The Day: A Wednesday in early 2015
The Time: 2 p.m. Eastern
The Event: America’s Day of Reckoning
I’ve been predicting it for a while. Now, the Federal Reserve just confirmed: The clock is ticking down toward it.
I’m talking, of course, about the moment when the Fed finally is forced to raise short-term interest rates. It’s an event almost a decade in the making, and it will have serious ramifications for virtually every capital market on the planet — currencies and bonds, commodities and stocks, you name it!
Can’t envision a world with higher rates? Think I’m off target? Then go back to what I predicted in early 2013: The death of QE. Back then, virtually every financial pundit on Wall Street said the Fed would never back down from money printing. They said officials wouldn’t even contemplate dialing the program back.
But then in mid-2013, then-Chairman Ben Bernanke and other Fed officials signaled a looming “taper” of bond purchases. The global markets got rocked. Bonds plunged in price. And a few months later, the Fed did what I said they would do: Started dialing QE back from $85 billion. Now, QE is down to zero here in the U.S.
|The Federal Reserve has dropped “considerable time” from its policy statement.|
What did I say would happen next? That the Fed would start to move interest rates off zero, first by backtracking from time-sensitive pledges to keep rates low for a “considerable time,” then by actually raising them.
And in the wake of Wednesday’s Fed policy meeting, right there on the front page of the Wall Street Journal‘s website, was this headline:
In the Financial Times, the headline read:
And on the home page of Bloomberg, it read:
Bottom line: Wall Street is coming around to the view Weiss Research laid out for you several months ago! So what consequences might we see?
First, a potential further rally in the U.S. dollar against weaker foreign currencies. The dollar has been thumping most currencies around the world in the second half of 2013. The Russian ruble is one of the most visible, and sickest, currencies out there. But we’ve also seen the dollar rise against major currencies like the euro and the Japanese yen.
We are very extended in the short-term, and could see a correction at any time. But with our central bank removing policy accommodation at the same time foreign central banks are doing the opposite, it’s likely the dollar will rally — not because of fantastic U.S. fundamentals, but because of relative interest rates and us being the “least ugly” girl at the dance!
That should continue for a while. But as rates start rising, the Day of Reckoning for a nation addicted to cheap, easy money can’t be pushed out forever.
We’ve already seen taper tantrums in everything from emerging market bonds to junk debt, and at some point, the pressure on stocks will reach unbearable levels as well. We don’t need to freak out about that yet … but we do have to be vigilant about the future.
Until next time,