Finally the Fed has raised the interest rate by 25 basis point. The Fed even mentioned that unemployment numbers were good and the economy was sound. They even forecast a 25 basis point rate increase in every quarter in 2016. But nothing could be further than the truth. Here's why:
1) An interest rate hike will push the value of the US$ upwards. So prepare to see US trade deficit increase and US made goods more expensive. This will result in further manufacturing slowdown. The November PMI is just barely above the 50 level at 51.3 while the ISM manufacturing data showed a reading of 48.6. Incidentally the Chinese Yuan has continued to depreciate vs the US$. So I expect to see further reduction of imports from the US in China, thus widening the trade deficit.
2) Yes, jobs growth have been fantastic - but at the expense of manufacturing jobs. Low paying jobs in the services sector are substituting high paying manufacturing jobs. So the volume matters less as more people are earning less. This could impact consumption further down the road. The unemployment data exclude people who have left the work force or gave up on finding any employment. If these were taken into account, the number of unemployment could see as high as 9.9% (The U-6 data). The unemployment rate is actually far worse than the Fed perceives.
3) There was a sell off in High Yield Bonds with two funds (Third Avenue and Stone Lion) halting further redemptions which prompted Carl Ichan to warn that a meltdown is coming. In fact the performance of the majority of High Yield Bond funds are already in negative territory.
Most High Yield Bond funds invest in the depressed energy, mining and industrial sectors. The recent rate hike would put pressure on major shale oil producers as the cost of refinancing increases. Add in a depressed oil price and many could be in distress in coming weeks. A total of 44 shale oil producers are utlising 83 cents per dollar of cash flow to pay interests on debts. Should these companies fail it could threaten a combined US$200B - US$250B worth of debt held by shale oil companies. This could unravel the financial markets.
4) The US is sitting on a debt time bomb. Increase in interest rate just increase the burden of payment. The Total US debt stands at US$58T, more than 300% of its GDP. Global debt is about US$230T which is also more than 300% of global GDP. Since 2007, global debt has increased more than 200%. Total global financial derivatives stands at US$700T (lowest estimate) which is more than the US$506T total during the 2008 Global Financial Crisis.
So the unraveling of bonds could impact the financial derivatives market, which could result in a full blown crisis, much worse than the 2008 crisis
The interest rate hike would push many companies worldwide into default especially those from the EM which borrowed US$ to fund their expansion, as their currencies fall in value vs the US$.
And if you've not read about it, auto dealers are offering cheap loans to buyers, and many of the loans could be of sub prime quality. The total auto loans just exceeded US$1T.
5) Home sales. The Fed touted the increase in home sales as a strong indicator for the economy. Well let's see if there's any increase in home sales after the interest rate hike. More likely, buyers are rushing to commit before the interest rate hike.
6) S&P 500 companies are already in earning recession. In 2014 the S&P 500 companies borrowed more money to buy back shares and paid dividends than their earnings. The ratio: US$1.27 of debt vs US$1.00 of earnings. Yet the S&P is trading at multi year highs.
Even the NASDAQ big 4, the FANG are trading at astronomical values. Facebook is trading at a PE of 107.28, Amazon, a PE of 980.29, Netflix, a PE of 372.02, and Google, a PE of 35.66. Talk about high valuations! In fact the 4 have almost the same marketcap of the DAX 30 companies combined!
7) The Baltic Index just hit a record low at 471 due to the collapse of the price of commodities, compared that to its height of more than 10,000 in 2007- 2008. If the Baltic Index cannot be a good gauge of global trade then I do not know what is.
All the above points to a potential crash of epic proportions.
These are some of the things which you can do:
Look into ETFs that short the market indices. (Please do your own research). The pivot point will be in Q1 2016 during the earnings period and potential default in debt by major shale oil producers.
Invest in Gold and Silver ETFs and mining companies. (Please do your own research). The strength of the US$ will propel the price of Gold and Silver lower, making the investment cheap as a hedge. Interestingly, Goldman and HSBC who were both bearish on Gold, bought more than 7 tons of the metal in August, 2015. China, Russia and India continue to accumulate Gold. Now, if it is such a bad investment why are the bankers and central bankers buying? Look at the COMEX. Amount of Gold sold is leveraged more than 300 to 1 physical ounce of Gold.
Buy physical Gold and Silver. Invest in other hard assets such as land.
The above are entirely my opinion. Always remember to do your own research.
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