The US Federal Reserve confirmed market expectations by raising interest rates with 25 basis points. Today’s Global Economic Outlook considers an investment strategy for the new higher-rates world economy.
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Wed 16 December
USD FOMC Economic Projections
USD FOMC Statement
USD Federal Funds Rate (actual: 0.35% expected:<0.50% previous:<0.25%)
USD FOMC Press Conference
The Federal Reserve announced on Wednesday that it would raise its funds rate by 25 basis points. The announcement fulfilled market expectations and pre-existing trends should now continue into the higher rates era.
The good sense of raising rates, at this time, is debatable and there are many opinions, from economists, analysts and the mainstream media on the matter.
Some argue, for example, that the sheer weight of US govt debt, will quickly become unmanageable when accruing higher interest.
Others argue that higher interest rates in the US will attract investment (both foreign and domestic) to US companies and financial products/services as well as bolster the US dollar.
Then there is also the argument that a stronger US dollar will harm US exports and ultimately have a negative impact on jobs and trade balance.
The economic effects and repercussions, the pros and the cons, of raising rates is a complex field of discussion. It is made yet more complex by a world economy awash in credit. And here we get to the heart of the matter: credit and debt.
Hidden between the lines of everything every central bank (the self-appointed issuers and managers of fiat credit) says is a morbid concern with inflation. Not inflation of the price of consumer goods – that’s only an inverted measure of the real kryptonite they fear, namely deflation of credit.
When central bank spokespeople refer to “meeting the inflation target” and “concern about low inflation“, what they’re really saying is that central banks are fearful of deflation.
Credit is counted as money, so when credit contracts, that means that money supply deflates. Deflation is a terminal threat to the world economy because it tends to operate by contagion: a credit collapse in one area quickly affects collateralized lines of credit that run through the global economy.
This is what the Fed’s rates hike is all about. The Fed (central banking) is trying to regain control of the credit expansion that resulted from their previous zero interest rates policy and money (credit) printing spree. Whether or not they can subdue and then ride this beast, remains to be seen, but for the sake of their credibility (and survival) they are compelled to try.
As a result of the Fed’s policy to increase rates over the coming years, we face the following financial prospects:
So how can investors and speculators best position for the new era? Will the gains be in stocks? In gold and precious metals? Is there perhaps more security in Treasury bonds?
We cannot know. There may be some strategic stocks that do very well, but how do we select them? Gold may begin the epic rally that many have predicted for years… or it may just continue devaluing to below $1000 in an ongoing decline. With the Fed blatantly manipulating interest rates, will the Treasury bond market ever normalize? Bonds, incidentally, saw their biggest outflows since June 2013: $13.1 billion in one week.
At the beginning of this higher rates, deflationary era investors should hold both US dollar (preferably cash notes) and bitcoin (preferably in a secure wallet). This is the foundation of a positioning strategy for the coming years or decades.
With regards to the market noise and spasms that will accompany the initial transition – next week, next month, and next year – into the higher rates era, we’ll have to see how the Fed introduces the rates show and how the market reacts. After the market has reacted, speculators can look for signals in the charts, and then respond with confidence and with a game plan.
The second component of a deflationary era investment strategy is to periodically adjust investment holdings between US dollar and bitcoin. There are three market conditions that will determine the speculator’s allocation of dollar versus bitcoin.
When the US dollar corrects downwards (during its multi-year rally), on market reaction to various macro-economic events, then bitcoin holdings will protect the investor against the initial drop in the dollar’s value. Bitcoin may, during such events, move in sympathy with the dollar or bitcoin may move contrary to the dollar – it will depend on the specific circumstances at the time. During periods of US dollar correction, allocation should be weighted toward bitcoin.
If the Fed continues putting its money where its mouth is, then US dollar holdings will benefit from a continuing rally. Bitcoin may follow the dollar and rally or speculative forces that are specific to bitcoin may see the commodity sell off and its value transfer to other investment classes. During periods of bitcoin price decline, allocation should be weighted in favor of the US dollar.
In case of an unforeseen macro-economic event (Black Swan), speculators will already hold some dollars and some bitcoins. Weighting can be adjusted as an appropriate response becomes apparent. Disruption to the availability of the bitcoin payment network means that the investor has dollar cash notes on hand. Disruption of the banking system means that the holder can pay using bitcoin.
In the long run (years and decades), both the dollar (cash notes) and bitcoin will become more valuable. Bitcoin should, eventually, become more valuable (preferred for transactions) than the dollar, as society learns about blockchains and bitcoins and how they offer the very real possibility of not trusting third parties with control of money supply.
“Trustless” does not imply that bitcoin holders do not want to trust anybody. Of course, we still value trust where it is deserved and appropriate. Seeing the value of, and using, bitcoin also does not require bitcoin to be the only currency in existence – a kind of global imperative. Bitcoin can happily and easily co-exist alongside many other currencies. This will be the case for the foreseeable future, since we know that many (if not most) citizens of the world will not practically be able to make a full transition to digital money for decades to come. Hence, in the streets and in the street markets – cash notes will retain their usefulness and value.
The New York Post reports:
Star Wars: The Force Awakens pulled in a record $57 million at US and Canadian theaters in its debut on Thursday night, boosting its global ticket sales total to nearly $130 million in two days.
This analysis is provided by xbt.social.
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The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
Charts from TradingView, financial data & cartoon from Investing.com, image from Shutterstock and Disney.