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Aurora, Il USA
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"Money has never made man happy, nor will it, there is nothing in its nature to produce happiness. The more of it one has, the more one wants." — Benjamin Franklin
The Federal Reserve is desperate to raise rates so that they can lower them again.
Think about that statement for a second. By definition, every day that goes by, we are getting closer to a recession. Yes — a recession. Business cycles still exist, and recessions tend to happen when it seems like everything is good. Feel good about Draghi's "whatever it takes" moment? Last I checked, Germany and Italy are suffering from contracting GDP, and deflaton risks are meaningfully rising in Europe. The iShares Germany ETF EWG, -0.55% and iShares Italy ETF EWI, -0.45% don't look too hot.
In the U.S., the Fed needs to raise rates to have ammunition to fight the next recession, which for all we know, may be coming much sooner than we think as global growth continues to be questioned, and disinflationary forces continue to permeate worldwide. Of course, it remains to be seen if the Fed can possibly do this when inflation remains muted.
There are some that are arguing that another round of quantiative easing is coming. The Fed isn't done with bond buying because we are in the "QE4EVA" period. I disagree. I think the Fed may never do quantitative easing again. Why? Because if they do, then Yellen would be admitting that the Fed has turned Japanese, and the last thing the Fed wants is to lose credibility by being perceived as a different shade of the Bank of Japan that can never leave the marketplace
Deflation is a real problem, and is decades in the making for developed economies. Remember — the problem for all central banks has never been the amount of money in the system. It was, is, and continues to be the usage of money throughout the system. The velocity of money simply isn't turning in a way that suggests reflation is coming. If anything, the velocity of money has completely crashed despite all kinds of stimulus.
Source: St. Louis Fed
I believe this means one thing and one thing only: Risk management will likely return with a vengeance on the realization that we are entering a dangerous phase of future economic growth and inflation expectations worldwide. People forget that, mathematically, what matters for longer-term wealth creation is not getting big upside gains, but avoiding big downside losses. From the standpoint of a long-only equity strategy, this is precisely why we designed our sector-rotation ATAC Beta Rotation Fund BROTX, +0.08% to have the ability to go all in on utilities, consumer staples, and health care when risk conditions heighten based on areas of the market which tend to move ahead of stock-market volatility.
Note that the velocity of money peaked some time around the mid 1990s — this is not a trend that happened after the 2008 financial crisis. This is something deeper, and I think another round of QE won't help, won't matter, and won't reverse this trend. So what if the S&P 500 SPDR ETF SPY, +0.27% drops 20% in a correction? The Fed may not be able to do anything about it given that all of their tools have failed to actually increase reflationary pressure.
Why [AUTOLINK]the Fed[/AUTOLINK] may never do QE again - MarketWatch
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