25 Basis Points – to Nothing

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Interest Rates RisingTo all my readers, this is my first real re-assessment of global matters this year. So a belated Happy New year.

Just prior to Christmas, Janet Yellen – Fed Chairperson, announced a 25 basis point rise in interest rates. Since then, a sell-off has occurred in markets both near and far. The NYSE is down from its recent 18,000 high to circa 16,400 as I write. The LSE (FT Index) is down from close to 7,000 to a little under 6,000 – no problems here?

In China, the Shanghai A Shares market fell from 5,400 in mid-June 2015, to 3,087 as I write – close to a 45 percent fall, in 6 months, as those leveraged souls sold off their holdings to meet margin calls, and this in itself forced another round of selling, which created a need for more collateral, which forced others into selling to meet margin calls, which… (ad-nauseum) you get the idea…

Of course the Chinese Government had pulled out a sticking plaster to paper over the cracks by inserting automatic trading gates when markets fell which automatically closed to halt trading for the day. And a day or so ago, I learned that employees of large Chinese corporations expecting annual bonuses in their end of year pay packets, are being required to buy their company’s shares, and are unable to sell them for six months or even a year.

They also instigated legislation to limit large holders over a certain per-centage from selling within 6 months of purchase, stopping large holders from unduly influencing key corporations’ prices. All of which suggests not all is well in the netherworld on the far side of our planet.

This steadied the markets a little, as also some good news came out of Britain and America, a few days ago, who are still the most important world economic barometer.

Meanwhile, in his Farewell State of the Union speech, President Obama, sounded a bullish note, that all was right with the world. The U.S. was still the most powerful country in the world, far above the rest in terms of influence, economic and military power, and the sheeple can all sleep snugly, safe in the knowledge that he has got their back…

He touched on the shortcomings (as he saw them) of other politicians who made swipes at other religions (no names mentioned – but it was obvious who, he meant), and he covered the new compact between those signatories to the Trans Pacific Partnership (TPP), which is making its way through the corridors of power in those 18 nations who have or will sign up to it – it will protect corporate jobs in America he stated, but at whose cost? (We will have to come back to this particular topic in the future as it is too big to cover here – but you can make your own judgement here —->>> https://www.eff.org/issues/tpp)

So, this brings me to yesterday’s news, that the oil price has dropped further and went below $30 per barrel. This may on the surface appear good news for consumers, as diesel and petrol (Gasoline) will be cheaper, making the journey to work a little less costly, and provide those who can’t afford to live in the city or town of their employment for cost or availability reasons, a little comfort. But the downside to this is ominous. Most oil producers in western nations are producing oil at circa $40-60 barrel, depending on wages, and source rocks. Those under water will require perhaps as much as $80/barrel to break-even, meaning those who work in the North Sea fields are a little nervous about their employment prospects in that area. Those oil co’s with fracked wells rely on cheap finance to drill for new reserves, and need high prices to pay off their previous borrowings on existing fracked wells. The cheap finance that allowed these wells is drying up as interest rates rise, and oil prices tell their own story.

Oil is though, the engine of the world economy, as it is the most widely used commodity on the planet, and goes into more products and services than any other – plastics, chemicals, transport, energy production, glass production, paints, road maintenance – you get the picture.

So, as to the title of this piece, Ms Yellen raised her interest rate by 25 basis points – one quarter of one per-cent – and was/is hoping to raise them in small baby steps over the coming year, but it is increasingly likely that further falls in world stock markets will risk them falling off a cliff, if rates rise any further. This may happen anyway as it is now 8 years since the last market correction meaning we are long overdue. Some pundits are predicting a March-May sell-off as the next rate rise takes effect, but China’s problems of keeping their economy afloat may be the petrol, that is thrown onto this slow-burning peat-moor fire – For those not familiar, with these, in the UK., they are famous for slow burning moorland fires that last weeks, or longer as the heat gets transferred to the root system, and the ground is so dry, that nothing short of exploding bombs can put a stop to it or it burns itself out.

Jim Rickards, Bill Bonner, and many others have been predicting this slow motion car-crash for what seems like ages, and many will be feeling like these are just doom-mongers or like the boy who cried “Wolf” because nothing seems to happen. Harry Dent – like myself has suggested we face deflation more than inflation, but where Harry and I differ is that I expect, the period from 2018-2020 to be a critical one from an economic perspective. Given the birth rates after the second world war, which peaked in the end of the fifties (at least in America), those births fuelled the growth in jobs, and the economy from 1947, through to the recessions of the early 70s to 80s, as they at first grew up, bought their first flats, and then their starter homes and then during the early 80s started their own families.

In the late 90s and early noughties, the baby-boomers spending and their desire for retirement income, fuelled the web explosion and the housing boom, as lowering interest rates meant it was expedient to buy buy-to-let property in the late stages of the interest rate reduction lifecycle. Their offspring meanwhile were buying their first flats and starter homes, and if my eyes don’t deceive me, their tiny Tims and Jessica’s are now part of the new baby-boom that will fuel the next music revolution. Whether that is more Punk, than Cool Britannia will depend to a large extent on what happens with the economy, which tends to change every seven years as teenagers become twenty-somethings, and their younger peers seek to distance themselves from those that went before, until 30-40 years later, it all comes round again… Just like in the financial and economic world. The recessions of the 70s, the Oil price spike in 73, the rise of Islamic Fundamentalism, all re-runs, and the worst of it is, every two generations the world has the big one… Think 2008 was the big one? Think again. Prepare for it. Here —>>> FREE Crypto-currency or Here —>>> Silver Coins and Bars