Almost Time For A Victory Lap

» Posted by on Aug 19, 2015 in CNBC, Commodities, Geopolitics, Shop Talk | Comments Off on Almost Time For A Victory Lap

Almost Time For A Victory Lap

victory lap

Chair Yellen, Please Take Your Victory Lap!

Professor Jeremy Siegel gave one of the best descriptions of present market conditions in a CNBC interview last week. When asked about the FED and the chances of a September rate hike he said,

“The anticipation of raising rates is worse than the actual act of raising rates for the market.”

Being the wonderful teacher he is, the message was clear. Nothing is as bad as your imagination makes it out to be. The truth is that today’s FED minutes, which gave us a blinding glimpse of the obvious, showed the central bank can and should move in September, even with looming concern about China.

There are two good reasons: First, the FED needs to show the financial world that they are consistent in their ‘data dependent’ stance (perfect data does not exist in this world).

Second, to paraphrase Paul McCulley, for Janet Yellen to take a victory lap.

The hardest pill for us to swallow is the waiting game.

Let’s understand that we have never been in a zero interest rate environment like we are now and any move by the FED from these historically low levels would be…well, historic! But the moves will certainly be slow and gradual with no drastic surprises. Let’s keep in mind that the market has traded in a counterintuitive manner for the last seven years and a dogmatic approach to the end of ZIRP (zero interest-rate policy) would be shortsighted. With strong numbers coming from the housing sector coupled with solid, consistent job creation over the last few months, the time has come for Janet Yellen and company to finally make their move and raise rates.

When Quantitative Easing was introduced to the United States, the unanimous consensus amongst market observers was that it would end badly. The final result was thought to be the debasing of our currency and runaway commodity inflation. Brilliant central bank watchers became ‘Soothsayers of Doom’ warning of the impending disaster created by such reckless monetary actions.


Neither inflation nor dollar debasement became a reality and the fears generated by those worried about an expanding balance sheet have all but disappeared. Guess what, the FED was right.

One thing we must be reminded of is that the FED has a dual mandate. Not only must they be concerned about the prospects of inflationary or deflationary pressure but they need to be the vanguard of growth for the entire economy. In a business climate which fosters over-regulation, tax ambiguity, hints of protectionism and the total lack of pro-growth policies out of the congress, this dual mandate becomes a heavy burden. To borrow an old Armenian saying, the FED has pulled a two horse wagon alone. And has done a magnificent job.

There are some very good things which have happened because of ZIRP over the last few years. Aside from saving the housing market and the banking system, the zero interest rate environment has allowed corporate America to refinance its collective balance sheets using the historic low rates to become stronger than ever. When the FED starts to move rates higher, it will be for the right reason. Growth will be approaching a level which comforts the doves and would signal the start of interest rate normalcy, thus making hawks ecstatic!

The minutes of July’s FOMC meeting showed that the combination of a strong dollar and velocity of the move in crude forced the FED to hold off longer than they probably wanted, but the time has now come for the FED to make the first move. It will very likely be followed by another long pause but, finally, the wait will have ended.  As those who are long and convinced it’s a FED driven rally, run for the exit, those who are wise enough to understand market structure will find the next leg of the move higher in equites.

Remember, bull markets don’t end because the central bank starts to raise rates – they end when the central bank stops raising rates.

~ Jack Bouroujian, CEO


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