The Economy: It is finished. The long wait for the Fed ended today. At the end of their two-day meeting they announced a ¼ increase in interest rates. Money center banks immediately followed by raising their prime rate from 3 ¼ to 3 ½ percent. After almost a decade, we are now in a tightening cycle. The Fed indicated that 2016 will see 4 increases of ¼ percent each. This guidance will be data dependent but it gives markets an indication of where we’re heading. Bonds sold off on the news. Stocks took off on the news. Happy Holidays!
Food for Thought: As a Thought Experiment, imagine a meteor that is 1-mile across. Imagine that meteor striking the earth in the middle of the Pacific Ocean. Off the shipping lanes, sight unseen. At the exact moment of impact there is little effect. Then the consequences begin. How this scenario unfolds for you depends on your specific situation. For example, do you live in Hawaii or Montana? Do you grow your own food? On and on. The Fed’s action is like that meteor. The ripples are just beginning. Bond funds are already feeling the impact. Marginal players will be priced out of some financial deals. Variable rate loans will become more expensive. Savers will begin to see improved returns. This is one of those seminal events that should be used to re-evaluate your portfolios and financial plans. Wrap that re-evaluation into your year-end tax planning.
The Economy: All eyes are on the Fed meeting next week. This is the long awaited meeting where Interest Rate Liftoff is supposed to be announced. Nothing else this year, in the realm of finance or economics has commanded the attention, anticipation and anxiety of this meeting. The Fed goes into this meeting with its credibility in question and its 7-year old policy of Quantitative Easing (QE) widely viewed by some as a failure. Having masterminded financial engineering on an unprecedented scale the Fed is clearly at a loss as to how to normalize interest rates and the financial environment. Like the unanticipated consequences of the 2008 Lehman Brothers collapse, ending QE and normalizing interest rates is fraught with unknowns. While a ¼ point increase is considered insignificant, the Fed itself has no idea what it will bring. The fact that they are going to pull the trigger during the holidays, another unprecedented action, is further evidence of supreme hubris or cluelessness … or both.
Food for Thought: Our recommendation as we go into the last few weeks of the month is to be prepared for whatever the Fed serves up. Like Y2K, Liftoff could be a non-event or it could be the beginning of dramatic changes. It’s a given that financial markets are disconnected from the economy. So whatever gyrations we do or don’t see, should be taken with initial skepticism. Whether Liftoff will actually result in the end of QE is up to speculation. This is a presidential election year and the Fed is arguably the most political of animals. Regardless of what they say, they won’t be doing anything to raise the ire of their political overlords on The Hill, Pennsylvania Avenue or at either The Democrat or Republican National Headquarters. Stay liquid; stay nimble.
The Economy: It’s High Holidays with the crush of parties. But the past week has been too action packed to ignore. The letter “V” comes to mind. V for Victory; V for Peace and Love; V for the Long bowman’s insouciance; V for Volatility; V for Vertigo. V for the roller coaster ride of uninterrupted highs and lows that characterized the week. If you didn’t like what you were seeing in business, the economy, politics, finance or culture, you could wait a few minutes and be assured that things would change. Economic numbers that were released remained mixed to weak with the ISM Services Sector coming in lower than expected and following the ISM Manufacturing Sector down. The Fed continued to stand in the eye of the hurricane, upraised fist pumping the sky while muttering, “I think I can, I think I can.” Across the Pond, Super Mario botched his “I’m Just a Gigolo” routine with an expanded QE that was less than had been hoped for. Global markets gave both Bankers the Bronx Cheer and cratered 2% in a matter of hours. Terrified that financial markets might actually go down, Super Mario was back on Friday announcing that there were no limits to what the ECB could do and that trees do grow to the sky. Markets responded by rocketing up 2%. Ride the wave; The Emperor has no clothes.
Food for Thought: Optimism is high at holiday parties this year. The eggnog may have something to do with it. My finely honed recipe of powdered sugar and Mount Gay is renowned for the healthy glow it produces. Having said as much and not wanting to play Ebenezer, it is year-end. Tax time is next up. Review wills, trusts, financial plans and goals. As we move forward into the brave new world of increasing interest rates, reassess the inputs you use to monitor the health of your organization. Think global, act local. Stay ahead of the game as the unintended consequences of rising rates unfold. Have a very Happy Holiday.