Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Yellen's Tiger Riding Dilemma Keeps Interest Rates Near Zero

Interest-Rates / US Interest Rates Mar 20, 2015 - 06:12 PM GMT

By: Dan_Amerman

Interest-Rates

Riding a tiger is one thing. But getting off the tiger, without that tiger then whirling around and consuming you – now that is another thing altogether.

A short non-econospeak translation of the results of the March 17-18 Federal Reserve meeting is that Fed chairwoman Janet Yellen still maintains that she is getting off that tiger – someday – but not at this moment because she doesn't know how to keep the US economy and markets from being eaten in the process. 


The United States has been "riding the tiger" for some years now in the aftermath of the 2008 crisis, relying on "unconventional monetary policies" which boil down to creating trillions of dollars out of the nothingness and forcing interest rates to near zero. The reason for doing this has been to attempt to contain the economic and financial damage, even while creating an illusion of sorts for the nation as a whole by putting a soft cocoon around markets.

Record sums of cheap money flooding into the markets have driven bond markets and stock markets to historic highs. This has little to do with any of the usual underlying fundamentals, but rather it is the artificial creation of cheap money on a fantastic scale that has enabled this whole process.

In the immediate aftermath of the Fed announcement, stock markets soared, and bonds jumped as yields declined, even as the dollar plunged against other major currencies. All three are closely interrelated, and all three are based on the same thing.  The Fed expressing concern about slower than expected economic growth was interpreted to mean that there likely wouldn't be a June increase in interest rates after all.  Indeed, as reported in Bloomberg, per their mathematical interpretations of the moves in futures prices, the market shifted the most likely date for a small increase in US interest rates from June to December.

So, six more months of artificial cheap money supporting stock markets prices and bond prices. 

Even more importantly – six more months without a soaring dollar crippling US exports and increasing unemployment.  "The tiger" is thus kept at bay for another six months.

The mainstream narrative is that everything is just great with the markets and the economy, and things are moving back to "normality".  If that were actually true, however, interest rates would already be rising, and there would be no deferrals.  Instead, we continue to have economies and markets that have become addicted to extraordinary governmental interventions.  Withdrawing these interventions is what would force a "truth test" on the markets – with results that the Fed clearly still fears deeply when it comes to taking actual actions instead of merely making speeches.

Understanding The Tiger That May Eat Markets & Economies

There are multiple reasons for why the United States government engaged in quantitative easing for so many years, and why interest rates were driven so low. As I have previously written about extensively, one of the primary reasons is that the United States has been one of the participants in a global game of currency warfare.

And for most of the world this currency warfare is not only still ongoing, but has been shifting into another gear altogether, which is producing substantially positive results for the nations involved.

As covered in this recent news article, the relentless war Japan has been waging against the value of the yen continues to generate increases in exports.

By driving down the value of the yen, Japanese workers, companies and products have become cheaper to the rest of the world, giving Japan a competitive advantage – and this has been rebooting Japanese economic growth.

Simultaneously, Europe has begun its own relentless campaign against the value of the euro, driving it to the lowest level seen in more than 11 years against the US dollar. And the weapon of choice it has been talking about – and is now finally introducing – is a massive European program of quantitative easing / monetary creation.

And as covered in this Chinese news story we're already seeing a major change in competitiveness with European workers versus Chinese workers.

The Chinese are losing the advantage they've had for decades against the Europeans, and there's a good chance that European companies and workers will feel the very positive effects of a much weaker euro – unless the Chinese counterattack with another assault on the value of their own currency.

So in a world in which countries are competitively assaulting the value of their own currencies, and slashing interest rates for their own investors and their own retirees, the United States is talking about "decoupling", and unilaterally dismounting the tiger so to speak.

Now in an internationally interlinked world, with markets being held up by extremely cheap money, just how to do this is an incredibly difficult question.

Because the danger is that a 1-2 crisis scenario is set off.

The first element is the fundamental economy. The US raising interest rates, which (all else being equal) increases the value of the nation's currency, at the very same time when every other major economic power in the world is attempting to cut the value of their own currencies, could be called unilateral surrender.

It means that US workers are almost certain to suddenly be under an extraordinary competitive disadvantage when it comes to Japanese workers, European workers and Chinese workers.

Simultaneously, the very cheap money which has been driving US stock markets is being withdrawn.

So the market support crumbles, even while the economic growth that the stock market is based upon is savaged.

Falling economic growth – or no economic growth, or perhaps even a shrinking real economy – combined with the removal of the artificial supports that stock market prices are based upon is a powerful two-part recipe for the rapid destruction of stock market values.

That's the danger, and that's why for some years now in their more candid moments, Federal Reserve economists have been admitting they're not exactly sure how an exit strategy is going to work.  For "decoupling" and unilaterally exiting the tiger potentially creates simultaneous economic damage and market damage.

And what we see happening in practice is that there does not appear to be any preplanned exit strategy or contingency plans for how to exit this impossible situation unscathed.  The Fed says they want to exit – but clearly, they still lack the specifics for what to do next when that tiger quite predictably whirls around toward them with open jaws. 

