Thursday, September 17, 2015

This We Know

September 17, 2015
When the Fed raises rates, here's what happens

No, when the Fed raised rates in the past, this is what tended to happened in the past. Big difference. You cannot predict the future with 100% accuracy simply by looking at the past.

A rate hike will come and the bull market will stumble, bond yields will climb and the economy will slip into a recession.

This we know.

We don't know that. I can prove it. I don't know it and I am part of the we. Therefore, if I don't know it then we can't know it. It doesn't even matter why I don't know it, but you can probably guess why. I don't know anything about the future with absolute certainty.

I can say with 99% certainty that a rate hike will come. So let's say that it does come, using the "beyond a reasonable doubt" criteria. Could the following happen next?

1. The bull market stumbles.
2. Short rates rise. Duh!
3. Long rates fall though. (Bond yields do *not* climb.)
4. The yield curve inverts. (Often presages a recession.)
5. Recession.

I'm not asking if it will happen. I'm simply asking if it could. If it could happen then we cannot know what the article claims we know.

There's a reason why history is taught in school but future is not.

Picture the first test in future class. The teacher asks what will happen in the year 2020. Little Jimmy thinks he knows the answer. The earth will be encased in a block of ice. Little Jimmy knows something that the teacher does not. Little Jimmy's father is an evil mad scientist and is currently working on a weapon of mass refrigeration.

Won't the teacher feel incredibly stupid when what he thought he knew about the future wasn't correct? Won't he feel especially stupid for giving little Jimmy a failing grade in future class? Never underestimate what a vengeful, proud, evil mad scientist father will do to prove his son right, lol. Sigh.

We cannot "know" the future. Anyone who thinks they can is delusional. Further, anyone who claims to know what long-term interest rates will do in the future is exceptionally delusional. If long-term rates were truly guaranteed to rise then we could all make guaranteed money shorting the hell out of treasuries. Good luck on that sure thing.

1 comment:

Stagflationary Mark said...

As a side note, what would we expect to happen if the Fed raised short-term rates to 2% today?

I think we would go directly to Great Depression II. We would not pass Go and would not collect $200.

I don't think we would see long rates rise, although it is possible. I don't know what would happen for sure if the Fed pretty much proved to the world that it was bats%^t crazy. ;)