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Affluent Investor | June 24, 2017

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Fed Rates: Here’s What Really Matters

Markets stabilized on Monday and rallied on Tuesday as the Fed did what they have done now for roughly nine years … NOT raise interest rates. The Fed Funds target of 0-.25% remains where it has been since the fall of 2008, with market pundits – many of whom practically guaranteed a March increase, and then a June increase – now looking towards the inevitable September increase.

At The Bahnsen Group, we assign a 30% probability that the Fed raises a quarter of a point in September, much lower odds than consensus. In fact, we assign only a 60% chance that they raise at all this year.

The timing of the first quarter point hike, whether it be September, October, December, or 2016, is truly not that important. At whatever point the “gradual” increases commence, we believe the bigger impact will come if and when rates rise to the “sudden” phase of rate increases (to borrow the paradigm that Jeffrey Gundlach uses).

Along the way, we are mystified by market participants who believe this is GOOD for markets to delay the inevitable, thereby guaranteeing a more sudden paradigm in the future. Earlier = more gradual to come; later = more sudden to come. No matter what short-term market volatility this whole discussion creates (today it is upside volatility; another day it will be the opposite), we are focused on our five beliefs about this whole crazy deal that is rate abnormalization seven years after a crisis with unemployment at 5.5%:

  1. Always expect them to be late, not early.
  2. Increases from present levels are surely inevitable.
  3. Be wary of the asset classes most susceptible to frothy behavior in the present rate environment.
  4. Look for the easy money to eventually become inflationary and force as policy reversal that becomes recessionary.
  5. Take advantage of that when it happens.

In the meantime, we await September, and look forward to the [dollar] or [Europe] or [GDP] or [Q1 weather] reasons that a hike is delayed yet again. Or will we finally return on a path to normalcy in September? We give it a 30% chance.

“Moral Capitalism”
David L. Bahnsen, CFP®, works as a Senior Vice President in the private client group of one of the premier Wall Street firms in the country where he provides financial planning and investment management services to individuals and families. He and his wife of nearly eleven years (Joleen) reside in Newport Beach, CA with their seven-year old son, Mitchell, five-year old daughter, Sadie, and 2-year old baby boy, Graham. He is an active board member of the Lincoln Club of Orange County where he serves on the Executive Committee and chairs the Program Committee. He serves on the Board of Advisors of Dr. Art Laffer’s California Recovery Project with the Pacific Research Institute. He has recently been appointed to the Board of the Concordia University Center for Public Policy. He also serves on the Blackstone Faculty of the Alliance Defense Fund and is a Cooperating Board member of the Center for Cultural Leadership where he is the Senior Fellow of Economics and Finance. He is a member of the Investment Management Consultants Association (IMCA), and holds numerous financial designations and licenses.

David is a disciple of Milton Friedman, a lover of Ronald Reagan, and a “National Review kind of conservative”. His writings strive to reflect an ideology of freedom principles integrated with transcendent truths. His hero is his late father, Dr. Greg Bahnsen, but he is pretty fond of John Calvin, Abraham Kuyper, F.A. Hayek, Winston Churchill, C.S. Lewis, William Buckley, Margaret Thatcher, George Gilder, Steve Forbes, and Larry Kudlow as well.

Hobbies include travel, fine dining, golfing, and sports. His true passions in life include anything pertaining to USC football, the financial markets, politics, Palm Desert, his gorgeous and brilliant children, and his lovely wife, Joleen.

 

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