Wolf Money(interest rate watch)update 2.0

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This is a repost which I wrote a couple of months ago. The latest Federal Reserve meeting minutes released had shown most members favour a tapering by end of this year. The timeline is similar to my own forecast. The Fed is also concern with the runaway valuation of the stock market. The US market did get a reaction, most indices are down around 1% after the announcement. Going forward there might be a repricing of risks by the market participants. 

Wolf Money(interest rate watch)

June 24, 2021


Lone Wolf Investor interest rate watch officially start this week . Recently Fed Chairperson Jerome Powell had indicated interest rate increase might move forward from the previous communicated timeline of 2024 due to better than expected employment numbers and rising inflation. Now the market is expecting interest rate to increase sometime in 2023, about 1.5-2years from now. There is also the fed tapering of QE(quantitative easing which mean buying bond in cash effectively inject cash into the financial systems) for the stock market to content with. The current QE is at 120B a month. The Fed will be doing a reduction of that amount a few months down the road. That act itself is amounting to a rate increase.

The purpose of this blog is to highlight the importance of interest rate watch. Interest rate is a big part to consider when one invest. It affected risk free rate, calculation on rate of return, expectation of return, interest rate affect currency, interest rate determine how much loan the borrower need to pay. I can’t emphasis more the importance of this financial matrix had on the health of the economy. The current fed fund rate is close to 0-0.25%. When Fed increase interest rates,laterally the consumers and corporate borrowers had to pay more for their borrowing, that itself is a tax against business and consumers. A substantial increase in cost of fund will affect the stock market return and almost all investment due to diminishing liquidity. If the Fed doesn’t rein in on cheap money, bubbles in assets price and excessive inflation will formed and ultimately cause a big crash which have a bigger and longer deflationary impact post crashed. Japan excessive bubbles in the 80s and subsequent crash of asset price cause the economy and stock market to limp for the next 30 years. This is one situation any central bankers will want to avoid. 

I am guessing the Fed is going to do the first tapering by end of this year and potentially a rate increase by second half of 2022 base on what I could see. Of course nothing is set in stone due to fluidity surrounding covid 19 situation. If there is a flare up of covid 19 infection, interest rate increase and tapering of QE might not even happened.

The moving of the needle on interest rate front can be negative for the market if market participants foreshadowed the rise in interest is coming thick and fast. I had been through a couple of interest rate cycles. Sometimes the market can go through quite a deep and painful correction of up to 20 percent 6-9months prior to the first rate increase as market try to make sense how the higher interest rate will affect corporate profit and of course if the market is satisfied that a slow rising interest rate environment can’t cause much harm to the economy and corporate profit, it will resume its uptrend. The maximum rate the stock market can absorbed will also be the inflection point for any start of bear market. Watching interest rate movement is like watching the tea leaf in the tea cup which might turn out to be a storm in a tea cup. The most important thing is to keep that tea in the cup at the end of each cycle.


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Disclaimers 

All investments is highly speculative in nature and involves substantial risk of loss. We encourage our reader to invest very carefully. We also encourage reader to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on our statements. All information provided are for information only. Buyer beware,do you own due diligence.

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