According to Dr Michael Ivanovitch, the US has several alarming indicators which will deter the Federal Reserve from raising any interest rates. Below are excerpts from an article published by CNBC and my own reflection of what they mean.
1) Evidence that a mild contraction of monetary creation (tightening of money supply) earlier this year was reversed in June. Between end of June and the middle of October, the Federal Reserve's monetary base increased by 3.5%.
My opinion: This is a sign that the Federal Reserve is NOT leaning towards a tightening policy
2) Substantial slack still remains in the US labour market. The number of under- employed and unemployed is still 15.8 million. This is an exceptionally high number.
3) No inflation threats, mainly due to very low energy prices. The CPI in September 2015 was flat. With energy prices forecast to remain low well into 2016, inflation (in the US) is not going to happen anytime soon.
On top of that, despite economic growth, wage growth has been minimal. Reflecting on the excess supply of labour, unit labour costs on the first half of the year rose 1.4% from a year earlier, a substantial slowdown from the 2.2% recorded in the first half of 2014, and the average 2.1% for the whole of last year.
My opinion: The Federal Reserve has time and again mentioned that their most important task is to increase jobs and increase wage growth. This is not happening. On top of that, we have a low inflation environment.What is the reason to raise rates when there is no inflationary pressures in the economy? It is akin to shoot into one's foot, because if the Federal Reserve does raise rates, the economy will tank and hiring will fall, therefore defeating their original objectives.
4) Latest surveys show weakening in the service and manufacturing sectors. The industrial production increased a small 0.4% year on year after monthly declines in July and August, and the capacity utilisation rate of 77.5 % is far below the long term average of 80.1%.
5) Slowing lending to consumers by banks. Despite the sharp increase in excess reserves in the banking sector, bank lending to consumers slowed to an annual growth rate of 5%. Was it due to poor demand by consumers? Apparently not. Non-bank lending to consumers actually rose 8% year on year.
My opinion: Now why are banks not lending? In any economic environment, once lending by banks has slowed, it means that the economic picture is less than rosy.
4) An interest rate increase would induce capital flows into the US, causing the US$ to rise and weaken US trade. The US$ 12% trade-weighted increase YTD has taken its toll on US foreign trade. In the first 8 months of this year the trade deficit came in at US$500.1B, a 3% increase from the previous year. This could cause a serious drag on the US economy.
The US trade deficit with Europe in the first 8 months of the year rose 8% as Europe goods become cheaper due to the drop in the Euro's value and the rising US$ made US made goods more expensive.
US trade deficit with Asia is even worse, reflecting a 15% increase.
My opinion: So at this juncture it becomes highly unlikely that the Federal Reserve would raise interest rates, not when there are so many negative factors about the US economy.
My opinion: What are your investment options? US and global equities have more legs to move higher and I will continue to invest in companies which have high growth potential, and companies which pay high dividends, but I will also build a defensive portfolio consisting of REITs (high dividends lower risks) and gold mining companies (No matter how good are equities, one day the music will stop playing and the market will crash, gold will be a defensive option, and gold mining companies are the benefactors)
Link: http://www.cnbc.com/2015/10/25/fed-money-market-operations-balance-sheet-show-no-plan-for-rate-hike.html
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