The FED and the Elections

cropped-bob-shapiro.jpg   By Bob Shapiro

The Stock Markets often predict the outcome of Presidential elections. If stocks are up – or even if they just are flat – the party which holds the White House tends to win the election. If stocks are down – especially if they’re down big time – the opposite party is favored to take the day.

The Dow Jones Industrial Average has been in the 18,000 area for the last two years, and as the US Economy has stagnated, the PE Ratio has gotten up to a near bubble level over 25. This has been achieved single handedly by the FED, which except for last December’s hike, hasn’t raised rates for 10 years, keeping them near zero for several of those years.

fed-funds-85-2016

Super low interest rates do several things. By allowing the government to finance Budget Deficits – and the accumulated National Debt – on the cheap, low rates encourage profligacy in Washington. With the current National Debt near $20 Trillion, a return to more normal historical rate levels – maybe 3% higher all along the yield curve – that would make the already ridiculously high $500 Billion Deficit shoot up to well over a Trillion Dollars. This is a disaster that no current rate manipulator wants to face up to.

In the private sector, low rates encourage actions which wouldn’t make sense during a normal rate environment. Company officers whose stock options, bonuses, and even paychecks depend on earnings growth have been on a binge of buying back their own stocks using borrowed money. They posit that, if they can keep earnings steady or only slightly down, and the number of shares is reduced, they will look like heroes as the Earnings Per Share (EPS) goes up. I consider this out and out stealing, but since I’m not in the AG’s office, they can get away with it.

djia-0916

For execs who actually would like to grow their businesses, the low rates make many projects look good enough to start. With normal rates, the extra cost of financing the added debt would kill the projects, but with near free money, the picture changes so that many less than optimal projects make sense…. Until rates get back to normal… when reality kills the projects and many whole businesses.

While the whole history of the FED since its start in 1913 has been to manipulate rates to the low side – by expanding the money supply (debasing the currency) – these last 10 years have been extraordinary. Democrats tend to favor the FED’s rate suppressions, so the FED tends to be more accommodative to favor their benefactors.

With the FED currently levitating stocks with near zero rates, they obviously are playing politics trying to bring on a Democratic win. However, in the last week or so, Donald Trump has called them out for their insane policies – and politics.

Apparently Trump has struck a nerve at the FED. With most onlookers expecting no rate hike at the September FED meeting, it looks like a surprise may be in the works. Rates have moved up a little the last couple of days – up by from a few basis points to almost a quarter point according to maturity.

I wouldn’t be surprised to see an official hike at the FED’s meeting, although I still think it’s less than a 50-50 chance.

But, with the actual, effective rates going up, that’s got to leave a mark on the stock market (a red mark). The last few days have seen higher percentage moves (down Friday, up Monday, down Tuesday), so the chances of a couple thousand point drop before the elections has risen.

Coming back around, The Donald may have scared the FED into supporting his electoral chances – rising rates sending the markets down support the party out of office.

We’ll see how this plays out and how it might affect the election.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s