Friday, June 26, 2015

US RATE HIKE.....WHY ITS URGENT

Its being said that the world is preparing for the interest hike from US and emerging markets are prepared for the same. Equity analysts, Fund Managers and Stock brokers all have already started preparing their notes that interest rate hike would have short term mild affects and the world and more of India is prepared for the same. Well as an economist I find that rate hike is being created to hide the current weak potentiality of the US government and its weak policies to revive the economy. The US elections is the key factor behind the interest rates to hike and also to hide the long term weak strategy of growth adopted after 2008 collapse.  Its trying to save the face of US from another recession. Rate hike is being done so that more collapse happens in the economy and worldwide equity market goes for a tailspin and all asset bubbles get cleared out . After this they will again go for rate cut so as to spook economic growth and DowJones.New strategy for corporates to play  and make the shareholders more rich.

Economic data supports the same and also the socio political structure of US also supports the same. Rate hike under the current Obama government would create catastrophic affect on the economy this will lead to Jeb Bush to win as he will come as superman to save the economy form the downfall. This downfall would be for 1 year which will be equivalent to 5 years terms of economic slowdown. US economy is growing but is the growth sustainable that’s the trillion dollar question which is well knows NO. Now coming to some number game about how much strength does the stock brokers, Fund Managers and Equity Analyst have in their comfortable words that world economy and India and markets are prepared for the US interest rate hike we find that US  companies’ share prices have shot up, with the S&P 500 index rising by 95%.

According to Robert Shiller, an economist at Yale University suggests equities are valued at around 20 times earnings, more than 30% above their long-run average. The Forward PE is the most dangerous game which has been played by the US markets. The zero interest rarest have only widened the income inequality and created castle of Dow Jones growth made up of sand. NYSE data showing margin debt lending to invest in stocks rising by 14% since January from $445 billion to $507 billion. According to another research made by Dealogic, a consultancy it has been found that Companies are issuing debt at record rates, with $609 billion raised so far in 2015, up by $40 billion on a year ago according to Dealogic, a consultancy.

The story does not end here that as earning of the US companies have slowed down resulting a significant increase in the number of American firms with low credit ratings (BBB- or below) has risen, according to data from Moody’s, a credit-rating agency. Now the real truth behind Dow Jones creating historic highs is due to passing benefits of zero interest rates to the shareholders. According to Moody companies are reluctant to commit funds to capital expenditures have opted to pay for these buybacks and dividends by issuing new debt amid record-low interest rates. U.S. companies allocated 12 percent of their earnings before interest, tax, depreciation and amortization to dividends in the third quarter of 2014, up from 9.4 percent in 2013. In 2007 it was 4.5% only.

So if the US interest rates increases driven by US election and strategy to make Jeb Bush winner then the first correction over the next 1 year time frame would come from US stocks which will drag down the global growth momentum as Stock Markets are linked with economy. Now those who are saying that India is ready for the interest rate hikes do you really think we are ready. Do you think that when the earnings and steep decline of the credit quality of US companies would happen then in that case pull back of funds would be massive which is hardly taken into account? We are thinking about money flowing from emerging economies where as its clear that emerging economies story of collapse would be written later whereas US collapse would be steep. The US elections is the key factor behind the interest rates to hike and also to hide the long term weak strategy of growth adopted after 2008 collapse. Rates will hiked, to save the economy form another collapse of asset bubbles going for burst.  Remember US don’t have any more ammunition to fight for another recession coming out from cheap money hence lets add the flavor of politics and let Jeb Bush become superman and let interest rates hikes kill the asset bubbles which saves US from its weak policies and falsified growth stories and let again create a bubble of growth for another 5 years terms. The theory is wrong that growth has come so US interest rates needs to increase. It’s the best weapon to save from another recession.


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