How to think of the markets going forward

December 14, 2016 2:56AM CST

The real US rate has risen substantially since the US elections and anticipation of a FED hike. To me, and from what I have researched through history, the FED seems to vie on the reactionary side of things. This would mean a FED hike today is almost guaranteed since the real rate would still be higher than the FED’s comfort level of a rate hike. An example is if the real rate is at 2.25% and the FED Target rate is at .50%,  the FED can raise one full point 1% and still be under the real rate of 2.25. As the real rate continues to rise eventually the FED could try to continue to raise under the guise of fighting inflation. This is a big nonsensical paradigm shift in market participant view. How could it be only months or weeks ago we had no inflation, and now we are on the receiving end only after raising rates? This is because of a misconception or participant fallibility about how inflation works. To create inflation in short periods of economic downturn, it is highly possible that lowering the FED target rate should help cause some support economically. Thus causing price inflation. The problem persists when the economic downturn has been persistent under a longer duration. Years of down turn.  Meaning if lowering rates to zero bound  for a extended period of time eventually creates deflation. The FED knows this. The FED policies also eventually created a negative feedback loop. Lowering of rates causes participants to believe that the economy is not good and this forces the FED to lower again because the economy is getting worse or stagnant at best. Negative information feeds off of negative information. If history is to repeat as is usually the case. Then the FED will raise rates and continue to raise over the next very long cycle. This in turn should cause momentous inflation. The FED from this point on, according to my inference, will be behind causing inflation and in a few years will be trying to slow inflation. This longer tern example of fighting inflation will play out as another negative feedback loop. They will also cause another negative feedback loop by raising rates to slow down inflation, thus causing more inflation. This would be in the future though. This is great news for commodities long term. This last ten year down cycle is seemingly bottomed.

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