Sunday, May 22, 2016
The Dog That Didn't Bark
In one of Sir Arthur Conan Doyle's well known stories, the story of "Silver Blaze", there is the famous line about the dog that didn't bark in the night. A racehorse had disappeared and a man had been killed. But the dog didn't bark during this incident. Holmes was sure this indicated that no stranger had been at the scene. The dog didn't bark because there was nothing to bark about.
The above thought came to me as I watched another in a long line of talking heads on one of the business channels talking about the great swoon yet to come in the stock markets of the world when the Federal Reserve raised interest rates. The recurring theme over the last few months has been that the "market has not priced in" the raising of interest rates by the U.S. Federal Reserve Bank.
Yet, everywhere I turn I am hearing about the imminent raising of interest rates or how the stock markets of the world will sell off in the consumation of this radical deed that will unsettle the world's financial arrangements.
But the dog is not barking. The S&P is perhaps 3% off of the all time highs and has been in a range for over one year. Yet is at the high end of this range. When will the dog bark?
The stock markets are forward looking. And after several sharp selloffs over the last few years, including the "Taper Tantrum" of a few years ago and the "flash crash" of more recent, I would think that the responsible money out there has found a safer way to invest, or at least, the intestinal fortitude to withstand a 1/4 point interest rate rise.
Much depends on the actual state of the world economy. Much of the world has been in slow recovery for several years. The recovery, according to most accounts, is agonizingly slow and has dissappointed all who long for the good old days of debt creation and GDP growth above 2%. However, as I stated recently, the consumer is coming back due to a period of savings growth, or at least debt reduction, and coming back also due to a strengthening of wages. The cost of energy seems to be stabilizing at a lower level and this will give some confidence. On a personal level, just watching what is going on around me, I see the traffic on the freeway going stronger than ever, the slow lanes filled with trucks carrying goods, and vacationers on the highway in numbers. I see people changing jobs with the confidence that they will find another and survive the change. And the ranks of the retirees are swelling and younger workers are taking the reins. This makes me optimistic about the dynamism of the world and in particular the U.S. economic situation.
How the markets react to any raise in short term interest rates is anyone's guess but I am guessing that the dog has not barked for a reason and that the markets will survive a strong economy, despite their own worst fantasies.
There may be a knee jerk reaction when and if the dreaded day of an interest rate increase arrives, but this amateur thinks that reaction will be the twitching of algos whose instructions are in need of a paradigm change driven rewrite.
Time will tell.
Control your risk,