By Parke Shall
The rate hike fiasco is getting absolutely ridiculous at this point. The amount of debate on national television and in the media on whether or not we should be raising interest rates based on Friday's jobs number has reached a feverish pitch.
It has gone from a debate to absurdity. We are opining on and scrutinizing one small piece of macroeconomic data in a large ocean of data that we have had access to for the last seven years. All of this data has suggested that the economy has at least been improving notionally and that, in order to maintain some semblance of order, interest rates should have been moving up a while ago.
Yet here we are, with the Dow and the S&P at all-time highs. Both risen nearly exponentially since rates have been lowered. See anything odd about the divergence in this chart?
In this time, while the Federal Reserve was supposed to be doing a clinical objective job of managing interest rates, the FOMC decided instead to heed to the equity markets and simply keep the cost of debt low because it can. Over this course of time, we have arguably created semi-serious bubbles in high-yield corporate debt and subprime automobile sales. Companies like Valeant (NYSE:VRX), whose entire business model is based on taking on cheap debt, have provided 90% losses for shareholders. Companies like SunEdison (OTCPK:SUNEQ), employing the same strategy, didn't even make it and winded up going bankrupt. These are residual effects of a low interest rate environment that has continued for too long.
The inflection point for these companies was nearly at the exact same time, indicating to us that the Fed has pushed this bubble as far as it can go and is only now irresponsibly considering rate hikes at a time where they are in a catch-22. The clock is up. Equity valuations are at highs. Surely they can't raise now and cause a crash, right? Should have thought of that for the last 7 years of inaction and apathy.
Savers who have been doing the right thing and rebuilding their savings since the crash in 2007 have been rewarded with nothing. They are simply now just reloading their brokerage and 401(k) accounts to again be crushed when the next bubble does burst. People can't even consider certificates of deposits or savings accounts anymore because they offer no yield. People are being pushed into the stock market at a time when equity valuations are far too high and it is all because the Federal Reserve can't get their act together.
If the tone of this article comes off as scathing, it should. The fact that we are even debating a single piece of macroeconomic data after the recovery that the stock market and economy have seen over the last 7 to 8 years is absurd. The fact that the Federal Reserve continues to set targets, initially four rate hikes for this year, and then back away from them because they are cowards, is embarrassing. While the rest of the world is set on an attitude of economic stimulus forever and negative interest rates, it is our responsibility to lead as a nation and show that economic policy should be administered in a clinical fashion that allows equally for both booms and busts.
The Fed needs to show the world, and most importantly the market, that they are not afraid of equity prices coming in. We will be far better off over the course of the long term for them doing so. Until then, if the Fed wants to perpetuate the cycle of encouraging companies to take on more debt than they can handle and forcing the American public into the stock market because it's the only place to find yield, they are going to park themselves back into another crisis similar to 2007, but this time with no levers to pull.
When that does happen, we all know it will once again be us, the taxpayers, on the hook for the check. The Federal Reserve needs to get over itself and raise rates this month. End of story.
Disclosure: I am/we are long VRX.
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.