Thursday, September 3, 2015

A Schiff Shift on Interest Rates

A friend emails:
I haven't listened to Peter in awhile, but Tom Woods just had him on his show.

Peter's latest is that he still believes that more QE is coming, however, there is a possibility that The Fed will temporarily raise by a quarter-point, but the next move from there is down again.
From my perspective, there is a very strong possibility of a Fed hike, most likely 25 basis points, quite possibly the decision to increase rates will come at the September 16-17 FOMC meeting. I identify the specific data points the Fed is monitoring that will drive their decision in the EPJ Daily Alert.

 There is, also. a very good reason there will not be another round of QE anytime soon.

In the longer-term, over the next 2 to 3 years, I expect multiple interest rate hikes by the Fed. My view is that a bottom interest rates has already occurred and that a multi-year climb in interest rates has started.



  1. "A Schiff Shift on Interest Rates"

    Meh. He's been saying this for some time, now, and it hasn't ever been INconsistent with his monetary views.

    For example, his warnings about inflation are always of the form "if the Fed keeps doing such and such" - *if*, that is, ceteris paribus.

    Twenty-five basis points isn't a lot. Does that really count as a rate hike, for our purposes? That's more like sticking your foot in the water to see how cold it is.

    Also keep in mind that China's dumping of Treasuries is like a Quantitative Tightening, as they say. So, I think Wenzel might be on to something with regard to a series of rate hikes, but only for that reason.

  2. I just read Schiff's piece about Quantitative Tightening over at Lew's site. It is well argued. If it doesn't sound too presumptuous, I think I understand (at a basic level) both Schiff's and RW's positions RE the Fed near-term actions.

    Both agree that there will be pressure on the bond market to lower prices and raise yields. RW has always said this in his Daily Alert, and Schiff is noting that emerging market central banks are dumping treasuries lately to stabilize their currencies against the USD. Schiff also noted that Yellen is on record wanting to unwind $3.5T of Fed owned U.S. Treasury paper by not rolling it over at maturity between now and 2020. So this is a lot of bond market pressure, with a big risk that much of the currency inflation that the U.S. exported out of the country returns home soon with a vengeance.

    Now this is the point where I believe RW and Schiff differ, and it concerns the Fed's ultimate reaction to this pressure:
    i) RW has said that the Fed will respond to currency inflation/bond market pressure by raising interest rates. (RW also predicts the Fed will be ineffectual and chronically behind the curve)
    ii) Schiff foresees the disaster that raising rates would cause, considering the huge debt bubble ZIRP enabled for the USG and the financialized crony U.S. corporations. So rather than trigger this debt bubble explosion, Schiff believes the Fed will kick the can further down the road by another QE program of buying U.S. securities, to the tune of expanding the Fed balance sheet from $4.5T to $10T.

    I think both RW and Schiff agree on the fundamental point, that whichever way the Fed swings, the inevitable outcome will be a USD collapse.

    “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”
    -Ludwig von Mises

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  3. As you've no doubt read in a recent post by RW, the master himself has responded to this subject in his Daily Alert.

    The following synopsis of RW's position is my own interpretation. I strongly recommend all readers of the EPJ to subscribe to the Alert themselves and get RW's valuable intell without filters or any of my errors and/or omissions. You won't get his unique perspective and insight anywhere else.

    That said, here's my synopsis of RW's views on the economic situation:

    1. interest rates will rise because of:
    a. new USD creation:
    i. the Fed could expand its balance sheet
    ii. U.S. banks, (that create USD through lending), could start lending more
    iii. either i. or ii., or a combination of both, but at minimum a net increase overall
    b. "old" USD held overseas will return to U.S. financial markets: FCBs will continue to sell their USD-denominated reserves
    2. rising interest rates likely will NOT cause an Austrian crack-up to the economy, because even though higher, these new rates are likely to be LOWER than what "appropriate" rates would be, (i.e. rates determined by free market forces)
    3. continued rate "subsidies" will likely stimulate USD inflation through increased lending; this will continue to fuel the current economic boom
    4. USD inflation, (where new USD stay increasingly in the domestic financial market), will bid up prices; (i.e. price inflation will rise in the U.S.)
    5. although the probability of preceding points 1-4 is high, the situation is admittedly complicated and precarious; stay liquid to take advantage of investment opportunities as they arise

    Where Schiff and RW AGREE:
    1. USDs are coming home in a big way, and quickly
    2. There will be upward pressure on domestic interest rates
    3. There will be USD inflation, price inflation, and a continued credit-fuelled economic boom

    Where Schiff and RW DISAGREE:
    1. Schiff:
    a. the economic boom is purely financial in nature, and the "real" U.S. economy is doing very poorly, in general
    b. (almost) ANY increase in rates would trigger widespread credit defaults and ultimately the crack-up
    c. the Fed will not allow the crack-up to occur, and therefore will not raise interest rates from present levels
    d. USD inflation will increase because the Fed will maintain ZIRP and enlarge its balance sheet by purchasing new U.S. securities
    e. the boom will enter an out-of-control inflationary spiral SOONER RATHER THAN later

    2. RW:
    a. the U.S. economy is for the most part "expanding", supported by artificial inflationary conditions
    b. ANY higher rate(s) set by the Fed, (in the current circumstances and under the current leadership), will ALWAYS be lower than a true market rate
    c. Fed rate hikes will not cause, (because of the preceding point), any significantly adverse effect on the current credit-induced boom
    d. USD inflation will increase either by the Fed's direct actions and/or by bank lending
    e. USD inflation will continue to fuel the boom
    f. hyper-inflation or an end to stimulus could bring about the crack-up, but money supply indicates that the current phase of the business cycle is still "boom"; "crack-up" could come sooner OR later, but timing it is not possible right now

    The golden question is, therefore, what is that rate of interest at which dissolution of extensive malinvestment occurs and triggers a crack-up?

  4. Mr. Wenzel,
    Simon Black over at sovereign man points out that the highly levered portfolio of the FED will be underwater if they raise interest rates. Black and Schiff insist the FED is caught between the Scylla and Charybdis. You seem sure the FED will choose to hike rates soon. How is Black's thinking wrong. I could see, down the road, MR. Market forcing a rate hike. I see the governors hiding in the Eccles Building for now.