Last night the Fed had the financial world on tenterhooks, would it raise rates, would it leave them on hold….how would markets react? The excitement was palpable, if deeply depressing bearing in mind all the real worries in the world, but it gave Wall Streeters the chance to have smart sounding, if usually mind-numbingly superficial soundbites on US news shows, trotting out trite pre-arranged analysis. In the end nothing happened but frankly it didn’t matter either way.
Let’s go straight for the jugular. It is pretty clear now that history will show the US Federal Reserve has not only become one of the most incompetent and erroneously self-congratulatory institutions in existence but, more importantly, that it has also managed to do more damage to the global economy over the last couple of decades than the unimaginative academics and politicos who run it could even begin to appreciate. Indeed against the legacy of stupefying incompetence last night’s machinations over a 25bp (0.25%) interest rate hike barely register. Many people in the UK probably had little idea that this allegedly epochal moment was an issue…and you know what… it wasn’t. Well apart from in the self important canyons of Wall Street and the wine bars of the City it really, really wasn’t.
As we have discussed before the fact is that to most in the real world an interest rate rise of 0.25% (from 0.25%..or as the Fed describe the current rate…”Between 0% and 0.25%”) is not going to make a blind bit of difference.
However let’s be fair to the market, the real issue is not that 0.25% makes much of a difference to real borrowing cost, it is more that it means the tightening cycle is finally here, that the Fed recognizes recovery and the cost of capital will start to normalise……or at least that is the mildly deluded narrative.
Unfortunately that narrative is so far South of wrong that when you understand the reality it makes you realise how pointless the decision was either way, unless you are even more Bearish than Prometheus (trust us on this, it’s very possible) and thought that lifting rates by nothing from nothing would precipitate the end of days.
As we discussed previously (HERE) the industry’s misunderstanding of the underlying reality is horrifying, if depressingly unsurprising. Forget normalising interest rates…that’s not going to happen any time soon, the underlying economic conditions simply can’t accommodate them (unless the Central Banks want to precipitate the very Schumpterian economic cleansing of excess they have been trying so hard to avoid for over two decades….which is going to happen eventually anyway), so any rate rise can only be seen as an attempt to hide away at least a few grains of dry powder for inevitable future crisis.
These comments may seem a touch controversial, polemical even, however we simply need to look at my favourite chart on Fed predictions to see how inaccurate their forecasts about future interest rates have been for years and you have to wonder why anyone listens to them at all.
Source:ZH Click/Tap to enlarge
Hence the entire excitement over the beginning of a new interest rate/business cycle is entirely misplaced. There is simply nothing normal about this and what we are actually living through is the debt fueled faux-recovery which has extend the long wave cycle and that is now on full life support (part of which process is Zero rates). It begs the question how can so many (often very well paid) alleged professionals be so very wrong. Again?
Well in part its simply that the last time the US went through a rising interest rate cycle was between 2004 to 2006. As a result recent analysis indicates over 60% of those working in front line Wall Street positions have never been through a full raising rate cycle in their careers. If this is correct (and it ties in with analysis of the UK fund management industry) the vast majority responsible for managing the day-to-day of the financial system have no direct experience of the narrative of mistakes that brought us here, while they will mostly be working for managers who largely never saw things coming (and generally still haven’t got it).
In the end the weakness coming from Emerging Markets/Asia, the uncertainty around other world events (for example, an election in Greece, which may upset the bailout that hasn’t been agreed and the IMF still wants nothing to do with, while at the same time Europe faces the largest diaspora since the 1940s, while in Spain Catalonia – the bit with all the money -may vote to secede in a couple of weeks) persuaded the Fed to hold off……queue much pointless and largely misguided discussion on financial news channels.
In the end it didn’t really matter either way. Events are unfolding with their own momentum and only a few central banks have any firepower left, but probably not enough to have much impact. There is simply too much inertia as the very long debt/economic cycle heads towards its reset.