Just remember as we interpret the headlines and digest the political rhetoric that emotions and knee-jerk reactions rarely produce sound investment decisions. You need to be able to synthesize and distinguish what is actually the “music” and what is simply loud “noise.” In other words….
- If your looking for “clarity” in regard to Putin…it’s not going to happen. He is in power, he is not going away, and he is going to remain highly unpredictable.
- If your looking for “clarity” in regard to the Middle East…it’s not going to happen. They have been fighting for over a 1,000 years and its not going to change anytime soon.
- If your looking for “clarity” in regard to the US Fed…it’s not going to happen. The dynamics of the game are constantly changing and they are clearly shooting at a moving target.
- If your looking for “clarity” in regard to the Chinese economy…it’s not going to happen. They obviously have their own agenda, so the economic numbers and data released will always be questioned.
- If your looking for “clarity” in regard to the European Union…it’s not going to happen. There are simply too many moving parts in this machine. In other words there are just too many countries under one roof ALL with different agendas.
Moral of the story, there is no such thing in the investment sphere as a “perfect world.” You can choose to focus on the “what if’s” and the “doom and gloom” scenarios, but will there every be time when uncertainties and problems do not exist?
I have commented on this several different times, but as I have noted it’s clearly a moving target and we must constantly monitor the situation and re-sight our rifles. As of today it feels like the Fed will begin to gradually raise interest rates sometime in 2015. You can argue which quarter based on your perception of inflation and employment. If you believe the unemployment rate will fall to 5.5% or lower by year end and core inflation will remain under 2.25% then you could easily conclude a rate hike in early-2015 (perhaps Jan-Feb-Mar). From my perspective however, I’m not so sure the employment numbers will be that strong, therefore I’m thinking more like the second quarter of 2015 for the first gradual rate hike. The “kicker” to all of this will be what they call “headline inflation”… which is much more volatile than core inflation and currently appears to be at the mercy of the Middle East and unforeseen global weather events (hurricanes, cyclones, etc…). In other words if turmoil in the Middle East increases and causes energy prices to skyrocket and or some unforeseen weather event causes food prices to inflate then ALL bets are off. The Fed will be concerned if they tighten in the face of increased “headline inflation” without a major increase in wages they could bring the economy to a complete standstill. Remember, weak wage growth has been a bit of a debate amongst analyst for the past several months. Bottom-line, this is a moving target with many variables and dynamics. If all things stay constant the Fed seems prepared to gradually start tightening and raising rates during the first half of 2015. If the variables between core inflation, headline inflation, employment and wage growth begin to shift and or change then so will the Fed’s reaction to the move. Just make sure you’re sighting your rifle in using the same calibrations and wind adjustments that the Fed is using.
There is a lot of talk circulating about the Fed jumping from a QE “balance sheet expansion” type mentality to a more “policy tightening” type mentality. The most important question is how do they get there? How do they go from point-A to point-B without knocking down the entire house-of-cards? Obviously it will require several small baby steps. The problem is the trade will heavily debate and scrutinize each and every move. Stepping back away from the forest in effort to better see the trees, my best guess is the Fed will have gotten away from ALL “Quantitative Easing,” meaning the will have entirely “tapered” the $85 billion they were reinvesting each month by early to mid-2015. Once QE is behind us and the market has a chance to fully digest the Fed pulling out, only then will they entertain raising interest rates. My guess is this doesn’t happen until very late in 2015 or by mid-2016. I just think there will be a few more unforeseen bubbles and hiccups along the way that keeps the Fed from raising rates as quickly as some are now projecting.