The markets are stressing about the fall in the oil price – who would have expected Brent at $37 even a year ago? But they are totally missing the most important commodity of all, and whose price has collapsed spectacularly.
The price of money has been almost nothing for nearly ten years but that price has now bottomed. We know that, because interest rates are pretty well controlled by man (or in this case a woman, Chair Yellen or Cher Janet) and we now know where they are going. The Fed is paying the boiling frog game – the idea is to heat up the water slowly enough so that the frog doesn’t jump out of the pot. We expect maybe another rise in June 2016, or March if you are a hawk, and one to cap it off by year-end.
It will still be not a lot to pay for those paying interest of 3% although a big hit on the financial wizards who have paid sweetheart rates for nearly a decade. The key hope is that the rates do not lead to deleveraging by the greedy, debt-hungry capital accumulators who have borrowed more than they can really handle.
The most likely scenario is a continuation of the trend – to see markets rise. This could well happen rather uncertainly to the end of 2015, followed by a goodly stock market rise and a sluggish bond market for the first quarter of 2016. The Fed game of again slowly warming up the market to another rise in June will then commence. It really is a good policy, just now working well, to recover a terrible situation. The Fed had found itself with rates so low for so long that the policy tool made no impact on the wider economy except to encourage bad behaviour. It is clear now that interest rate easing does not work below about 2% except for very short bursts at the climax of a liquidity crisis. Pity we have only found out now!
So we are likely to see a bull market climbing a wall of worry over the next few months. After all what is not to like? Input costs remain extremely low, policy is historically accommodative, we have pretty well fullish employment and reasonable economic growth – yes growth of 2.5% is pretty good.
But if you are an oil exporter; bad luck. Life will remain tough. Could crippling oil prices lead Russia to become more aggressive in geopolitics? It is likely to lead to Real (gettit) unrest in Brazil – and heaven forbid, Saudi Arabia. Iran will take more of the centre stage as an economic power – as a new oil pumper, the country can survive on $30 oil – as $30 is better than zero hitherto. Whisper softly about China’s uber-aggressive stance over the South China Sea, an annexation equivalent to 37% of China’s land mass.
The announcement by the U.S. of sales of weapons to Taiwan at the same time as the Fed press conference may well be followed by sales to other South East Asian nations to form a bulwark against Chinese expansion of the reef network. The U.S. selling weapons to Vietnam – whatever next? The markets may well be brighter after last night but the political stage is going to remain challenging.
Richard Harris
CEO, Port Shelter Investment Management
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