Markets Have Finally Woken Up

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I’ve been warning my readers since last December that the Fed was on track to raise interest rates on March 15.

I was almost alone in that view. Market indicators were giving only a 25% chance of a rate hike. Wall Street analysts were paying lip service to the idea that the Fed might raise rates twice before the end of the year but said the process might begin in June, not March.

Wall Street expectations and market indicators did not catch up with Fed reality until last week, when expectations moved from 30% to 90% in four trading days before converging on 100%.

So expectations of a Fed rate hike March 15 are now near 100% based on surveys of economists and fed funds futures contracts.

Markets are looking at things like business cycle indicators, but that’s not what the Fed is watching these days. The Fed is desperate to raise rates before the next recession (so they can cut them again) and will take every opportunity to do so.

But as I’ve said before, the Fed is getting ready to raise into weakness. It may soon have to reverse course.

My view is that the Fed will raise rates 0.25% every other meeting (March, June, September and December) until 2019 unless one of three events happens — a stock market crash, job losses or deflation.

But right now the stock market is booming, job creation is strong and inflation is emerging. So none of the usual speed bumps is in place. The coast is clear for a rate hike this Wednesday.

But growth is being financed with debt, which has now reached epic proportions. A lot of money has been printed since 2007, but debt has expanded much faster. The debt bubble can be seen at the personal, corporate and sovereign levels.

If the debt bubble bursts, things can get very messy.

In a liquidity crisis, investors who think they have “money” (in the form of stocks, bonds, real estate, etc.) suddenly realize that those investments are not money at all — they’re just assets.

When investors all sell their assets at once to get their money back, markets crash and the panic feeds on itself.

What would it take to set off this kind of panic?

In a super-highly leveraged system, the answer is: Not much. It could be anything: a high-profile bankruptcy, a failed deal, a bad headline, a geopolitical crisis, a natural disaster and so on.

This issue is not the catalyst; the issue is the leverage and instability of the system.

This looks like a good time to get out of stocks, increase cash and buy some gold if you are not fully allocated. Gold faces some head winds in the short run, but today’s prices offer an excellent entry point. Gold is a great safe-haven asset.

Regards,

Jim Rickards
for The Daily Reckoning

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