The Price of Interest Rate Manipulation

It’s pretty obvious there’s no this kind of thing as being able to see the near future. Or is there? From what I can gather there is no Grays Sports activities Almanac like in Back to the Future Component II, with the outcomes of events in the future.

But some extraordinary people have an uncanny ability to predict what is going to happen in the future. Currency Wars author and Strategic Intelligence Strategist Jim Rickards is one such individual.

And what Jim’s uncanny ability appears to be is predicting what’s going to take place in world economies. Sometimes I think Jim might even have a secret copy of Grays Economic Almanac and he’s just not letting on

While the world was calling for the US to hike rates in September Jim suggested they wouldn’t. And beneath you’ll see exactly why he made that call — and was right.

Furthermore you will also see Jim’s long term strategic view of the Fed’s actions, and the 5 choices he thinks they’re going to have. And then whatever the Fed does wind up doing will be a tradeoff between their credibility or catastrophe.

Regards,

Sam

The Price of Interest Rate Manipulation

By Shae Russell, Editor, Strategic Intelligence

‘The Fed will not raise interest rates. That’s some thing I’ve said for a long time.‘

This declaration is familiar to customers of Strategic Intelligence. It sounds exactly like something, their strategist, Jim Rickards would say.

In fact, it’s exactly what he said to the ABC around the Monday night before the Generous party changed leaders.

As most Aussies were tweeting ‘libspill’ memes, Jim was chatting to The Business about the ramifications of the looming Federal Reverse Bank meeting this week.

I recommend you watch the interview.

Now, this interview took place before the Sept Federal Open Markets Committee. When you watch the interview, it is clear that Jim was confident there’d be absolutely no rate increase from the Fed that month.

However, he do discuss something called the ‘October Surprise’.

Now the actual Fed meets eight times a year. But they only hold a press conference four times a year. As a general rule, the Fed tends to raise rates simultaneously a press conference is actually scheduled.

After this last meeting, the Fed won’t have an additional press conference until Dec this year.

Yet, as Jim describes in the interview, last year the actual Fed had a teleconference practice run during the Northern hemisphere spring.

The markets — and most in the mainstream for that matter — wouldn’t expect it because there’s no scheduled push conference. Hence, the October surprise.

At the time, Jim experienced the Fed may danger saving face and get rid of an October Surprise on the US market.

In saying that, he or she believes any rate rise this year is unlikely. 2016 is still possible, however, as Jim told subscribers of Strategic Intelligence on Thursday, the Fed have till March 2016 if it’s dependent on economic data.

While Jim’s telling you to look out for the actual unexpected, he reckons the Given missed the boat to raise rates.

They could have done so progressively over 2010 and 2011. If the central bankers had used this opportunity to raise rates, there’d be room in america economy to tighten financial policy today.

The fact is, they didn’t.

Today the US is faced with frail financial numbers. Jim says the actual, ‘Employment rate has come down, but labour force participation is lousy. The labour force declined last month and actual wages are going nowhere. In fact, monthly job creation is going nowhere. If you look at the information behind the happy talk, the [economic] data is very weak in america.‘

As a result, Jim believes the Fed has five options.

1. Fire up those printing presses and start printing money once more.
2. Establish negative interest rates. Although Jim thinks this move is extremely unlikely.
3. ‘Helicopter money’. This is where the US operates bigger budget deficits and also the Fed buys the bonds. Money printing with a purpose, Jim calls it.
4. The Fed changes its forward guidance. Since spring the Federal Book has put the ‘market on notice’ that a rate rise could happen at any moment. Jims says the Given could change the talk to being ‘data dependent’ rather than this tough talk we get now.
5. And the ultimate tool — currency wars. That is, cheapen the actual dollar at all costs. The problem — because Jim explains in the job interview — is that this move will put pressure on countries like Australia and China which are trying to weaken their currencies.

In saying that, the Fed may have these choices, but Rick doesn’t see the Fed using them at this point.

However, the biggest take away in the ABC interview is what occurs if the Fed doesn’t increase rates after all the tough talk.

Jim sees it coming down either to causing a meltdown in the US and emerging markets by increasing rates, or accepting they lose their credibility.

‘The Given have to choose between their credibility or a catastrophe. People are stating if they don’t raise prices, when they’ve been talking up for so long, they’ll lose their credibility. However the information is weak so if they do raise rates they’ll cause a disaster.‘

Pushed on the point further, Jim tells the ABC: ‘They will have to leave their credibility in shreds to avoid a catastrophe.?This is the price of manipulation.‘

Regards,

Shae Russell

Editor, Strategic Intelligence

Ed Note: the over article first appeared as a Strategic Intelligence weekly update (16 September 2015)