Tuesday, November 10, 2015

Naysayers and Interest Rates




We've discussed our views on the economy and what effect we think higher interest rates will have on it many times over the last 6+ years since the bottom of the "crisis"-driven stock market in 2009.

It would appear that the Federal Reserve is finally ready to end the "zero interest rate policy" (ZIRP) that it has pursued for half a decade now.  This morning on CNBC pundit Jim Cramer stated that only people who are "too young or are foolish" think that higher interest rates are good for the stock market.  After over three decades in the professional investment management business, we are pretty sure we are not the former; and we think disagreeing with Mr. Cramer does not suggest one is foolish.

We've said for some time that the market may well throw another of its "hissy fits" when the Fed begins raising the target for short term interest rates; however, we believe that a return to normalcy (assuming 0% interest rates are not, nor ever have been, normal) will move the economy and, more importantly, the psyche of market participants in a more positive direction, thereby leading to stronger markets in the future.  And furthermore, maintaining ZIRP creates distortions in how capital is allocated and causes unintended economic consequences which are very hard to predict and create more uncertainty.

Just in case our readers should assume that we are "out on a limb" in our views on this topic, we would note such notable figures as Stanford Economics Professor John B. Taylor, former Western Asset Mangement Chief Economist, Scott Grannis, and Chief Economist at First Trust, Brian Wesbury, have all stated support for raising rates.

Stay tuned, as we still don't know for sure if the Fed will act to finally raise rates before the year is over, but we definitely believe such action is long overdue and will ultimately get us pointed in the direction of normalcy.