Follow The Bottom Violation
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Feb
19
Stocks and Commodities Ignore Fed Rate Hike. Why? One Word: Inflation.
How many times in the last year have I said Bernanke and his pack of hyenas would need to time time a reversal of Fed policy with the atomic precision? Too many times. So here we are. And the only precise aspect of yesterday’s quarter-point rate hike is the antithetical degree to which it affected markets today; the results couldn’t have been more diametrically contradictory to the Fed’s objective.
First, ask yourself why the Fed would raise rates at all — especially in the middle of the worst economy since the 1930s? There’s no clear indication that investment has been (or is likely to be) reignited. There’s no obvious metric that suggests unemployment intends to do anything but go higher. The velocity of money is near zero and the printing presses are smoking. Housing prices continue to fall, America manufactures almost nothing, and consumers have decided to forgo mall-crawling in favor of huddling and shivering in the living room as the economic universe implodes around them. Sure, the government’s “funny” numbers suggest that we have rounded the corner. But do you really believe that? Is your financial life better? Are your friends easing into the sort of prosperity they enjoyed a decade ago?
Of course they aren’t. Things are horrible! And they’re getting worse, not better! Oh, Ben and Barack will do anything they can to distract you by pointing out the beauty of a rose growing in the middle of a dump, but the stark truth remains: we’re living in a global, fiscal nuclear winter, and the villains in Washington are only making it worse.
So I’ll ask the question again — why on earth would Ben & Co. raise rates? The answer should be obvious if you’ve been listening to me and my brethren for the last several years: Bernanke is terrified of inflation. He knows that U.S. debt is losing its cachet. He knows how much money has been printed. He knows the American consumer is an empty gun. He knows what’s coming, and he figures if he starts raising rates now, he can postpone the inevitable catastrophe. And maybe he can. If he raises rates to 10,000 basis-points (that’s 100%, by the way, and even that wouldn’t be enough).
You think that’s crazy? Ben doesn’t. After today, he’s more terrified than ever. Sure the dollar went up a little, but so did gold, oil, and stocks, and that’s not supposed to happen when the Fed raises rates. No, when rates go higher, it’s supposed to mean slower growth ahead, and less opportunity for investment. The only real exception to this rule is the anticipation of inflationary price increases — in which case markets don’t appear to care about slower growth, because investors are more focused on the likelihood of weakening currencies. In this case, markets anticipate higher prices and move up in spite of higher rates.
That’s what happened today. And it’s not good. More than anything else, it’s what I, and a handful of other Austrians have been trying to tell you.
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Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
You can buy his novel Discipline wherever books are sold.
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[...] thoughts – Inflation May Not Be All That Bad. Really, Trust The Economists – Tom Lindmark – The WSJ Real Time Economics Blog has an interesting post that discusses the possibility that the Chinese will allow inflation to do the same thing essentially that a revaluation of the currency would accomplish. Basically, make goods more expensive relative to their trading partners and thus move towards some sort of adjustment. – But Then What and Stocks and Commodities Ignore Fed Rate Hike. Why? One Word: Inflation. – by Paco Ahlgren – THE BOTTOM VIOLATION [...]
When I followed the link to this page and then the picture loaded, the spontaneous laughter caused me to spit out my coffee on my keyboard. Great article with a hilarious picture… your work and insight is appreciated.
As we all know, today we are going through an Economic Crisis that boggles the mind as to money supply deflation, unserviceable debt, unemployment and everyday cusumer price inflation.
There are only two assets to own and hold during such a Crisis. Real Estate and Gold Bullion.
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My recent post “Monex systematically underpaid their employees“