LQDB - And Then Sherlock Showed Up

Summary

• People are looking here and there for clues but they aren’t grasping what the Fed is actually doing to either the state of the nation or to both the bond and equity markets.
• The Fed’s relentless pursuit to lower our rate of inflation is having a quite severe effect upon our economic conditions as not only do interest rates rise, but the cost of borrowing money skyrockets.
• Battling Inflation is fine but not if other economic factors aren’t considered.

Sherlock Holmes and Dr. Watson decide to go on a camping trip. After dinner and a bottle of wine, they lay down for the night, and go to sleep.

Some hours later, Holmes awoke and nudged his faithful friend.

"Watson, look up at the sky and tell me what you see."

Watson replied, "I see millions of stars."

"What does that tell you?"

Watson pondered for a minute.

"Astronomically, it tells me that there are millions of galaxies and potentially billions of planets."

"Astrologically, I observe that Saturn is in Leo."

"Horologically, I deduce that the time is approximately a quarter past three."

"Theologically, I can see that God is all powerful and that we are small and insignificant."

"Meteorologically, I suspect that we will have a beautiful day tomorrow."

"What does it tell you, Holmes?"

Holmes was silent for a minute, then spoke: "Watson, you idiot. Someone has stolen our tent!"

This quote summarizes our current markets conditions and also our overall economy. People are looking here and there for clues but they aren’t grasping what the Fed is actually doing to either the state of the nation or to both the bond and equity markets.

The Fed’s relentless pursuit to lower our rate of inflation is having a quite severe effect upon our economic conditions as not only do interest rates rise, but the cost of borrowing money skyrockets.

The Prime Rate, according to the Wall Street Journal, now stands at 7.50% which is slightly higher than our Inflation rate and then when you add on the credit risk component, both people and corporations are now paying double-digit yields to borrow money.

Bankrate now quotes the average rate to borrow money on your credit card at 20.82%. This is causing havoc for many people as the default rate rises because of it. Yet, nowhere, in any comments from the Fed, do we find this discussed or even referred to. It is like it doesn’t exist.

Battling Inflation is fine but not if other economic factors aren’t considered. As I have said before, the Fed should get to a 4.50%-5.00% rate and just stop so that the rest of the economy can catch up with the rise in rates to borrow money for each and every thing.

This cost of borrowing money will also have a major impact on corporations, as they need to refinance or as they come to the bond markets to raise capital.

The average yield on Bloomberg’s IG Corporate Bond Index now stands at 5.16% which is much higher than it was one year ago. Don’t fool yourself, this will have a major impact on both corporate revenues and profits for many companies. It is one reason, one significant reason, why profits, for many corporations, will not be what they were last year.

The Fed’s policies have put them under siege.

Even our own country is suffering the consequences. The U.S. government spent a record US$213 billion on interest payments on its debt in the fourth quarter, up $63 billion from a year earlier.

Indeed, a jump of almost $30 billion on the previous quarter represents the biggest quarterly jump on record. That comes as the Fed lifted interest rates by a whopping 4.25percentage points from March through December.

All in all I refer to the mastery of Mr. Sherlock Holmes. The Fed is stealing our tent!

Original Source: Author

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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