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Investors Trapped in Dangerous 'Time Cycle' as Rate Hike Looms

Investors Trapped in Dangerous 'Time Cycle' as Rate Hike Looms

(Dollar Photo Club)

Friday, 12 August 2016 09:03 AM Current | Bio | Archive

San Francisco Fed President John Williams told the Washington Post when asked if the Fed’s gradual rate increases should include any rate hike this year:

“In my view, it does. We’ve been adding enormous policy accommodation over the past several years. As the economy gets closer to its goals, we can again pull our foot off the gas a bit and hopefully execute a nice, soft landing over the next couple of years.” 

He went on to say: “The specifics of when we raise rates … will depend on progress we make on our objectives and also changes to our outlook. I would say our strategy has not changed. I would say that what has happened since December is that numerous events have occurred that have made the tactical execution of that strategy flatter in terms of the interest rate path than I was expecting. Because we haven’t taken action to raise rates, it kind of looks like we’ve changed, but I don’t think we have.” 

Williams, who is not a FOMC voting member this year, is known for his views that are closely aligned with those of Fed Chair Janet Yellen.

In simple words, a Fed rate hike is back on the table for this year. At least for now, markets only give a 20 percent probability of a Fed rate hike in September and a 41 percent probability in December. 

One of the big questions that remains unanswered is: How will markets react when the Fed finally starts raising rates?

In this context, it might be useful looking at the U.S. markets from a technical/historical perspective, now that we have seen U.S. markets close, for the first time since 1999, at record highs simultaneously.

It’s a fact that momentum has been bullish and, technically speaking, that could continue at least for the short term.

Nevertheless, it could be rewarding paying attention to what are called short-term and long-term cycles.

I have no doubt whatsoever that the long-term U.S. markets cycles still have serious big bumps in the road ahead.

For example, when we look at the economic data, we could ask ourselves if there is a serious financial economic upset lurking on the horizon.

Again, technically speaking, we should ask ourselves when markets are running at historical highs, is it because sentiment is strongly bullish, or is it mildly bullish, or is it all about momentum?

Fact is that several technical indicators show there are growing divergence patterns that hint the actual strength in U.S. markets is probably not going to sustain itself for too long and once we see head-and-shoulder patterns developing, the market run will probably be over.

Besides that, there is also, and this is typical for U.S. markets, there is what’s called the “short-term-window” phenomenon whose defining elements are: price, pattern and time.

This time around it’s all about time and that window starts on August 26, which is a Friday and because it’s impossible to know what could happen that weekend, the time window of interest occurs on August 30.

Before we get there markets could still go up by a 150 to 250 points, but once we reach the short-term-window markets could experience a sizable decline and even roll over. Markets have experienced this six times since October 2014. 

Besides that, I personally think there is also the possibility that markets could roll over at this time window and if that doesn’t happen this time around the next time windows are September 26, and October 20 in this specific “time cycle” that by the way will last until 2018 and where we could see sudden sharp declines that will trap many investors who are not prepared for sudden sizable market drops.

Last but not least, at present we are in a very dangerous time zone in a 84-year “time cycle” that stretches from 2011 to 2018 and that we have only experienced once before between 1928 and 1934: the Great Depression.

Please don’t misread me. These are all warning signs and nothing more, but it must be said, they have often ended up being true.

Maybe putting the chase for yield aside for some time to come (at least until 2018) could be, in the end, not such a bad idea.



Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.


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Maybe, letting the chase for yields aside for some time to come (at least until 2018) could be, in the end, not such a bad idea.
investors, fed, yield, chase
Friday, 12 August 2016 09:03 AM
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