The Phaserl


The Inevitable Return of Risk

from Outsider Club:

It looks like the insanely prolonged pregnant pause may finally come to an end.

With the job report that just came out, there is a good possibility that Yellen and the Fed will finally raise rates in a couple weeks.

Of course, if some small hikes occurred as the economy steadied itself over the last six years, there wouldn’t be so much irrational fear of a hike from 0.15% to 0.4%, but there is nothing anyone can do about that now.

All that can be done is to drop an icebreaker. The monetary equivalent of commenting on the weather after an awkward, long silence in a conversation.

Today, we’re not going to go into what the chances of a hike are. It is foolish to take consensus surveys, like Bloomberg’s recent poll of futures traders that stated there is a 70% chance of a December rate hike.

To us, it is either 100% or 0%. It is a binary decision made behind closed doors, and speculation portrayed as probability doesn’t provide any benefit for us.

Instead, we’re going to take a look at how a rising Fed fund rate heralds the return of risk.

Priced In

We should probably start by spelling out a couple things.

First, there is always risk. However, the six years of the near-zero interest rate policy have made traders complacent.

That changed for a hot second back in August, with the sharp downward spike across the markets. However, by October, the indices returned to levels that have been roughly maintained since February.

Second, buying and selling — along with volume — are expressions of risk tolerance at their most basic levels.

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