- The Fed is determined to increase the Fed funds rate on 12/16. We are concerned that they could be making a policy mistake. The expectation of the first rate increase in nine years has pushed up the value of the U.S. dollar 19% over the past eighteen months. Depressed inflation expectations could pressure the Fed to pursue a shallower rate path into 2016.
- A rising dollar over the past eighteen months is the equivalent of de facto Fed tightening of financial conditions by an estimated 200 basis points worth of rate increases.
- Slowing new orders for capital goods, coupled with tepid growth in credit is signaling economic growth may be decelerating. Both the GDPNOW model and Economic Surprise Index are decelerating.
- The stock market expects earnings growth of 8% in 2016. This may prove too optimistic unless the U.S. dollar corrects.
- Maintain a defensive investment strategy favoring bonds over stocks and foreign equities vis a vis domestic.
- Commodities are in a secular bear market, but the dollar could correct and decline subsequent to the Fed raising rates, which would give commodities a cyclical boost. Watch Saudi oil production for signs the Kingdom wants higher prices.
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