If The Fed Raises Rates… Who Cares?
“Don’t run for the exits just yet…”
That’s what my colleague Jimmy Butts and I told readers in the most recent issue of our premium newsletter, Maximum Profit.
#-ad_banner-#Yet it seems like every day for the past week or so, we’ve seen headlines about the possibility of the Federal Reserve raising interest rates in June. And depending on how investors feel about the Fed on that particular day, it’s led to a number triple-digit swings in the Dow.
There are certain economic factors the Fed needs to see in order to raise interest rates — and lately we aren’t seeing those indicators.
Let me explain…
Usually, the central bank looks to raise rates for one of two reasons: to strengthen the dollar or curb inflation.
Right now, the dollar is the strongest it’s been in years. Deflation simply isn’t happening.
Take a look at the chart below to see what I mean.
Central banks around the world are slashing their interest rates in an attempt to devalue their currency. Lower yields make government and corporate debt burdens more tolerable and their exports more attractive. One of the biggest culprits right now is the European Central Bank, which is beginning the early stages of U.S.-style quantitative easing.
If you want to see what a devalued currency looks like, then just take a look at the euro versus the U.S. dollar.
But that’s not even the half of it.
The Bank of Japan is going a step further by purchasing Japanese equities. The central bank is buying stocks one out of every three days, on average, for a total bill so far of $23 billion.
That doesn’t even take into account Japan’s $1.1 trillion Government Pension Investment Fund, which is also buying Japanese stocks (among other foreign investments). You can see how that’s helped fuel Japan’s stock market in the chart below.
Simply put, we’re in the middle of a race to the bottom. Central banks around the world are hopping on the “easy money” bandwagon, and it’s sending global currencies into a tailspin.
The Fed doesn’t want to jump off the bandwagon, because it’s our wagon — remember, the Fed was one of the first to devalue its currency during the financial crisis.
Or said another way, the U.S. Fed laid down the first card and other countries have built on top of it. Our entire global economy is essentially a “house of cards” with a financial structure that can and will come crashing down.
Between the “currency war” we’re currently in and the lack of economic data to support a rate hike, we simply don’t see Fed taking action — not yet, anyway.
But this isn’t going to end well.
“Bond King” Bill Gross seems to agree with us. This is what he had to say in his March investment outlook letter:
| A more serious concern however, might be that low interest rates globally destroy financial business models that are critical to the functioning of modern day economies. Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates. |
But it’s not just politicians and investment managers who have to worry about this problem. This affects you and me, too. Here’s more from Gross:
| In fact even households are handcuffed by low/negative yields, who everyday must now address their inability to save enough money at a high enough rate to pay for education, healthcare, and retirement obligations. |
This means, whether you like it or not, if you’re hoping to have enough for the necessities of life in retirement (and otherwise), then CDs and T-bills won’t cut it. We have to play the game.
But I’m convinced there will still be opportunities for investors — regardless of whether I’m right or not about the Fed.
That’s because Jimmy and I think there’s plenty of fuel left in this bull market — and we intend to squeeze every last drop out of it by using the Maximum Profit system. We’ve spent the better part of the past year telling StreetAuthority readers about this system, which has been developed and tested by our team of researchers, market experts and computer models for the past two years.
Our system has shown its ability to identify “what’s working” at any given time in the market — after all, there’s always a bull market somewhere, as they say. We were able to beat the market handily last year, delivering gains of 57%, 72% and 181% to our readers in a matter of months.
In fact, we’re so confident in the Maximum Profit system that we’re issuing a challenge. During March only, if you give our system a try (at the already-discounted rate) and we fail to beat the S&P again this year, we’ll give you an extra year for free.
If you want to learn about the steps we’re taking in Maximum Profit to ensure that we continue beating the S&P, then click here.