Sunday, November 29, 2015

Changing Tactics

"If you do not change directions, you may end up where you are heading"

-Lao Tzu

Welcome to The Golden Sense!  When the news initially broke of Playboy magazine’s decision to stop running photos of completely nude women I simply assumed that “somebunny” had gotten the story wrong. After all, since Playboy first appeared back in 1953, such photos have been ever-present. Gradually over the years, the magazine has fallen victim to the power of technology and the Internet. There, people can just click to “every sex act imaginable for free,” according to Playboy’s CEO. That is why the magazine is changing tactics, in hopes of a toned down magazine.

Speaking of changing tactics, the big question in the financial world is whether or not the Federal Reserve will raise interest rates. Interest rates are incredibly important because they affect everything in the world. They are the price of money. Since 2008, interest rates have been held at an artificially low level of 0% to 0.25% by the Federal Reserve.

The thinking behind low interest rates is to encourage borrowing that will spur growth in the economy. The subsequent growth is meant to boost employment. 

In addition, the Federal Reserve entered the market place and purchased trillions worth of U.S. Treasuries and Mortgage Backed Securities. This maneuver was meant to fund Government spending and lower mortgage rates. This was termed quantitative easing (QE), or more simply put, money printing. Although QE has ended in the mainstream media’s eyes, the Federal Reserve actually still purchases treasuries and mortgages with the interest earned on the bonds they currently hold. The buying continues, only at a slower pace.

There have been a variety of results from this monetary policy. The low interest rates allowed the bank's to increase revenue volume by providing a cheap source of funds. This helped some banks ride out the storm of loan defaults hitting their books.

The low rates facilitated the Government's spending binge and increased debt levels to the point where national debt repayment is now a complete impossibility. In addition, consumer and corporate debt has reached dangerously high levels. U.S. companies have issued $9.3 trillion in new bonds since the financial crisis. That includes $1.4 trillion in new bonds in the last year alone, according to the Securities Industry and Financial Markets Association. That’s a new all-time record.

The low rates have crushed retirees, as old folks now cannot earn a fixed income on their savings. The consequence has been the creation of a generation of people dependent on social security.

Since bond yields have reached all-time lows, money has flown into the stock market creating a massive bubble. Stocks are overpriced and the entire market hinges on every word the chairman of the Federal Reserve says.

People now refer to the current state of the financial world as the twilight zone, where fundamentals don't matter and the only thing that does matter is what the Federal Reserve is going to do next.

Economic growth has been slow and mild. The official unemployment rate has gone down, but this is only a consequence of the participation rate, which is now near all-time lows. The unemployment math is fuzzy, but makes for a good headline.

So what's going happen? The Federal Reserve targeted 2015 as the year in which they were going to raise rates. Yellen has even admitted that the employment picture isn't perfect, growth is mild, and inflation is low. In fact, the current economic situation is slowing dramatically.  

It appears that after seven years of low rates, all the U.S. economy got was more bubbles and more debt. No one could refer to it as a rip roaring success. 

Is it time for the Fed to take a page out Playboy's play book and change tactics? It is something to think about. After all, if you try something different, you may get different results.

Over and Out,



Bank Investment Daily, Steve Brown