Tuesday, September 15, 2015

Will The Fed Raise Rates Tomorrow?

Hi Folks,

For a guy who claims to stick to technical analysis I sure am writing too often about economic fundamentals more and more. With that being said here we go again.

The Fed really can't raise rates tomorrow. If they do it will start a rush to the exits in US Treasuries further pushing rates higher and higher without the Fed ever having to raise rates again for a long time and in a short period of time causing a reversal of policy triggering QE4.

China, the largest holder of US Treasuries, has recently started dumping treasuries. Why? At the beginning of this month China announced that is was committed to letting the Yuan or Renminbi actually float against other currencies. This is HUGE folks! In my opinion this is part of their openness about wanting a currency other than the US Dollar as the world's reserve currency. China has for a long time had it's currency literally pegged to the US Dollar until 2005 but then purchased such a huge portion of US Treasuries that it was still unofficially pegged to the dollar. Now that it wants to float it has to sell it's treasuries.

Additionally due to falling commodity prices and political unrest, the Emerging Market economies currencies are in free fall potentially forcing them to liquidate their US Treasuries. They account for about 6 trillion of the outstanding US Treasuries. So if they liquidate only 10% of their treasuries that amounts to an increase in the 10 yr of about 108bps or 1.08% alone. For every 1% rise in rates it costs the government $170 billion more in interest. Where will this come from?

I think the writing is on the wall. We are heading down the rough road of economic contraction coupled with inflation regardless of what the Fed does tomorrow. Ouch!!

Thanks and Good Trading,


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