
If the Federal Reserve Doesn't Raise Rates, It Could Be Disaster for the Markets
NEW YORK (TheStreet) -- The Fed has lost control of the interest rate market, not to mention the economy and other venues that the last few years of nearly $5 trillion of quantitative easing (translation: capital market manipulation). Lately, a parade of pundits have appeared on media outlets to state their certainty that rate would not be raised in September, and likely not December, either.
Three weeks ago, the decision support engine reiterated its forecast that rates had likely bottomed the last 34 years of declining yield levels, and the Fed has no choice other than to raise this year, if only to keep in step with the reality of the rising 10 year yield (which bottomed in 2012), and the 30 year yield (which bottomed earlier this year). Both of these analyses were accompanied by data showing the lows in yields, and the rises since those lows.
This week, the herd has begun moving to the side of an imminent rate hike, as pundits has acknowledged that a hike Thursday, or in December, is likely. Here's the interesting part: The denials of the past were, at least partially, based on the fear that a rate hike would pop the stock market's bubble of the past six years (a valid inference, given historical evidence). What is appearing today is the rationalization that any rate hike that comes will be a buy signal for stocks, rather than the bubble popper that was worried about all summer.
The investing public, as well as the professionals, are in massive confusion; even chaos. Analysis paralysis has crept in, and most are now biting their toe nails now, since their finger nails are all gone. This is what happens when the sentiment pendulum reaches its maximum swing to mania, stalls, and begins the swing toward the opposite extreme of depression. If you visualize that pendulum in your mind, you can imagine the point of no motion; the split second in time where the pendulum is changing direction from moving from right to left, to the returning motion of moving from left to right. We are there.
For the past 34 years, since 1981 or so, rates have declined, with counter-trend rising periods along the way. That path was the pendulum swinging from historic highs to the recent historical lows. The two green boxes in the above monthly chart of the 30 year yields show the 2012 (10 year yield low) and January (30 year yield low) bottoms, and the undisputed rise of yields since.
The second chart of the 10 year yields shows the same data, but from the perspective of the higher bottom in 10 year yield, confirmed by the higher low in the monthly stochastics. These two pictures combine to illustrate a pendulum direction change in the making, and a choke hold being placed upon the FOMC to tap out (and raise rates), or risk brain damage, by becoming so far behind the reality of the market that their existence becomes questionable.
As we all see in UFC battles, some choke holds are able to be escaped. But, not a properly applied rear naked choke, which police officers and departments around the country are in constant litigation over. These particular choke holds often result in death for those caught in them, as much of the time, the adrenaline of the moment prevents those caught in them from tapping out to live to fight another day. These chokes are called blood chokes, as opposed to air chokes. Blood chokes can lead to death within 10-15 seconds, rather than the 60-90 seconds it might take an air choke to kill.
While the time between 2012 and now can be argued to be an air choke, the current grip that the crowd has on the Fed appears to be setting up as a rear naked blood choke, and if the FOMC doesn't tap out and raise rates Thursday, brain damage or death could result.
In the shortest term, the 30 year yield can even retrace the recent rise from August's low near 2.62% to today's 3.75% by correcting toward 2.7% +/- a few basis points (2.08%-ish on the 10 year). However, the intermediate and longer term trends are firmly established to the upside, and there are few tools left, if any at all, remaining in the Fed's manipulation tool box (unless they make some new ones out of thin air, which they'd never do, right?).
DSE, therefore, continues to pound the table that adjustable rate debt should be locked in NOW, and all debt should be reduced as much as possible, as the coming environment if rising rates and falling prices, for bonds and stocks, will strain federal, state, city, corporate, and personal balance sheets to extremes not experienced in nearly 100 years.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.










