I Stand Corrected

Well, if I am going to be wrong, I might as well be the first to point it out.  Let me begin by admitting defeat.  I predicted in April that the Fed would not raise interest rates this year and I was wrong.  Missed it by two weeks.  Oh well.

Might I add that I said then and all along that them raising rates is a good thing.  I wanted them to do so.  Indeed they should have never even gone to ZIRP in the first place, but once they went there the sooner they ended it the better.  Now I did not think they would raise rates this year given the state of affairs and their self-made mandate of the economy having a never-ending expansion.  But they did indeed raise them last week, though the reason I thought they should raise rates is not the reason they gave.  Lance Roberts here http://seekingalpha.com/article/3767106-fed-rate-hike-starts-the-clock?ifp=0&app=1 quotes our dear Ms. Yellen on the reason for the rate increase being okay and timely:

When asked about why the Fed decided to raise rates now, Ms. Yellen responded by suggesting that the "odds were good" the economy would have ended up overshooting the Fed's employment, growth and inflation goals had rates remained at low levels. She then went on to state that it was a "myth" that economic growth cycles die of "old age."

He then goes on to write the following sentence:

While such an optimistic outlook for economic growth was certainly welcomed by the markets, both of her statements expose the challenges that lie ahead for the Fed. 

Instead, I believe he should have worded the sentence thusly:

While such an optimistic outlook for economic growth was certainly welcomed by the markets, both of her statements expose the challenges of believing the lies from the head of the Fed.

Point being that the reasons Janet gave are most certainly not the real reason they did it, which I suspect was largely an attempt by them to maintain some small semblance of credibility as they have been telegraphing a rate increase for a very, very long time.  The also know perfectly well the prolonged ZIRP is brewing disastrous consequences and is leading to increased criticism of them not raising previously, so they likely want to silence the critics (albeit while lining up a whole new cadre of critics because they raised rates).  Just no winning for poor old misunderstood Janet.  It is also quite possible they want/need some wiggle room for when the recession/depression/end  of the world (take your pick) hits and are hoping like hell they can get in a few increases in the rate before that happens - AND HOPEFULLY WITHOUT CAUSING IT TO HAPPEN.

Oh, and there is one other possibility, which is just evil enough in its covert continuing support of financial institutions that I have to believe it may indeed be a significant part of Janet's plot.  You see, there are a couple of different ways the Fed can effectively raise rates.  The easiest and least suspect would be to simply reduce its balance sheet by say $1.4 trillion.  There is a lot of detail not needed here on how this works, so if you are interested see Dr. Hussman's nice piece explaining it here:

http://www.hussman.net/wmc/wmc151221.htm

But nooo, the Fed chose not to take this logical and easy route, which would also achieve a long overdue reduction in its balance sheet.  Nope, it has chosen instead to increase the rate it pays banks on excess reserves and reverse repurchases, thereby subsidizing both U.S. and foreign banks to the tune of billions more (as in more than the billions they have already been giving them each year).  And yes, a lot of this goes to foreign banks, as in U.S. taxpayers subsidizing those banks when their own governments won't do so.  Oh joy.  For more of an explanation on how this works, go here.

http://www.zerohedge.com/news/2015-12-21/real-reason-behind-yellens-rate-hike-11-billion-handout-foreign-banks-fed

So are you at all surprised that Yellen did not give the real reason for their moves or how the moves will be achieved?

Still, whatever the real reasons are for the Fed doing it, an increase in rates is a good thing either way (though doing it by reducing their balance sheet would have been a lot wiser).

Now I am not a fool (unless you talk to my wife), and I have no burning desire for a recession or the inevitable pain and financial misery it will bring to many people, both here in the U.S. and around the world, and I know the rate increase will likely hasten the pending recession's approach.  I just know it is inevitable and the longer the Fed falsely pumps up markets and the economy with false rates, the worst the next bubble bursting will be.  And it will already be a doozy. 

You see the falsely low, artificially manipulated rates lead to falsely high, artificially manipulated markets and business models.  It leads to virtually free money being used to speculate through financial gamesmanship and on poorly conceived business models.

