Bad News is Good News
Today is your lucky day. You get two articles for the price of …Free.
The decision has come down from the King of The Hill and we have the next rate rise in place. Ok. Thats done but why would investors believe this is a good thing for stocks?
That is why I decided to write an additional column today. Investors are desperate for something to feel good about and let’s be serious for a second, since when are higher interest rates a good thing.
Yes, it is the most powerful tool in the Fed arsenal at the moment and the Fed apparently is not afraid of the resulting slowdown and possible recession. They have mandated that this is the right thing to do.
I agree but I don’t agree with the way this is being portrayed. As if this will cure inflation and we can go ahead and grow at 4 to 5% annually for the next three to five years.
Interest rate hikes are not a sign of prosperity and increasing profits for corporations. They are a sign that something is deeply wrong with the economy and the only course of action is to put a major impediment to whatever is affecting the economy. Untamed growth is one of those things.
This may be that third bear rally I have spoken about and this rally has started on the shakiest of foundations.
Let’s look at the simple facts:
Higher interest rates generally slow housing growth. Rule number one in Costa’s Recession Theory is recessions never get underway without a slowdown in housing. Put two and two together there. If we are looking at a recession, why would you buy when the cause of that recession was just announced?
Higher interests tend to eat into earnings and earnings are why we invest. Potential growth can no longer be a given when interest rates are rising.
Higher interest rates will eventually rest on the individual. While it takes a little bit of time for the costs to fall on individuals, they eventually do. Higher interest rates on credit cards. Possible tightening up of the credit markets is something to think about as well.
Higher interest rates can get passed on to consumers as well. Producers who will be dealing with higher borrowing cost will pass those higher costs on to consumers. This has two impacts. One, it lengthens the time that prices will rise. Two, when those prices become out of reach, production slows and a recession grabs hold.
The only one who benefits in this scenario are banks. The cash on deposit does not go up proportionally, yet the interest they can charge will go up probably more than the actual rates they are paying the Fed. That is all profit. I know, that is a simplistic explanation but trust me, banks do very well in rising interest rate environments. Their other businesses may suffer a bit but there isn’t a bank in this country that is afraid to charge more for services that were once free.
The reason I stopped what I was doing and decided to write something about the Fed’s decision is because I feel very strongly that we are going to go into a recession of some consequence and todays response again shows that some investors are completely detached from reality. I can’t stop people from being stupid but I can warn the rest of us to not follow stupidity.