The other major event of the week was Janet Yellen’s first Fed meeting. The change in the language is the Fed is finally signaling they are willing to raise interest rates six months after the tapering program ends. Simple math puts that at a year from now. On the surface, I don’t have a problem with that simply because if we rewind the clock, Bernanke originally told us rates would be low until about 2013. Back in 2009, that was a long time into the future. Now that it's 2014 nobody should have a problem with it. However people do have a problem and all you really need to do is look at the HGX to see what kind of problem people have. My problem is Bernanke had to ease much longer than anticipated because Obama and Congress never learned to work together
The economy could have been so much further along by now and as it turns out we have the weakest recovery since the Great Depression and I don’t think the economy is going to ready to increase rates even in a year down the road. Too bad they don’t have a choice because the Fed can’t control long term rates and I think the bond market has already entered a new bear market. What that means is the lower the price the higher interest rates go and 2013 turned out to be a year that greatly exceeded even my lone wolf voice in the dark projections.
Here’s the other problem: Suddenly geopolitics is getting in the way. I warned you a year ago the big geopolitical story of the year would center on Iran. I thought Israel would hit them, I really did. Instead they tried to cut a deal and are slowly finding out that no matter what Iran says, their actions are they will continue to support the terrorists whose goal is to wipe Israel off the face of the earth. It was reported here 2 weeks ago US intelligence played a key role in the capture of a ship headed for Gaza loaded with rockets that could’ve destroyed both Tel-Aviv and Jerusalem. Score a major victory for the Obama Administration.
Why am I spending so much time on geopolitics? Look back at the two world wars and you’ll see they were both preceded by economic disasters. The panic of 1907 was the precursor to World War I in 1914. What year was the financial collapse? So you can see we are in a behavioral/socionomic time window for the outbreak of another major war. Personally, I don’t think the United States can beat Russia in a war. That’s not putting the U.S. down, but I think all sides realize there is never going to be a winner if the US and Russia ever do go to war, so it can never happen. So all of this geopolitical stuff directly relates to our work.
So the economy isn’t likely ready for a hike in interest rates and we certainly aren’t in a position to wage a major war. Not when the government is downsizing the military to pre-World War II levels. The rebound in the economy is promising but in no shape or form are we to the consistent prosperity of the back end of other cycles of expansion. I’ll leave you with this question. Is this economy anywhere near as prosperous as the end of the last two business cycles in the 1980s and 1990s? Your answer to that question should determine whether you think rates should go up. Then you are likely to understand why this bull market is getting long in the tooth.