","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=852"}],"version-history":[{"count":2,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/852\/revisions"}],"predecessor-version":[{"id":854,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/852\/revisions\/854"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=852"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=852"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=852"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}