The Fed: Driving With A Rear-view Mirror

The Fed is working with an anachronistic model. Keep buying China and America.

  1. DEJA VU

    For those (younger) market observers shocked by this Friday's tumble of 2.5% on the S&P 500, we have had similar skids twice this year: between 4th - 10th February, the index fell by 3.3%, and it fell by 3.6% from 23rd - 24th June. Each time, the market rebounded strongly.

    What we are witnessing the corridors of the Fed is nothing than a good, old-fashioned power struggle between the hawks and the doves. Dr. Yellen's weakness is that she is allowing this to be exposed to us  in the market, and that is what is confusing.

    But so is the whole proposition that the Fed is basing its rates policy on: it is anachronistic. As stated in the Financial Times of 10th - 11th September 2016, p. 8: "With inflation and inflation expectations still below target, the Fed would be raising rates on the basis of historical relationships between the real economy and prices, with little appreciation that the world may fundamentally have changed... The argument that raising rates now gives the central bank more room to cut in in the future has it precisely backwards. Keeping policy loose now reduces the probability that the central bank will have to try to ease further later on, only to find it has run out of tools."

    We stick with our view of an anachronistic rate hike in December.

    Nothing has changed in America's Economic Time®, and China's keeps improving: railway freight indicators for both powers vindicate our view. So why not buy on the dip and enjoy rebounds in America, China and thus Hong Kong?

The above notes were used in a recent RTHK radio show, you can listen to the podcast  more

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