2 Scenarios To Understanding Interest Rates

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Understanding Interest Rates 2 Possible Scenarios
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Understanding Interest Rates
When it comes to understanding interest rates,
there are 2 scenarios that can happen. Its
unfortunate that the place to start if you want
to understand a lot of whats going on in the
markets is the Fed. In fact, nothing is more
important and we wish that werent true.
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4
Central Banks
We wish the central banks could go back to just
being boring, opaque, marginal institutions that
took care of money supply and acted as a lender
of last resort instead of monstrosities that seem
to manipulate and invade every corner of every
market in the world. But unfortunately, that is
what we have today. When the Fed manipulates the
dollar and dollar interest rates, they are
directly and indirectly affecting every market in
the world equities, gold, real estate, other
commodities, junk bonds, corporate debt,
etc.  So even though we wish it wasnt the case,
understanding what the Fed will do next is the
big question.
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2 Scenarios To Learn From
WE WILL TAKE TWO SCENARIOS AND BREAK THEM UP INTO
A 2 PART POST SERIES. Part 1 What if they raise
rates? Part 2 What if they dont?  
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Scenario 1
What Happens If They Raise Rates?   
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Feds Signals Rate Hike
Well address both of those directly but first,
let us give you some background to help you
understand whats behind the debate. The Fed has
certainly signaled that they intend to raise
rates and its what the markets
expect. Securities around the world are priced
as if the Fed were going to raise rates. Ive
never seen anything more trumpeted and more
advertised. Theres good reason for that. The
last time the Fed raised rates was 2006. In
terms of cutting rates, they hit bottom in late
2008 when they got to zero and theyve been at
zero ever since. Its been seven years at zero.
But you have to go back two years before that to
find the last time they raised rates, so its
going on nine years at this point. Thats a long
time without a rate increase and people may
forget how nasty they can be.
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It Happened In 1987 and 1994
Back in 1994 when the Fed raised rates, it was a
wipe out. Thats when we had the bankruptcy of
Orange County, California, and other dealers went
out of business. There was a bond market
massacre. The same thing happened in 1987. A lot
of people recall the crash of October 1987 when
the stock market dropped 22 in a single day. In
todays market, that would be the equivalent of
over 3,000 Dow points. Imagine the market
dropping not 300 points, which would get
everyones attention, but 3,000 points. Thats
what happened in October 1987.
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The Problems are

• But before that, in March of 1987, there was a
  bond market crash. The bond market crash preceded
  the stock market crash by about six months.
• The BIG problem is... 
• nobody in economics
• nobody on Wall Street
• nobody on the buy side
• nobody in academia
• Nobody Ive seen has a worse
• forecasting record than the Fed.
• We dont say that out of spite or to try to
  embarrass anyone its just a fact.

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High Growth Forcast
Year after year they produce these very high
growth forecasts, and every year theyre wrong,
theyre not just wrong by a little bit theyre
wrong by orders of magnitude. So when the Fed
says, well, we think the economy is healthy
enough for a rate increase, thats the first sign
that its not. Now besides that, theres a lot
of data. Were seeing auto loan defaults go up,
real wages are stagnant to down, labor force
participation continues to be very low, our trade
deficit is getting worse partly because of the
strong dollar, emerging markets are slowing down,
and China and Europe are slowing down. And its
nonsense to believe that the US would be closely
coupled on the way up but somehow the rest of the
world is going to go down and the U.S. wont be
affected by that.
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Close To A Recession
Growth is weak, so not only would we expect some
disruption from a rate increase, but we think the
Feds got the economy wrong and theyre going to
increase rates into a very weak economy. But why
does that matter? Because this could probably
make the U.S. economy to come close to a
recession, more deflation, and disruption in
equity markets. Read full post http//www.golver
card.com/blog/understanding-interest-rates-part-1

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GolVerCard Free eBook
5 BANKING REALITIES YOU MUST KNOW

• We put together this Free Banking Industry
  eBook to share the 5 things we believe you should
  know BEFORE you put ALL your Trust and Money into
  the banking system.
• How Banks gamble with your money.
• The Banking system is very fragile.
• Banks take away your purchasing power.
• How you will go bust before the Banks do.
• Banks dont make policies to protect you.  

Or click url www.golvercard.com/banking-industry-
ebook