Rate Hikes as Stimulus

 | Jun 19, 2014 | 5:00 PM EDT  | Comments
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Stock quotes in this article:

corn

,

soyb

,

cane

,

weat

On Wednesday, I wrote about a possible developing El Nino storm and the impact it could have on grain and soft-commodity prices. To follow up, I'll mention that several good exchange-traded funds run by an outfit called Teucrium Trading allow investors to take positions in a grain and soft-commodity markets. Since they are ETFs, they trade like stocks, and that is probably a more familiar way to go for most people.

I have been a futures trader for the entirety of my career, so it's routine for me to talk about futures markets. However, many people might be uncomfortable with futures or lack the experience, so if you prefer to do it via a vehicle that trades like a stock, check out the Teucrium funds. The company currently offers Teucrium Corn (CORN), Teucrium Soybean (SOYB), Teucrium Sugar (CANE) and Teucrium Wheat (WEAT), among others.

Now for today's subject. Long before the Federal Reserve started tapering asset purchases, when there was already a great amount of worry and concern about the impact that tapering would have on stocks, I opined on Real Money that tapering would be bullish for stocks and for the economy in general. Very few people had that view back then, and even fewer (zero, I submit) actually said it would be stimulus. I even put a number on it. I said that every $10 billion reduction in asset purchases amounted to a $3.5 billion fiscal injection into the economy annually.

This was simple to calculate. Since we knew that the Fed handed over about $100 billion in interest income to the Treasury, and since it had about $3.5 trillion of securities, that meant the average coupon was about 2.8%. Over 12 months, that meant $120 billion less in purchases, which meant that $3.5 billion ($120 billion times 2.8%) of interest income remained in the economy. Multiply that by eight, because the Fed was winding down an $80-billion-per-month program, and that's almost a $30 billion stimulus each year.

If you think that $30 billion is not a lot, consider that it completely offsets the loss of unemployment insurance due to the cuts to that program that Congress made recently. Sadly, though, those interest payments accrue mostly to people who already have means and not to those who are out of work and out of luck.

So not only did I say that tapering would be bullish for the economy and for stocks, I put an actual amount on it. Many other people just cried about how the Fed would be removing stimulus.

Now I will go one step further. The new worry is an actual rate hike or the reversal of monetary policy accommodation that has been in place for the past six years. This will eventually happen for no other reason than the fact that the Federal Open Market Committee members, including Fed Chair Janet Yellen, believe that they are keeping rates "artificially low" and that that will bring on inflation. (There is yet to be any inflation from this policy, and I will even say that there cannot be inflation from this policy.)

The Fed will eventually raise rates to "remove stimulus" in the same misguided way that Standard & Poor's cut the U.S.' credit rating. The latter was a ridiculous display of ignorance with regard to sovereign debt. When the Fed raises rates, guess what will happen. The economy will take off and so will stocks (albeit after a violent knee-jerk selloff, which you absolutely must buy).

A rate hike will constitute stimulus in the same way that rate cuts were never stimulative at all. Rate hikes really are the printing of money (government must pay more interest -- more dollars are created), whereas rate cuts were really the "un-printing" of money.

The stock market's slow, easy grind higher will end one day, but that doesn't mean the direction will end. No. The slow grind will turn into a parabolic rise once the Fed starts hiking rates, because that will open the spigots of new money flowing into the economy.

We could have had this policy last year or the year before or right at the very onset of the crisis. Maybe not in the form of higher rates, but in the form of massive spending increases and tax cuts. Nobody would have even felt the crisis. In fact, there wouldn't have been any crisis or foreclosures or job losses. Nothing. Aggregate demand would have stayed strong, and the economy would have rolled on as the Fed and FDIC worked to close down banks that become insolvent because of really terrible and inept investing.

Instead, we saved the banks and gave them even more money to lose, while allowing mass job loss, unemployment, foreclosure and an economy where the vast majority of people are still struggling to make ends meet.

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