I note in an article at the Mises Institute site this week, that there is a debate among economists on whether businesses actually take more risks with money when rates are low.  You can find it here:

https://mises.org/library/why-capitalists-are-repeatedly-fooled-business-cycles

Now the Austrian business cycle theory ("ABCT") concludes that low rates lead to a misallocation of resources because free money leads businesses to do stupid things.  The counter thought is that business people know better than to be stupid.  (I may be simplifying these arguments a tad, but this is the gist.)  As quoted in the Mises article, a critic of this ABCT theory is Gordon Tullock, and Gordy believes they are all wet:

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.

So Gordy concludes business people have learned from past mistakes on what not to do with low rates and undoubtedly behaved properly during the just ended 84 months of ZIRP.  RIGHT . . .

I certainly agree with Gordy that perhaps SOME business people are smart enough to know better, but unfortunately these business people have to compete with stupid business people who are only looking to boost profits for the coming months or year.  Unfortunately many CEOs are more focused on next year's stock price and the impact it has on their compensation and a good bit less focused on appreciating the teachings of Mises and Rothbard.  So they do foolish things like borrowing tons of money at low rates and using it to buy back stock or give dividends, which has been occurring at a record pace the past couple of years.  Or they take the free money and invest it in poorly conceived business models and acquisitions.

And the fine folks giving the loans to these poorly conceived businesses really do not give a damn as they are just getting their commissions or fees and packaging the loans for "investors" starved for any investment gain they can get because the damn interest rates are so low and they cannot make gains on more conservative investments.  Thus, one gets all these high yield bond funds provided by our good friends at BlackRock, Third Avenue and the like that make it possible for the average retail investor to play in the junk bond market, which as we speak is in the process of imploding.

But hey, Gordy tells us this is not really happening as all these smart business people are familiar with the teachings of Mises and Rothbard and know the dangers associated with the improper use of low interest rate funds, so they are only using said funds prudently, just as those lending the funds are being so prudent in who they lend to.

But wait a second, as pointed out in the Mises article linked above, this whole Fed ZIRP thingy was supposedly to get consumers to borrow money they did not have or spend savings which were earning them nothing and indeed losing money to inflation.  Someone has to meet this artificially created demand and what better way to do it than to borrow money at cheap rates.  This was happening on a global basis and China became the 800 pound gorilla of artificial demand, building unneeded infrastructure and ghost cities.  When China cooled, so did all the artificial demand for commodities and all those foolishly highly-leveraged businesses that were created to meet this demand are now sucking wind.  So everyone is slashing prices and both the good and the bad businesses are struggling.

Let's look at another example of this prudence, which we can find in the retail auto market.  Auto loans are at records on virtually every stat, including amount financed, the length of the loan, the percentage of sub-prime and deep sub-prime borrowers, etc.

http://www.zerohedge.com/news/2015-12-03/auto-loan-madness-continues-us-car-buyers-take-record-debt-lunatic-financing-terms

But hey, prudent business people running used car lots who spend their free time studying Rothbard and Mises know better than to tie their business model to cheap credit.  They would not sleep at night if they thought those buying the cars were getting in over their heads.  And they would not have a business model that throws caution to the wind and allows - perhaps promotes - people borrowing more than they can afford to buy a car now instead of waiting until they can afford one or perhaps buying a more expensive one now than they otherwise would.  No way Jose.  Nope, I most certainly did not hear any auto ads promoting "Bad credit, no credit - no problem."  My imagination is again getting the best of me.

Car dealers always think for the long term and promote sound buying choices.  Why they would be foolish to frontload sales during low interest rate times only then to suffer the consequences when demand evaporates with higher rates.  Surely they would not want to suffer the consequences of every Tom, Dick and Gordy defaulting on sub-prime loans and lots filling with repossessed vehicles.  Why that would be foolish of them to risk.  Moreover, they know that the companies financing these loans have the exact same interests of fostering sound buying decisions and affordable loans.  So these loan companies have their backs and the backs of the consumers as well - not to mention the backs of the investors in the HY bond funds.

And so economists like Gordy are undoubtedly correct to assume business people are wise and prudent in their use of low interest rates.  Again, I stand corrected.  My thoughts on all this were clearly wrong.  I really need to stop making so many mistakes on this blog.