Here’s What the Fed Does Next
Here’s What the Fed Does Next by Jim Rickards
The Fed raised rates yesterday, as I predicted back in December. The market dismissed it at the time, and only just caught on within the past couple of weeks. So basically, the market caught up with my forecast.
I don’t say this to pat myself on the back.
The point is, I use a rigorous scientific method to analyze and predict markets. I don’t guess or take positions just to get attention. I constantly apply new data to test my original hypothesis. If the data confirms my hypothesis, I stick with it. If the data conflicts with it, I step back and re-evaluate. You have to stay nimble.
I’m a big critic of the Fed models, but that’s because they’re obsolete and they don’t record with reality. You need the right ones.
The reason why I was able to accurately predict yesterday’s rate hike back in December when Wall Street gave it little chance, is because Wall Street is looking through a backward looking lens.
It’s looking back at 40 or so business cycles since the end of World War II. In a typical business cycle, the economy starts from a low base, then gradually business starts expanding, hiring picks up, more people spend money, and businesses expand.
Eventually, industrial capacity is used up, labor markets tighten, resources are stretched. Prices rise, inflation picks up and the Fed comes along and says “Aha! There’s some inflation. We’d better snuff it.”
So it raises rates, usually for a full cycle.
Eventually it has to lower rates when the process goes into reverse. That’s the normal business cycle. It’s what everyone on Wall Street looks at. And historically, they’re right. That process has been happening 40 times since the end of World War II.
The problem is, that’s not what’s happening now. We’re in a new reality. This is a result of nine years of unconventional monetary policy — QE1, QE2, QE3, Operation Twist and ZIRP. This has never happened before. It was a giant science experiment by Ben Bernanke.
And that’s the key…
You have to have models that accord to the new reality, not the old. Wall Street is still going by the old model.