Ad Hoc Commentary – Republican captures senate, Yellen’s honeymoon inflection point

Nearly a year ago, yours truly wrote:

“…the impact of USD loan payback will dominate over the next two years. This will give Janet Yellen the honeymoon in the first two years of her Fed presidency. And this will likely make it a very tough economic situation for Clinton come 2016. The elites are likely thinking very hard about the situation, and the next crisis is going to be extremely volatile. But, given the myopic nature of today, we should be celebrating S&P500 reaching 3000 before the next panic. Now that the stage had been set, the equity party should begin early next year…”

“…Many Republican lawmakers also want to require the Fed to use a mathematical rule to guide interest-rate decisions or shift its focus more directly to inflation rather than inflation together with unemployment…”

“…A rate hike would strengthen the U.S. dollar and boost world economies, BlackRock Chairman and CEO Laurence Fink said on ‘Squawk Box’. They’re behind the curve, but they have a systematic approach. They finished bond purchasing this month and I think they will be on a path, ultimately, to normalized rates,” said Fink, who has led BlackRock through its entire two-decade history and has more than 30 years of investment experience…”

Connect the dots, and you will read:
1. the Republicans want the Fed to hike interest rates. When Larry Fink says the Fed is behind the curve, he likely has very good quantitative proof to back it.
2. the US interest rate hike will lead to USD loan repayment, leading to US dollar strength.
3. our favorite S&P500 equity index will keep going higher because worldwide investors will see gains in their own currencies. There is a possibility that S&P500 will trade sideways in US dollar terms.
4. the rate hike will likely lead to a mini-1997-style financial crisis in Europe. This is mainly because foreign holding of government debt in Europe, most notably France, is above 60%. This will likely manifest in EURUSD going to parity. Or, if the Europeans are too stubborn to admit that the currency union had failed because they did not create a common EU Treasury Bond, then a very painful bond market rout in the European core.

Rate hikes are major events, especially when it is a US rate hike. The confused bears will yet again be calling for the S&P500 to crash. If you are tempted by their likely very cogent explanation, please look at their track record. If their track record is not available, then remember this: if dividend yield is 2% and your borrowing cost is 1%, you still make positive carry on top of the capital gains if everyone is chasing this carry. We shall listen to the bears sometime towards Oct 2015 when Obama’s budget deal expires. But till then, yours truly will continue to gather coins in front of the proverbial steamroller, and perhaps watch some more CNBC Squawk Box.

Good luck in the markets.