A Rate Hike? Forget It

| About: SPDR S&P (SPY)


Brexit uncertainty will prevent a rate hike in 2016.

I wish there was another word for Brexit.

The uncertainty for markets continues, but low rates should push momentum behind commodities.

Back in June, the Fed (NYSEARCA:SPY) made it clear that until they could get a grip on Brexit backlash, there would be no rate hike. This isn't surprising. Britain has put the world into a tailspin, and, whether the markets currently reflect that reality or not, global growth is going to slow as a result. Across the European continent projects are hitting the brakes. And, with anemic growth already the status quo, the world is one step closer to recession.


I wrote an article at the end of June on my views on Brexit, and a followup article on how I would be trading it (buy AUD, sell GBP). As time moves on I, expect uncertainty to grow. Uncertainty persists across all of Great Britain. It is unclear if an early election can be called, it is unclear if the parties have funds to continue through an election, it is unclear who the party members are backing, and it is even unclear how the Prime Minister can even invoke Article 50. The debate continues, the investment community watches on with skepticism.

It is evident to me that Britain's separation will not be quick, easy, and it may not happen for years - if ever. Politicians were widely against Brexit, and the lack of truth from the Brexiteers is becoming apparent. A tool for gaining political power and clout, the Brexit crowd have damaged their country for personal gain. Many voters wanted to give one big slap to the EU Bureaucracy but have dealt themselves a devastating own goal.

U.S. Rate Hike

Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data on the consequences of the U.K. vote," according to the minutes. - Yahoo Finance

Waiting for certainty on the impact of Brexit will bring about, even more, uncertainty. Politicians and central bankers around the globe can point to Britain as the reason they can't raise rates, or need to enter another round of QE. Brexit has given politicians around the world a reason to continue their currency wars, competitive devaluations, and propping up of asset prices.

Low-Interest Rates Gut The Competitive Drive

Since low-interests provide easy cash, they give managers an easy alternative to operational challenges. Margins slipping? Borrow and buyback stock. Revenue dropping? Borrow and expand to low ROI regions. The list goes on. Low-interest rates are a cancer to productivity.

Boom and bust economic cycles are critical to cutting the fat. Our economy needs a diet, and the fat and excess in the system continue to weigh down prospects of growth. Delaying the economic bust, ignoring the meager growth and the reasons for it, and failing to bring it legislative changes to account for technological change will be the downfall. Politicians have become lazy. CEO's have become lazy. As a result of low interests, their failures have been hidden. However, not all sectors have been binging on debt. Commodities are set for a rebound after a multi-year bear market.


Low U.S. interest rates mean a weak U.S. dollar; however, a devaluing dollar can only move commodities so far. The evidence is starting to prop up that the copper bear market is nearing an end as I called in my article here. Nickel and Iron Ore have seen price rallies. More importantly, these companies have been cutting costs and increasing efficiency.


While a global recession would crater demand for many commodities, I see a slow recession coming rather than absolute collapse. Rich world economies will stagnate or contract over many years rather than suddenly while emerging markets will continue to grow. The outlook for Copper is healthy. Growth continues (albeit slowly) while declining grades and a vacuum of capital will lead to increasing supply outages and more expensive production.

Iron, I'm sorry to say it, but we're floating on an iron ball, the earth. Iron is either the first or second most common element on the periodic table and everyone and his brother are building iron mines. But copper is rare and hard to find and without it we don't have a modern world. - Robert Friedland

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.