woensdag 15 maart 2017

FOMC Meeting: Gold Rises During Q&A Session With Janet Yellen

Today, the Fed raised interest rates to 0.75%-1% with longer term goal of 3%.



There are several issues with that. Why does Janet think that 3% interest rates will not crash the economy? Everyone knows that the 10 year bond yield will need to be higher than the fed funds rate, which means 10 year bond yields need to be higher than 3% in a few years.

When that happens, P/E ratios will go down as the following chart suggests. When earnings don't go up, this means that the price of stocks will need to go down. This will lead to a market crash.



We know that GDP only went up 0.9% yoy in the last quarter. So that says that growth is minimal and I don't expect bond yields will rise dramatically. So we will end up with flattening yield curves when the Fed keeps raising interest rates.Moreover, if the Fed knows GDP will only be at 2%, then why does the Fed want to raise interest rates to 3% in the first place? Doesn't make sense.

A recession is near. And we could even see an inverted yield curve soon. You do not want to see an inverted yield curve, because that means certain recession. The problem is, we already see that LIBOR is touching the 10 year bond yield.

 

So Janet, either you don't raise rates and let inflation spiral out of control. Or you raise interest rates to LIBOR rate and you'll trigger a recession.