Don't believe the hype, and get real: the Fed will not hike in December and here is why ...

The Federal Reserve is a talking shop surrounded by Chinese Walls and the minutes and statements only tell half the story, the half that they want the markets to hear. Here s the other half that they don't want you to hear:

Yellen testified last week, something that we were all looking forward to hearing after Trump's election and subsequent volatility. She said again, it would 'likely' be 'appropriate, to raise rates 'soon'. How coy can you get!? Should you be allowed to be this coy in such an important position of the world powers?

She did not say, it would be 'appropriate' to raise rates in December, yet markets reacted as if she did. So, everyone assumed that 'soon' means the very next meeting, why? What is so significant about December apart from it being Christmas for most of us all over the world? Mind you, she does seem to like to give the US economy a Christmas present as she did last year. 

However, this year is somewhat more significant given the dollar index being at new 14 year highs and Trump scheduled to take the helm on the 20th January in the New Year. Moreover, the bubbles that were gigantic last year are even more inflated this time around, so high that an interest rate hike would be even more problematic this time around, and ironically, the longer the Fed wait to start hiking rates, the worse the economic "come down" is going to be. 

The bond market is going to be the most problematic area for the Fed as they try to offset the spending hikes under Trumps presidency. However, here is the thing - Any significant rise in long-term rates will crush the US economy no matter how much Trump cuts taxes or by how much fiscal stimulus he adds. And by the way, Yellen is very against Trump's plans for fiscal stimulus, suggesting that it could overheat the economy. Yellen argued that the US economy is growing and everything is on track with a very low unemployment rate and in essence, this is what has been scaring the bond markets. 

Yellen will be forced to act next year to offset any runaway inflationary pressures should congress and Trump really put the foot down and accelerate government spending to such a degree that Yellen will need to keep up. She already said that she will let the economy run hot for a while, so that doesn't really allude to a rate hike as soon as December, especially as the economy is running at temperatures that, until the dollar surged, had been attracting Eskimo holiday-makers looking for some winter sun; The economy is far from running hot and there lies the elephant in the room and why the Fed will not hike in December.

The Fed knows too well, shame the market doesn't seem to acknowledge it, that If interest rates have to go up to battle against fiscal stimulus, people will have to spend more money on higher interest on the existing debts and the effect of fiscal stimulus will be like a drop in the ocean compared to how hard this will hurt the economy; Mortgage rates have already shot up to about 50bps since Trump won the elections with 30 year mortgage credit headed to, say, 5% or higher by the end of the year should the Fed keep on with their mantra and 30 year T-bills shoot up to 4% from 3% current. But, with a housing bubble and interest rates rising, you will not have a market there and demand will fall out - The economy just isn't strong enough to justify higher rates.

Banks and lenders are rallying on the back of long-term yields rising because the market thinks this is a great environment for them, being able to borrow cheap money and lend  out at higher rates, but what no one seems to have woken up to is the fact that Joe Bloggs on the street still can't afford to borrow at higher rates, and in fact, will not be able to the pay existing debts off if rates continue to rise. Anyone with any capital at all in their house will be concerned about the market falling and will be stuck with a home they cannot afford to sell or even make the mortgage payments on. The banks don't actually have a market and may not even get paid on the money they have lent out. So this is all a lot of badly calculated hype in my opinion. This may go on for some time until the market wakes up to this.

Nothing fundamentally has changed for the Fed to need to hike and there is not anything significant in terms of improvements in the US economy to warrant an interest rate hike as soon as December, nothing between now and the Fed's last decision to leave rates on hold anyway. Mind you, there is still time for some improved data before the 13/14th December FOMC meeting, but a one-off decent number from any of the key data releases is hardly going to be a game changer on aggregate.

The bond market is probably a lot more worrying to the Fed than the stock market due to the values in banks and foreign portfolios or even at the Fed and their own treasury holdings now under pressure; This is another ticking time bomb with all the foreign central banks that will want to sell their US government bonds and buy back their currencies at a far cheaper rate with DXY at 14 year highs, before their holdings become worthless and before the dollar falls out once again - So timing is going to be key and for sure fingers are hovering over the sell tab on their keyboards. 

Yellen knows all this far to well and this why the Fed will not hike until they really have to. Right now, there just is not a strong enough case and far too many uncertainties on a global macro scale. On the other hand, even if they do hike in Dec, all of the above will just come to fruition faster than if they don't and soon enough it will be back to QE, but this time on a far greater scale, because at the end of the day, where is Trump going to find all the funds to replace all the tax cuts he is talking about? 

Something has to give in order to fund Trump's 'all things to all people and fiscal stimulus spending approach' and interest rate hikes are going to be counterintuitive. This is what the Fed is worried about and not telling us. This is why they will only act when they are forced to do so when they reach their breaking point. At the end of the day, the markets are changing their tune at the drop of a traders tinfoil hat, and all those that say a Trump presidency is good for stocks were the very same traders that said a Trump presidency will send markets into a tail spin. 

Don't believe the hype, and get real.