So they defer. Repeatedly.

Huge Risks For Miniscule Gains

Unfortunately, there has been an ongoing powerful cost to these "unconventional monetary policies" that have helped maintain stability (even if artificial) in the US financial markets.

Which is that this artificial stability has been achieved by essentially sacrificing the retirement income of current retirees on a deliberate basis, with the long term creation of retirement wealth having been slashed by as much as 95% for many retirement investors, even as the current standard of living for many current retirees has been reduced by close to 50%. 

Indeed, government policies have essentially pulled the rug out from underneath conventional retirement planning and turned long-term investment from being a process of wealth creation to a process of wealth destruction for many millions of savers and investors.

Given this situation, one might therefore be encouraged by the Fed's discussion of increasing interest rates.

The problem however is that the increases being considered are quite small, perhaps somewhere in the 0.25% to 1.00% range – which unfortunately is going to make very little difference when it comes to retirement income.

An increase from let's say 0% to 1% has only a very minor impact on long-term investment profits. On the other hand, increasing yields to more like 4%, 5%, 6% (in other words something closer to historical averages) has a hugely positive impact on the creation of wealth, as well as the quality of life that a given portfolio will support in retirement.

The issue has been that because the United States is now $18 trillion in debt, increasing interest rates to more historically-average levels could set off an explosive compounding of the size of the annual US deficit as well as the total amount of US debt outstanding.

So it should therefore be anticipated that any interest-rate increases are likely to be quite small. Which unfortunately leaves conventional investors in a lose-lose situation.

The first level of loss is a fundamental weakening of the US economy, as that brings everything downward.

If the real wealth of goods and services isn't being created, then the wealth isn't there for the nation to consume, and the rest is merely paper gains and the redistribution of wealth.  The wealth isn't there for investments, and it also isn't there for Social Security and Medicare.

Simultaneously, even as the real economy and jobs are savaged, the artificial support mechanisms are removed, creating a danger of swift and major downward movements in equity market prices.

Now while this might be a worthwhile risk if we could genuinely reboot long-term investment performance, if realistically all that we can afford given the current national debt and other constraints is a fairly small increase in interest rates, then the small increase in retirement investment income and retirement lifestyle is quite minor in comparison to the potential economic damage that is being done to the nation as a whole.

Actions Speak Louder

A fundamental conflict remains between reality, and what we are told reality is as part of the mainstream investment narrative.  Let me suggest that those who do not take this conflict into account risk repeated financial surprises, some of which may be quite unpleasant.  If the US markets and economy are actually as strong as we are told on a daily basis – then there is no reason whatsoever for the government to be forcing near zero interest rates. 

Across America and around the world, retirees and long term investors are paying a very real price for the continuation of "unconventional" central banking interventions on a massive scale.  Interest rates being forced below the rate of inflation on a quite deliberate basis translates to the personal cost of retirees forced to make difficult daily choices when it comes to food, clothing and other components of their daily standard of living, because what they assumed would be interest earnings in retirement – have not materialized. 

Lower retirement account income also translates to delays in planned retirement dates for many other millions of people.  Even as pension funds remain underfunded because of very low interest yields, thereby placing retirement benefit payments at risk.

Healthy economies and markets don't need the indefinite continuation of the unprecedented and the fantastic.  Period.  This is no more than common sense, and serves as a basic "truth test".  The proclamation that there has been a return to healthy normality, even while interest rate returns from retirees and others continue to be artificially stripped on an indefinite basis – creates an absolute conflict between words and actions.

I do strongly believe that there are answers, and that the current environment creates as many opportunities as it does dangers.  The first step is to recognize that the financial world is a different place than it used to be, and that those continuing to follow the usual investment advice are unnecessarily exposing themselves to extraordinary risks without a compensating upside potential.

Daniel R. Amerman, CFA

Website: http://danielamerman.com/

E-mail:  mail@the-great-retirement-experiment.com

Daniel R. Amerman, Chartered Financial Analyst with MBA and BSBA degrees in finance, is a former investment banker who developed sophisticated new financial products for institutional investors (in the 1980s), and was the author of McGraw-Hill's lead reference book on mortgage derivatives in the mid-1990s. An outspoken critic of the conventional wisdom about long-term investing and retirement planning, Mr. Amerman has spent more than a decade creating a radically different set of individual investor solutions designed to prosper in an environment of economic turmoil, broken government promises, repressive government taxation and collapsing conventional retirement portfolios

© 2015 Copyright Dan Amerman - All Rights Reserved

Disclaimer: This article contains the ideas and opinions of the author.  It is a conceptual exploration of financial and general economic principles.  As with any financial discussion of the future, there cannot be any absolute certainty.  What this article does not contain is specific investment, legal, tax or any other form of professional advice.  If specific advice is needed, it should be sought from an appropriate professional.  Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.

Alasdair Macleod Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules