It's like an old record that doesn't know when to stop. Just yesterday we have several Fed speakers talking about rate hike and pushing the dollar up when the dollar fell through the 100 Yen handle. The result of it? A US$16 per oz take down on gold. Gold is down again as I write. Perhaps the take down by the BIS did not help the distressed financial institution in covering its massive short positions so there is need to rely on some Fed speaks tonic.
Today, the FOMC meeting minutes will be out and I am almost certain we can expect more Fed speaks that a rate hike is still on the table and that they will be watching the volatility in the market for signs of weakness.
What if the Fed decides to raise rate? Well the likely consequences will be:
1) Raising interest rate when the GDP is low, Productivity is low, Retail Sales is low, is a nightmare scenario. But hey, the Fed has the "awesome" jobs report to rely on. I can only expect further decline in economic activities which will cause more companies to lay off employees.
2) US companies have to wake up to the fact that they need to allocate larger sums to service their debts which have skyrocketed to trillions of dollars in all forms of financial engineering to boost the share price
3) The above will impact on corporate earnings which are already in consecutive quarters of decline.
4) Any hint of rate hike will boost the value of the dollar which will result in US made goods and services much more expensive, therefore impacting the export market. For multinationals, the conversion of foreign earned currencies into the dollar will result in a reduction in earnings.
5) With 2) and 3) above, does it warrant a re-rating of the S&P companies which are already at multi-years high in terms of PE ratio? Will the S&P collapse under the weight of overvaluation?
6) A rise in interest rate will also result in the US government needing to borrow more money at a higher interest in order to pay for debts which were borrowed at lower interest (make any sense to you?). The US government has US$19.5T in debt with tax collection that has been falling due to lower corporate earnings and lower paying jobs on top of having a budget and trade deficit of more than US$1T each year.
7) The BOJ and ECB will be cheering of course as this will boost their exports. The PBOC on the other hand will devalue the Yuan further in response to the rate hike. So any devaluation of the Yuan will impact upon the US$ as the Yuan is closely peg to the US$. So US$ could fall if China devalues, and then the ECB and BOJ will have more QE and NIRP to weaken their respective currencies. See why this is a vicious cyrcle which will never end?
Incidentally, reports have surfaced that the ECB is running out of bonds to buy. The BOJ meanwhile is the top shareholder in 55 companies and is the top 10 shareholder in 90% of the companies listed on the Nikkei. The balance sheet of the BOJ has reached 250% the country's GDP. How on earth is the BOJ going to unwind its positions without causing a market collapse? But for the BOJ, "the market is down down, let's buy some more" policy will one day reared its ugly head and cause mayhem in the market.
What happens if the Fed decides not to raise rate?
1) US$ will fall and the Japan market could tank the next day. Gold and silver could recoup some of the early losses.
2) Oil could spike, and cause inflationary pressure further down the road.
3) The stock market will respond with a spike, pushing the PE ratio to even higher levels. But hey, aren't the central banks now supporting the global markets?
4) More borrowing binge by companies eager to refinance their debts.
5) Growing monstrosity in asset bubbles, pushing global risks to unimaginable levels.
There you have it. Just my opinion of course. Perhaps that is why being bullish in precious metals, miners and related ETFs is still not a bad thing.
No comments:
Post a Comment