Saturday 5 April 2014

Interest rates and the market

There remains a great misconception amongst both economic bulls and bears alike, that US equities will completely unravel and implode once the Fed raise interest rates. History would suggest that is most certainly not likely going to be the case.


Fed rate, with sp'500, monthly, 20yr


Summary

I was inspired to end the week highlighting the relationship between interest rates/equities by Don Harrold. Mr H' is one of the better, and long standing financial youtube posters...

see this...


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I realise some of you out there will consider Harrold's outlook as borderline heresy, but I absolutely would hope everyone at least consider it a viable outcome.


Will the Fed really raise rates?

It also remains a general consensus - particularly amongst the doomer bears, that the Fed can never raise rates again. I'm well aware of some of the implications of a rate rise - such as US govt' debt servicing costs. All things considered though, I'd at least think they can get away with returning rates to half of the historical norm (of the last 15-20 years).


What is my guess on where we are headed?

I do believe the Fed will eventually raise rates, but it is difficult to guess when the maniacs at PRINT HQ might do this. Further, just how high might they want to take rates?


In terms of the ECM cycle - from Armstrong


The ECM cycle would suggest rates reach a peak in late 2015, with equities perhaps peaking 3-6 months later in early 2016.

One scenario would be that the Fed raise rates to 1, maybe 2% - with the 10yr at 4/5%, only to then go full reverse, as a chain reaction begins of all sorts of nasty economic time bombs. We know Yellen supports negative int. rates, and it'd sure not surprise me if this becomes the case in the 2018/22 time frame.

As ever, all comments are welcome.

Goodnight from London
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*the weekend post will be on the world monthly indexes