The Fed Will Raise Rates In December

| About: SPDR S&P (SPY)

Summary

The incoming Trump Administration is a significant threat to the legacy of the outgoing Obama Administration.

Raising rates on an economy running on fumes may cause significant stress.

A struggling or reversing economy may slow or derail the Trump Administration's agenda, better preserving the legacy of the Obama Administration.

A Trump Administration will likely be more hawkish than an Obama Administration.

Ever since the first hike in December 2015, rate hike "fears" have been brewing market-wide. After the Fed promised multiple hikes throughout 2016, every single scheduled meeting has resulted in a "hold" verdict. After the first quarter point hike, I believed we would not see another hike in 2016. I have been right every time since. My theory as to why another rate hike hasn't occurred is centered around my understanding of the internal operations of the Obama Administration and their policy goals.

My prediction has now changed, and I believe there will be another rate hike in the December 2016 meeting of the Fed. I will explain why below, and what I believe we can expect moving forward as the Obama Administration transitions to the Trump Administration.

The information below is a prediction based on my understanding of history and my own personal analysis of the people and events mentioned. To understand my prediction, you will need to understand the backstory that has driven me to this conclusion.

Obama Administration Policy

The Obama Administration has been one of the most transformative Administrations in the history of the United States. While Barack Obama twice ran on a moderate platform, it was clear to me that this was not going to be a moderate Administration in terms of real, enacted policy. President Obama's Administration has been the most progressive in history by a longshot and the expansion of the Federal Government has been off-the-charts.

America's population is not a progressive one - most Americans have big problems with the US Government getting involved in their business and private matters. The Obama Administration knew this, and in order to advance such a progressive agenda successfully, data needed to show the policies are having a positive effect. There is no better way to show this than positive economic trends.

The most important benchmark to the Obama Administration was the Unemployment Rate. Entering the presidency in 2008 after the financial collapse, President Obama was dealt a terrible hand, and the Administration has done everything it could to show positive progress. Despite having the lowest labor participation rate since the 1970's, the highest rates of "underemployment" in decades and the highest welfare assistance rates in US history, the Administration has succeeded in eliminating enough labor-seekers from the job market to generate an Unemployment Rate of 4.9%.

Click to enlargeSource: BLS.gov

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The second most important benchmark to promoting the Administration's agenda has been the stock market indices themselves - the Dow (NYSEARCA:DIA), S&P 500 (NYSEARCA:SPY) and NASDAQ (NASDAQ:QQQ) in particular.

I am of the belief that the post-Great Recession market recovery has largely been fueled by three factors:

  1. Long-term ZIRP encouraging the over-borrowing of money to finance operations.
  2. Super aggressive corporate buy-back programs, largely paid for by the extreme amounts of money borrowed due to ZIRP.
  3. With ZIRP eliminating "safe" securities of historically moderate yield (CD's, bonds, etc.), investors have chased yield in historically strong dividend stocks, pushing valuations near all-time highs.

The effective Federal Funds Rate has been held near-zero for eight years, now.

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In short, we have seen market capitalizations grow proportionally with debt on the balance sheet and in kind with the huge amount of money we have printed to finance our debt. Hence, despite a surging stock market, we have seen historically-poor GDP growth.

President Obama's Legacy

If I had to describe the Obama Administration in one word, I would use the word: "Legacy."

I believe President Obama has been astoundingly successful at promoting his Administration's agenda, for better or for worse, and wants to preserve his legacy above all else. With Hillary Clinton leading in the polls throughout virtually every moment of 2016, the Obama Administration had little fear that their legacy was in jeopardy. A Clinton Administration would likely govern very similarly to the Obama Administration, and I believe President Obama was very comfortable with that transition.

A Trump Administration, on the other hand, would be a severe threat to President Obama's legacy. Donald Trump had centered his campaign around three dominant issues:

  1. Immigration Reform. Or, rather, much stricter enforcement of current immigration law, which has been seen as shirked by many Americans.
  2. Repealing Obamacare. This is President Obama's most defining piece of legislation.
  3. Restarting America's manufacturing economy. Centering his campaign around coal miners, steel workers, oil explorers and gasoline refiners, this is a polar opposite to the Obama Administration's stance against traditional fuels for renewable energy.

These three sticking points fly in the face of everything President Obama has worked for in the past 8 years and threatens to overturn most of his entire body of work. If these three policies are successfully enacted, President Obama's legacy will be mostly wiped away from American history.

A Legacy In Jeopardy

So what does this have to do with interest rates?

President Obama was able to pass so much of his agenda through Congress in part because the economy was seen to have been recovering. It is easier to corral the public when things are perceived as getting better. Conversely, when times are bad, people tend to pay much closer attention to detail and scrutinize policy more closely.

The more challenges President Trump will face, the more he will struggle to promote his agenda. A struggling President Trump will be better for President Obama's legacy, and a struggling economy or worse - a recession - is a great way to slow down the Trump Administration and pull attention away from the original platform.

In short, I believe the Obama Administration's Fed will raise interest rates in an effort to slow down or reverse the overall economy in an effort to create roadblocks for the incoming Trump Administration, therefore more strongly preserving the legacy of the Obama Administration.

A Changing Of The Guard

In the interest of full transparency, I have a strong internal bias when it comes to economic policy. I am a very fiscally conservative person, and with that set of values, I have been asking myself for years the following question:

What kind of an Administration holds near-zero percent interest rates this long?

I believe an Administration willing to promote the perception of growth at all costs would. And I believe that is what we have largely seen here - we have an artificial environment created by 8 years of ZIRP that has allowed policies that Americans normally wouldn't support pass through because they have been perceived as being largely successful.

Donald Trump's decisive victory caught most pundits by complete shock, but the county-by-county electoral map tells a very different story. It shows tiny, blue islands surrounded by an ocean of red, and shows how disconnected the pundits in the media and Washington DC are from Middle America, largely regarded as "flyover country" to the elites. The public is calling for a seismic shift in policy, for better or for worse.

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What remains to be seen is how a Trump Administration will treat the economy. As a shrewd businessman, I believe President Trump will have a much more hawkish view than President Obama, being more likely to opt to take our medicine now than waiting for the disease to spread further (and create an even larger potential bubble). An aggressive environment of rate hikes will likely force a significant market correction, as I believe the market is largely running on fumes from ZIRP-financed corporate buybacks and desperate investors chasing yields in Dividend Aristocrats, Champions and Contenders. The question is, how concerned will a President Trump be with his legacy? Will he be willing to preside over a major market downturn for the betterment of the country in the long run? That remains to be seen.

Disclosure: I am/we are long SPY.

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.

Additional disclosure: All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.