“…In July, 2008, on the eve of the biggest financial crisis in memory, the European Central Bank did something both predictable and stupid: it raised interest rates. The move was predictable because the E.C.B.’s president, Jean-Claude Trichet, was an inflation hawk; he worried about rising oil and food prices and saw a rate hike as a way of tamping them down. But the move was also remarkably ill timed. The crisis was already under way, European economic growth had slowed to a crawl, and within a couple of months the global economy had collapsed, inflation had disappeared, and the E.C.B. was forced to slash interest rates, in an attempt to avert economic disaster. That July rate hike was like kicking the economy when it was down…”
http://www.newyorker.com/magazine/2011/09/05/europes-big-mistake
Yellen is not repeating Trichet’s big mistake. One of the biggest difference is that Yellen is raising rates from low levels, while Trichet was raising rates from higher levels. We quote the results from JPMorgan’s analysis:
“…[JPMorgan’s Kelly] analysis shows that rising rates from a low level tend to be accompanied by rising stock prices, while hikes from higher levels typically happen in tandem with declines. ‘When the Federal Reserve raises rates from low levels it is generally taken as a sign of economic confidence—that the economy no longer needs the Fed’s help—and that rising confidence is generally positive for stocks,’ the economist wrote…”
http://www.bloomberg.com/news/articles/2015-10-26/how-a-fed-rate-hike-could-actually-stimulate-the-u-s-economy
We also previously reasoned that this rate hike is a direct stimulus because it involves the Fed throwing money into the economy:
“…The Fed would thus need to spend money to ensure that rates indeed rise as the Fed dictates it to. There are two ways Yellen could manipulate rates higher. She can either overpay banks on interest on excess reserves (IOER), or she can overpay a larger pool of intermediaries on the repo market (RRP)…”
https://tradehaven.net/ad-hoc-commentary-yellen-and-the-hike-that-is-not-supposed-to-be-a-hike/
Alas, these are the moments that separates the men from the boys. As yours truly write, the S&P500 is at 1828. Many are doubting the Fed’s rate hike plans, and probably in the coming days many will wrongly conclude that Yellen is walking in the footsteps of Trichet:
“…Many on Wall Street believe there will only be two rate increases this year. ‘We doubt that the Fed will be hiking the federal funds rate four times this year,’ Ed Yardeni, chief investment strategist at Yardeni Research. Yardeni is calling for only one rate hike this year…”
http://money.cnn.com/2016/01/19/news/economy/global-fears-federal-reserve-rate-hike/
Despite all the doom and gloom, yours truly think we are getting to the buying opportunity that Larry Fink talked about last Friday, and it will be a hockey stick move that will see the bears slaughtered when the stock market rout reverses itself and end higher in the second half of the year:
“…'[BlackRock Chairman and CEO Larry Fink] believe there’s not enough blood in the street. We’ll probably going to have to test the markets lower,’ he said. ‘When we test the markets lower, it’s going to be a pretty good buying opportunity.’…”
“…But by the second half of the year, Fink said, the stock market should be higher. ‘Over the course of the next six months, we think it’s going to feel a lot better.’…”
http://www.cnbc.com/2016/01/15/prepare-for-stocks-to-fall-another-10-larry-fink.html
In yours truly mind, the only risk to this outlook is if the Federal Reserve loses it’s confidence and decided not to deliver more rate hikes this year. If Yellen fails to deliver, or reverses course like the ECB did in 2008, then confidence is going to be lost in both the economy and the Federal Reserve itself. That would be disastrous. However, at this moment, the risk of a no-show by the Fed in March seems to be a remote risk at this moment:
“…[New York Fed President William Dudley] still believes the December decision was correct because ‘these risks were manageable … Downside forecast errors are certainly possible, but the U.S. economy appears to be on sufficiently sound footing to withstand downside shocks better than was the case a few years ago.’…”
http://www.reuters.com/article/us-usa-fed-analysis-idUSKCN0UT263
Yours truly was wrong on oil as it breaks below 30 dollars – probably it’s me that don’t understand geopolitics:
“Geopolitics will probably finally keep oil supported above 35 US dollars. Those who are calling for 20 US dollars oil probably forgot about geopolitics.”
https://tradehaven.net/ad-hoc-commentary-saudi-arabia-vs-iran-wti-should-stay-supported-at-35/
Good luck in the markets.