A Sane Response to the Fed's Decision
This was posted before today's Fed announcement. We hope it elicits a sane response to whichever of the three possible decisions they might make. Three? More on that in a moment.
First, the purpose of posting before the announcement was to make a point: Ignore whatever happens after it. However the markets react, the short-term response holds no weight. In an ideal world, you would have avoided your radio, TV, laptop, smartphone, Twitter account, etc. from Tuesday until today. After all, the drama would likely not have served you well. The emotions associated with all the drama would likely do nothing but feed on themselves, potentiall causing bad decisions. Emotions do that.
So if you have ignored the media, congrats. (Of course, why are you reading this then?!)
If you didn't ignore the media and manage to remain calm anyway, congrats twice. The discipline required to deflect emotions from unduly influencing decision-making takes a lot of effort for most of us. You're efforts will pay off.
At this point, you need to consider the investment strategy you're pursuing, a strategy based on more factors than whether or not the Fed makes one of three decisions regarding the Fed Funds rate. We suggest your strategy will be all the more robust the more factors it considers. The Fed Funds decision, at this point in time, should have been taken into account, one way or the other.
As for your response to today's decision, it should basically be this: nothing. There's no reason to react right now, and every reason not to react.
Now to what the "three" decision matrix is all about: It's three because the Fed can raise, stay the same or - get this - lower the Fed Funds rate. That's right. But, you say, the Fed Funds rate is effectively zero, and has been since 2008. That's what the "Z" stands for "ZIRP": zero. So how do you lower when you're at zero. You've likely figured that out by now: You go negative. That changes ZIRP into NIRP.
Whatever they do today, don't ignore NIRP if it hasn't already been decided that way. It very well may be coming at some point, depending on just how volatile markets get going forward, and how weak the already weakening economy becomes in coming months.
As for what comes after the short-term reaction, based on what we've already laid out, it looks like, despite the ups and downs that come with "volatility," the longer trend will be down - at least as far as stocks are concerned. And ditto for the economy. Our studies lean heavily that way. As for the other asset classes, chances are bonds, specifically the long bond, will benefit when stocks take a turn for the worse, since US treasuries remain the only viable safe haven for big money. They need a big liquid place to run. Gold likely doesn't serve their immediate need as, liquid though it might be, it's not as big a pool as treasuries. Besides, chances are reasonably good that, if the expected downturn in stock markets gets serious enough and also accompanies a credit crisis, gold will be one of the assets sold to raise cash.
Cash, of course, will likely remain just where it is: nowhere. Returning nothing, unless the short-rate goes up, in which case it will return next-to-nothing. No change in sight regarding the advantage big interests have over the common man in this area. The common man remains boxed in: No return on your savings; therefore no way to compound your money to increase your wealth - again safely - over time. Unless you go out into the riskier assets, you tread water and watch as the value of your savings slowly dwindles over time, as, in the end, the Fed manages, with its disordered monetary policy, to lower the value of your money relative to most of the items you need to purchase as part of the ordinary life of the common man.
But, hey, that's looking forward a bit. And, as you know, most of us can't look beyond our noses, especially those who write and blather for the financial media. But you, friends, don't need to be locked into the never-ending present in your thinking. If you don't like our thinking, just go out and find some that you do. Even better, do your own thinking. That will likely serve you best.
First, the purpose of posting before the announcement was to make a point: Ignore whatever happens after it. However the markets react, the short-term response holds no weight. In an ideal world, you would have avoided your radio, TV, laptop, smartphone, Twitter account, etc. from Tuesday until today. After all, the drama would likely not have served you well. The emotions associated with all the drama would likely do nothing but feed on themselves, potentiall causing bad decisions. Emotions do that.
So if you have ignored the media, congrats. (Of course, why are you reading this then?!)
If you didn't ignore the media and manage to remain calm anyway, congrats twice. The discipline required to deflect emotions from unduly influencing decision-making takes a lot of effort for most of us. You're efforts will pay off.
At this point, you need to consider the investment strategy you're pursuing, a strategy based on more factors than whether or not the Fed makes one of three decisions regarding the Fed Funds rate. We suggest your strategy will be all the more robust the more factors it considers. The Fed Funds decision, at this point in time, should have been taken into account, one way or the other.
As for your response to today's decision, it should basically be this: nothing. There's no reason to react right now, and every reason not to react.
Now to what the "three" decision matrix is all about: It's three because the Fed can raise, stay the same or - get this - lower the Fed Funds rate. That's right. But, you say, the Fed Funds rate is effectively zero, and has been since 2008. That's what the "Z" stands for "ZIRP": zero. So how do you lower when you're at zero. You've likely figured that out by now: You go negative. That changes ZIRP into NIRP.
Whatever they do today, don't ignore NIRP if it hasn't already been decided that way. It very well may be coming at some point, depending on just how volatile markets get going forward, and how weak the already weakening economy becomes in coming months.
As for what comes after the short-term reaction, based on what we've already laid out, it looks like, despite the ups and downs that come with "volatility," the longer trend will be down - at least as far as stocks are concerned. And ditto for the economy. Our studies lean heavily that way. As for the other asset classes, chances are bonds, specifically the long bond, will benefit when stocks take a turn for the worse, since US treasuries remain the only viable safe haven for big money. They need a big liquid place to run. Gold likely doesn't serve their immediate need as, liquid though it might be, it's not as big a pool as treasuries. Besides, chances are reasonably good that, if the expected downturn in stock markets gets serious enough and also accompanies a credit crisis, gold will be one of the assets sold to raise cash.
Cash, of course, will likely remain just where it is: nowhere. Returning nothing, unless the short-rate goes up, in which case it will return next-to-nothing. No change in sight regarding the advantage big interests have over the common man in this area. The common man remains boxed in: No return on your savings; therefore no way to compound your money to increase your wealth - again safely - over time. Unless you go out into the riskier assets, you tread water and watch as the value of your savings slowly dwindles over time, as, in the end, the Fed manages, with its disordered monetary policy, to lower the value of your money relative to most of the items you need to purchase as part of the ordinary life of the common man.
But, hey, that's looking forward a bit. And, as you know, most of us can't look beyond our noses, especially those who write and blather for the financial media. But you, friends, don't need to be locked into the never-ending present in your thinking. If you don't like our thinking, just go out and find some that you do. Even better, do your own thinking. That will likely serve you best.
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