Thursday, November 19, 2015
ZIRP to TWIRP; Federal Reserve Prepares for Rate Hike on 12/16/15
The stock market rallies strongly after the FOMC Minutes were released at 2 PM EST on Wednesday, 11/18/15. The Fed will likely hike on 12/16/15 unless a big negative event happens over the next three weeks (such as a terrorist attack) or if the 12/4/15 Monthly Jobs Report is disappointing. Dovish Fed members do not want to hike since an economic slowdown would require the central bank to immediately reverse course and provide additional monetary accommodation. Hawks say the hike is long overdue.
The most important takeaway from the minutes is that the Federal Reserve is in absolutely no rush to announce a second hike in fact the second hike may not occur until months down the road deep into 2016. Thus, the Fed's ZIRP (Zero Interest Rate Policy) morph's into TWIRP (Twenty-Five Basis Points Interest Rate Policy). Nothing really changes. The acronym similarity to 'twerp' is most definitely intended. The base rate will simply remain at 25 bips, or some other low percentage, instead of the zero bound. No biggie. Worries a few weeks ago were due to the expectation of a standard rate rise cycle; this is not in play.
Stock markets rally strongly since the easy money Keynesian good times will continue for months ahead. Fed Chair Yellen is leaning towards a 'one and done' philosophy on interest rates. The potential rate hike coming on 12/16/15 does not start a rate hike cycle like all prior decades. Instead, the 25 basis point bump, it may be a touch lower or higher, will remain in place indefinitely at least until the cows come home or cousin Godot arrives. This is why long traders are content and short-sellers are running for their lives.
If the Fed does not hike on 12/16/15, stocks will be happy that central banker easy money continues. If the Fed does hike on 12/16/15, as about 70% of market participants expect, the second hike may not occur until December 2016 so easy money conditions will continue indefinitely, the TWIRP policy described above, the Fed will remain accomodative. Long traders celebrate as the easy money Fed policies will likely continue well through next year.
Humorously, the ZIRP policy of zero interest rates forever will be replaced with TWIRP forever, a new Federal Reserve policy of ‘twenty-five basis point rates that continues indefinitely’. Fed easy money policies will continue as far as the eye can see. The wealthy light fat cigars as they watch their huge stock portfolios become bigger. The elite class, politicians, corporate executives and the Federal Reserve are in bed together; it is an incestuous bunch performing obscene (monetary) acts that would make Caligula blush. Fed members are cozy with the elite class in America since they will be rewarded with lucrative speaking engagements once they retire; a quid pro quo for their loyalty in serving the investment banks during their tenure at the Eccles Building. The wealthy become more filthy rich from central banker money printing while the middle class and poor suffer.
The Fed stresses a very gradual path of rate hikes will occur once the first rate hike is announced. Therefore, very simply, the Fed’s current ZIRP (zero interest rate policy) will likely be replaced with TWIRP (twenty-five basis points interest rate policy). Nothing changes after the potential December hike occurs. Easy money conditions will continue through 2016 with a base of 25 bips, or other small amount, rather than the zero bound. Stocks rally and the wealthy, that own large stock portfolios, become richer. Central banker easy money policies will continue for many more months.
What is the end game? As long as investors maintain confidence in the Fed the central banker Ponzi scheme continues. Markets are in trouble if the Federal Reserve loses credibility. If the Fed balks at raising rates on 12/16/15 that will destroy credibility. If the Fed hikes on 12/16/15 but into the first of the year has to immediately reverse course due to a slowing economy, that will destroy credibility. Choose your poison. Monitor these developments closely.
The beauty about the Federal Reserve's money schemes are that they will never be blamed for creating bubbles and causing bad behavior in markets. The economy was already sluggish and weak when the 9-11 terrorist attacks occurred but the history books place terrorism as the sole reason for that entire market selloff into 2002. Similarly, in the present day, the Fed will never be blamed for a potential stock market downturn of -20% to -50% or more. Instead, a major war will begin, or a devastating terrorism event will occur, or perhaps a pandemic or other major catastrophe will take place and be blamed for the likely stock market pull back coming over the next few months and years. The Fed's obscene Keynesian money printing monetary policy will never be blamed.
Comically, the Federal Reserve will actually be praised in future years on how they prevented the second Great Depression but that nasty event (insert the event that occurs probably anytime now through Q1 2016) came along and derailed the great market and economy the Fed created. It is ridiculous but this is how the Wall Street game is played. Considering the Baltic Dry Index crashing to record lows and deflation rampant around the world with an ongoing currency war in play, the chances are high that a major negative event will occur in the weeks ahead. The event, whatever it turns out to be, will let the Fed off the hook for its 6-1/2 years of obscene Keyneisan spending that only served to make the wealthy filthy rich.This is the way the game is played. Here comes TWIRP.