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Saturday, June 4, 2016

Rate Hike Cycle Likely Complete - Not Just Beginning

The Federal Reserve continues discussing the timing for a cycle of rate hikes and a return to "normal"...but I think there is more than ample evidence which points to exactly the opposite.  Seems the adage "watch what they do...not what they say" is appropriate as ever.

The chart below shows a 3yr moving average of the gain/loss of manufacturing jobs in the US vs. the same 3yr moving average of the Federal Funds Rate.  Noteworthy are the blue arrows representing cycle peaks in manufacturing job creation followed a couple years later by cycle interest rate peaks (dashed black arrows).  This incented the next round of investment and manufacturing job growth.  This has been as reliable as rain (ok...insert reliable metaphor here).

I draw your attention to the last blue arrow on the right of the chart.  It doesn't seem to agree with the Fed that it's about time to start a rate hike fact it seems historically to argue its the point in time the Fed typically begins easing?!?

And a close-up since 1980...the pattern of rate cycle bottoms soon after corresponding with manufacturing job cycle tops is fairly plain (yellow dashed arrows).  However, previously this was taking place during a rate hike cycle...but not this time.
Which seems to argue that the Fed is far more likely to start cutting interest rates (NIRP anyone?) than on the cusp of a rate hike cycle. 

This rate cut rather than hike scenario seems to agree with the work done and posted on the Atlanta Fed's website (HERE) that QE was essentially the equivalent of negative interest rates (charted out below).  This additional QE accommodation in addition to ZIRP peaked with negative 2.9% rates in early 2014.  Upon the initiation of the taper of QE in early 2014, effectively the interest rate hike cycle began.  And I suggest that the Fed's .25% hike early this year was the end of the hiking cycle...not the start.

This viewpoint finds significantly more evidence as one peruses the demographics of our situation...not the swelling ranks of old but the stalling young population, total employment among them, and full time employment (chart below).  As of 2000, the 25-54yr/old segment of the US population made up 120 million persons and held approximately 75% of all jobs in the US.  This critical core populations period of rapid growth from post WWII (and shown from 1980 in the chart below) ended just prior to the turn of the century.  Since that time, the core group representing the vast majority of the US workforce (and the vitality of the US economy) has entirely stalled out.  There are now 600k fewer total jobs among this core population segment than in 2000 (where this data set becomes available) with 500k of those representing declining full time jobs.  However, the redline rocket shot in the chart below representing mortgage debt went ballistic in this same period.  The Federal Reserve mandated interest rate cuts with the intention to substitute credit for declining numbers and quality of potential consumers and home buyers.  The Fed simply no longer believed markets premised on supply and demand should determine prices...the Fed would determine the "correct" values and centrally impose policy to achieve these targets.

And what that looked like comparing the Federal Funds Rate vs. outstanding US mortgage debt.  The sudden fall in mortgage debt starting in '08 corresponded to two contradictory inflections.  1) the implementation of ZIRP and the lowest mortgage rates in a lifetime, and 2) the peak of the 25-54yr/old population, employment, and full time jobs.  The demographic peak and fall seemingly overwhelming the Fed's "free money"...but the crowding out of those typically looking at bonds for retirement income or foreigners looking for a "safe haven" found a new "home"; rental real estate but with a minimum 20% down-payment (and often fully in cash).

Below, a close-up of these variables since 2000.  Difficult to imagine what a rate hike cycle beginning now would look like given the fact that the Fed's ZIRP policy couldn't induce any net new mortgage debt since its introduction.

Over the previous and current interest rate cycles, the growth in total US population vs. the net new growth in full time jobs above and beyond the previous cycle employment peak (below).
And the big winner...the true growth engine of ZIRP and QE...the present explosion of those deemed "not in labor force" (below).  This seems to be where nearly all the growth in the US population has gone over the current interest rate cycle.

Lastly, please no proposing that the rise in "not in labor force" is solely due to the retiring boomers.  The chart below outlines the rising 55+yr/old population, employment, and full time jobs.  In fact since '00, all gains in full time employment have been among the 55+yr/olds simply offsetting the full time job loses seen among the 25-54yr/olds.  The swelling elderly ranks filled with underfunded seniors are running into stagflation (high rising costs absent rising COLA's).  They are essentially left to mortgage the young's future to fund their present but this essentially means there is a generational skip taking place...hollowing out the core populations finances and the economy so dependent on them.

Somehow, it seems the preponderance of evidence points to this being the typical timing the Fed choses to initiate a new cycle of accommodation and rate cuts rather than the idea we are just starting a rate hike cycle.


  1. Are we in a recession now? Higher probability than many let on that we have entered a recession in March.

    Industrial production has been contracting for 8 straight months. Any time since 1920 it contracts for 6 months or longer the U.S. is in recession every time. 100% accurate recession signal since 1920.

    Looks like we may have entered recession, likely around March 2016. I have now exited long oil positions and am maintaining a higher balance of cash with more conservative investments in the remainder of my portfolio.

    Waiting on IOER to be cut by the Fed, possibly QE4, and a wash out of the energy and tech sectors which is so badly needed.

    Chris, this is a good article and synopsis of why we are near the end of the rate hike cycle. Thanks for your analysis and input! Keep up the good work.

  2. Chris, Nice work as usual. I have to say the one thing you perhaps have missed is the quantitative easing and near zero interest rates is starving the real economy. I agree that none of the historical precedents is in place to warrant a rate increase. The reality is the FED must raise interest rates or complete the destruction of the US economy.

    In 2009 they moved inflation into items that are not well measured by the CPI. Declining wages and rampant inflation in housing, food, education, and health care.

    At some point, pensions are going to implode. The Fed is either going to have to put up or shut up. If the Fed fails to increase rates this is the same as a pilot stating "brace for impact."

  3. I liked the article very much. I seems to be well prepared and deeply investigated. But the future is yet unknown, and variuos scenarios are still open. The rate hike may be for example caused by "internal forces" in the FED but as the data shows the range of the hikes(s) is very limited currently. I dont bet on either side as I am preparing the algo system that do not need that info anyway. For my way of gambling here ( is better to be blind rather than misdirected.


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