What a US Rate Rise Means for Your Investments Today

I’ve long said to expect a US interest rate hike this year. US Federal Reserve Chairperson, Janet Yellen continues to confirm my forecast with her comments. In her own words (but with my emphasis),

‘My own choice would be to be able proceed to tighten up in a prudent and gradual manner.

‘We should also be careful not to tighten too late because, if we do that, arguably we’re able to overshoot both of our goals and become faced with this situation where we would then need to tighten financial policy in a very sharp method in which could be disruptive.

‘If there is a unfavorable shock to the economy along with interest rates pinned at zero, we don’t have great scope to respond by loosening policy further, whereas with a positive shock obviously we can tighten monetary policy.‘

Indeed, US interest rates are going one way, and that’s up.

Why?

Because the Given has no other choice.

This isn’t regarding inflation.

And it isn’t about joblessness.

This is purely about the Fed using a job during the next economic crisis. Adjusting rates is the only policy tool that the Fed has available — the days of money printing are over.

This should be no surprise…

Why money printing is over forever

The Japanese government has been printing money for 20 years. And where’s that got them?

Absolutely no place.

The US money printing program didn’t achieve anything either. In fact, it merely postponed and amplified the next financial crisis. Which I may add, is in bonds and NOT stocks.

And the European Main Bank’s (ECB) money printing program?

Again, don’t expect anything miraculous presently there.

So, at the end of the day, money printing is only good for the bond holders. And it ensures that governments can issue even more bonds (we.e. borrow more money). Of course, this means that they can promise and spend more…

Now, while government spending sounds good in theory, it actually doesn’t do much for long term economic growth.

In reality, if you’re wondering, the majority of Foreign government spending goes in the direction of interest repayments on financial debt (19.8%), social security (Thirty-five.1%) and healthcare (16.1%). And even though most of this sounds good (as well as necessary), it doesn’t create sustainable long term jobs. At least not outside of government anyway!

And presently there you have it…

Money printing, which benefits government and the bond cases, does absolutely nothing for the actual economy. The experiment has sucked the economy dry. And central bank credibility has been hit hard for this.

This is why I say that the days of money printing are over.

And, because I’ve long said, you should expect US interest rates to rise higher. The first rate hike should come in either September or October. And I’m backing a second rise in December.

When interest rates start to increase, so will the US dollar. Which means that Aussie dollar will weaken. Yet this is still some time away.

In fact, before it happens, we’re likely to see a bounce in the euro. Which should affect your stock market investments.

If the euro rallies, what about the stock market?

Starting with Greece, here is why…

After all the controversy, the nation still remains in the Eurozone. This should observe confidence return into the Eurozone, at least temporarily.

Eurozone politicians will be in heated conversations into October 17 — the actual date when Athens’ bridging finance runs out — deciding on whether to maintain Greece in the Eurozone. In my view, otherwise at the mid-September Finance Ministers meeting, this will be the date when A holiday in greece will start packing it totes.

But, at the moment, the Eurozone remains. So that as Boris Schlossberg?of BK Asset Management?places it:

‘Almost everyone on Walls Street hates the euro right now and everybody is convinced that it’s going to parity [against the US dollar]. And it very well may. But not before I think it hurts quite a lot of complacent shorts.‘

Indeed, when the entire market hates something, typically you will see a rally. And this is exactly what I’m banking on…

And to shine it off, the US equities confirming season hasn’t kicked off to the greatest start. The technology sector overall has not impressed traders. For example, thanks to lower than expected Chinese iPhone sales, Apple Corporation. [NASDAW:AAPL] fell by nearly 8%. Additionally, it provided weaker profit assistance and a US dollar warning.

So, the data coming out of the US is not hot, to say the least. And a fragile earnings season may see investors punt on a later rate rise. This should strengthen the dinar. Furthermore, with Greece residing in the Eurozone, Europe has stabilised for the time being.

As such, expect a short phrase bounce in the euro. And, following the money trail, this should see capital shift in to bond market. Indeed, we’re already looking at a nice trend emerging in the bond market. Italian 10-year ties have had their best run because the summer of 2008

And with poor financial reporting results, this will see stocks trade reduced the meantime. Indeed, the correction which I called prior to the May high is not however over.

Take a look at this month-to-month chart of the Dow Johnson Industrial Index. It teaches you what we’re looking at for the short term.

Source: Freestockchart.com; Resource Speculator

The monthly chart will show you the big picture on the line. This year, we’ve seen the market smooth. And therefore, at the moment, it could move either way.

Yet, my analysis shows that it will move downwards. To confirm the ongoing correction, we need to visit a monthly close below 17,136 points. This is the January low. If this happens, it’s likely that we’ll after that be looking at the 16,Three hundred point region — the main target for the correction. This is proven by the lower black line.

Nevertheless, it’s still possible that I could be wrong. And the market could move higher if it removes the May high of Eighteen,351 points. If this happens, we’re taking a look at a two to three month move towards the 19,300 stage level. This is shown through the upper black line.

If you want more information on how to play these markets, check out Resource Speculator. I’ve been guiding readers through these choppy market conditions all year. See right here.

Regards,

Jason Stevenson,

Analyst, Resource Speculator

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