Will the Fed Blink?

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Yesterday, we got closer to the day of reckoning where the Federal Reserve finally starts to hike interest rates. It is the moment of truth, which was momentarily greeted yesterday, and will trigger more selling both before and after accommodation is removed. The knee-jerk reaction will be hastened by the way the Fed goes about this task. I hope they are not held hostage by Wall Street crybabies taking tiny steps like Alan Greenspan, whose view of the job as Fed Chair went from sage to cheerleader.
In the aftermath of the 9-11 attacks and harsh recession, Greenspan focused on housing as the tool to turn the economy around. What happened instead was punk job creation for the mother of all housing bubbles. Exacerbating the situation further was how the housing market was being fueled. I admit, I thought we were due for a run-of-the-mill housing correction, but it was a once-in-a-lifetime correction. Greenspan should have caught this beast before it was too late, but how could he? It was his creation.
His mistakes included:

Approved and encouraged exotic mortgages that became toxic mortgages
Overlooked massive regulatory issues and violations
Kept rates too low for too long, and slow walked them higher

Federal Reserve “Slow Walk”	Action	Rates Year End
2003	Final rate cut June 25 bps	1.00
2004	Five rate hikes	2.25
2005	Eight rate hikes	4.25
2006	Four rate hikes	5.25

Ben Bernanke took over and was admittedly, also blind to impending danger from the housing market. Once the bubble began to burst, Bernanke moved swiftly, but his actions including quantitative easing, have created more harm than a worst-case scenario housing meltdown, which we had anyway.
On that note, there was immense fear once the Fed announced it would remove QE that the stock market would crumble. On the contrary, the market moved much higher as many were relieved that perhaps the Fed would take measures to reduce the risk of its $4 trillion balance sheet. Nevertheless, make no mistake; stocks will come under pressure, as we get closer to the day the Fed has to hike interest rates.
Investors need to understand the rate hike pullback/correction could be a huge buying opportunity as history has proven. Knowing its coming, however investors need to make sure they are indeed investors. I say this because a lot of people are investors when their holdings are going higher, but it is traders who are willing to take losses at certain pain thresholds. This is the time to understand which holdings are more volatile and which are most susceptible to higher interest rates.
As for higher rates automatically meaning lower stocks, that's a notion belied by action in three countries where central banks have aggressively hiked rates.

New Zealand

March 13 +25bps to 2.75
April 24 +25bps to 3.00
June 12 +25bps to 3.25

These rate hikes were not only death knells, but also sparked higher stock market moves. When you think about it, when central banks back away, it's their way of saying the economy is fine. They have a well-earned reputation for being late because they seem consumed with power which makes them think that stopping inflation is as easy as flipping a switch. Just ask Alan Greenspan; being too confident as a Fed Chair can be destructive.

As for the inevitable rate hikes in America, I do not think there will be a death knells, although knowing the babies on Wall Street, there will be some wailing.

Housing Recovery Derailed

I know there was a lot of disappointment over yesterday's report on housing starts and permits, but the building blocks for a stronger second half are still in place. Vacancies are still low, reflecting supply issues that have hurt housing growth. It gets back to the idea of "If they build it, they will come."

I am not talking in the same line of thinking that drove Alan Greenspan to ignore or even encourage the warning signs. It is a legitimate issue, dogging the industry exaggerated by the fact that so many construction workers have left the industry and have not come back.

Will the Fed Blink?

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