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The Strong Reaction To The Heightened Certainty Of A Rate Hike

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It’s easy to think of today’s scorching-hot meltdown in equities, precious metals, oil and a majority of agricultural commodities, bond yields and the U.S. dollar as cyclical, corrective or somehow coincidental.

In fact, the meltdown is part of a continuation of the volatility that stems from the uncertainty surrounding the Federal Reserve’s rate stance. Janet Yellen’s speech last week aimed the arrow right at the heart of what has been feared for almost two years now: she says rates will definitely rise “this year” unless the Rockies may crumble and Gibraltar may tumble into the sea.

The Dow is off almost 2.00%, the S&P 500 2.5% and the NASDAQ off almost 3.00%. European bourses were also off on about the same spectrum, the CAC doing the worst.

Shanghai and Hong Kong were up ever so modestly. The Nikkei was down 1.5%.

Why should one small, probably insignificant rate rise have investors spooked? There is a relatively easy answer.

Nothing seems to stand in the way of large-scale economic upheaval except the Fed. And a simple application of interest rate change is a bit like the use of a cotton swab in a trauma center treating victims of a five-car pileup. What if Fed members are wrong? What if they’re right?

The U.S. Congress and to a certain extent President Obama have neglected their duties to see to it that the country as a whole prospers. Part of that charge is keeping up and growing the economy. Reducing our critique to simplest terms, the federal government has done next to nothing to spur economic growth, ignoring fiscal policy and instead relying strictly on monetary policy (the Fed) to do the job.

At this point, it is not important if the conflict between parties and between Congress and Mr. Obama is ideological, careless or myopic. The fact is that there have been no large federal initiatives for some time – infrastructure comes most readily to mind but there are other initiatives such as space technology, public lands improvement (a form of infrastructure) or a jobs program for youth, Hispanics and African Americans.

There has been an incessant hammering on lower taxes (we hear Republican candidates promising to lower taxes time and again when we know trickle-down economics is essentially a sham). Worse there is a crack-head rightwing hammering on the very value of government as a force for good in the social realm.

Congress in partnership with the president must help stimulate the economy. Once more, infrastructure is key, but it’s also important for banks to begin issuing regular mortgages for regular people, especially the young. In our mind, Wall Street banks were bailed out and now it’s time the banks – prudently but with alacrity – help Main Streeters own homes, start business and allow for a restructuring of college loans. The last is particularly egregious because those who bought into the idea of college as a sort of universal good have been penalized the most during this overall uncertain times we live in.

However, we are not optimistic. The resignation of John Boehner of Ohio as Speaker Of The House will be an enormous distraction. While Boehner was not a champion of democratic socialism, at least he believed in the power of government to create a better society.    

The battle for his leadership position will keep many, many minds busy in DC and prevent an agenda from being drawn up.

There is no other game in town. That is why the Fed is watched so painfully closely.      

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer