Don’t buy all the Fed-fueled hype.
The next Federal Reserve meeting is next week. It should be a complete non-event.
Based on interest rate futures pricing, there is a 1-in-25 chance the Fed will raise short-term interest rates.
With odds like that, any other move would spook the markets and stocks, bonds, and gold would all get hammered.
Not something the Fed wants to do at all.
That’s why your editor doesn’t worry about it much and encourages you not to either.
However, there is one thing you should understand about the Fed, why it really matters to you, and why you’ll never hear about it anywhere else.
The Only Thing Keeping The Fed Up At Night
The Fed has a lot of official and implied “mandates.”
Mainly, it’s tasked with managing inflation and pushing the economy towards full employment.
Needless to say, it’s done a poor job of both since 2008 and there’s a good reason too.
Inflation and full employment is not the Fed’s top priority anymore.
The Fed’s current primary focus is keeping credit markets moving. Everything else is a distant second.
As you experienced in 2008, the world economy is now built on credit. And when credit markets seize, calamity follows.
The Fed will do anything -- even at the expense of minimizing inflation and unemployment -- to prevent that from happening again.
They know that 2008 was awful and the next time credit markets seize, it will be even worse.
Since 2008 the debt levels have exploded around the world. Specifically, corporate debt levels.
The chart below shows how much corporate debt has been run up by U.S. companies (source: research.stlouisfed.org):
The trend is undeniable. And these are the companies that literally keep the lights on, the Internet working, and pumping out new cars and electronics for consumers.
The numbers are staggering. Apple has amassed $79 billion in debt. Post-bankruptcy GM is already up to $71 billion in borrowings. IBM has borrowed $40 billion. And on and on.
As you can see and as the Fed knows, as long as debt levels are rising, it’s all good.
The three times corporate debt wasn’t growing, were anything but good.
In 1991 debt growth leveled off. A recession followed.
In 2001 debt growth leveled off again. Another recession followed.
In 2008 debt levels actually declined. The economy collapsed.
The Fed will do what it has to in order to prevent that.
It will and has chosen a long, slow economic bleeding fueled by below-market interest rates over it too.
Right now, the Fed is especially concerned.
Defaults on debt are on the rise. And if defaults rise too high, lenders quit lending, and everything comes to a stop again.
The chart below shows default rates on high-yield debt over the past 44 years (source: Forbes.com):
Even a Fed chairman -- I imagine someone who actually believes the inflation data, economic numbers, and unemployment levels from official reports -- can see the risks growing tremendously.
This is all why the Fed is unlikely to raise rates.
Now, it may raise rates again before the year is out. But another quarter point raise will be far more show than substance.
The Fed knows it’s real job is to keep the party going regardless of the long-term costs.
That’s why we expect to see many trends continue well into the future.
We still see most economic, revenue, and earnings growth coming from innovation and efficiency increases (i.e. robots).
Interest rates will continue to stay low and borrowing will increase.
Inflation will continue to rise, slowly, steadily, and, for too many savers, perniciously.