April 27, 2021
Interest Rates ARE going up…
The Fed WILL be forced to RAISE…
As I have written for decades, the markets and the economy determine what interest rates are going to do…NOT the Fed…For sure, those guys on the Federal Reserve Board do officially set ranges for what they think short term rates should be, but FAR more often than not, when they do make their changes, all they usually are doing is confirming what has ALREADY HAPPENED in the futures markets. Believe me, when you hear the Fed announce, “We have ‘adjusted’ our forecast and now feel it is necessary to raise our rates”, meaning they have misread some aspect of the economy, the futures markets generally WILL have already reflected that raise…which is why they are called “Futures.” And do understand that just because they are Fed Governors does NOT mean they can predict what the economy will do. They are just guessing like everybody else…None of them, for example, anticipated the 2008 Great Recession…And they will tell you that…that they DON’T “know.”
Here is where short term interest rates are today…as well as some historical perspective, which I believe suggests that today’s rates are TOTALLY out of whack with anything even close to being normal…and therefore have nowhere to go from here but UP…and my strong contention is that they will start doing it NOW.
The Fed has said they are “being patient” about inflation (one MAJOR driver of interest rates)…and when I look at the charts following…I can only think that “patient” is about to become, “We need to make a move NOW!”
Relative to inflation potential, look at what most Commodity FUTURES have been doing for the past year, and still are…
One thing to remember is these price increases are at what should be considered as the wholesale level…which eventually get passed on to the consumer. And I would maintain that their impact has not yet even close to being reflected in prices at the consumer/retail level…which IS where inflation is most closely watched, i.e., the Consumer Price Index…AND reacted to by the Fed.
That being said, if strong retail sales (BUYING/CONSUMPTION) can contribute to generally higher prices, this chart also argues for inflation…
And when they pile the Infrastructure spending on top of it? I truly think the economy will be HOTTER than any Fed Governor might be expecting...and it WON'T take until next year to see it. This is all happening in the here and NOW...and I think the financial markets are already starting their move towards higher rates.
And lastly, let’s not forget what this approximate barometer of future economic activity, the Stock Market, is “predicting,” and it most definitely is NOT a slowdown.
Aside from my contention that the markets almost always lead the Fed, that the massive Eurodollar Futures market will start pushing rates higher long before the Fed makes any sort of official move, I cannot help but think that at some point, some of the people at the Fed table will start to think, “Commodities flying. Retail Sales zooming. Stocks going nonstop. SPAC and Crypto and Gamestop type manias everywhere…and now the spending bill? MAYBE we need to at least START tapping the brakes?”
I will say it again. The benchmark for short term interest rates, LIBOR, was at 1.9 % before the Pandemic EMERGENCY took rates down to .20%...and now that the pandemic, though not over, IS waning as an economic deterrent, the emergency IS falling in the rear view mirror, and I FIRMLY BELIEVE THAT RATES HAVE NO WHERE TO GO FROM HERE BUT UP…AND I THINK THE TRADE IS RIGHT HERE, RIGHT NOW…and yes, BEFORE the Fed finally even hints at the idea, or finally makes it official.
One more time, Eurodollar futures have nothing to do with Europe, are NOT the Eurocurrency, and are NOT the US Dollar…They are the futures contract that tracks LIBOR…and really should be called “LIBOR Futures.”
Here is my recommendation...
The bottom line is Eurodollar futures go DOWN when interest rates are going up…And that is precisely what I think we are going to see.
I urge you to get some now…here at 5 ticks…and then do more as/if we show ANY movement to the downside…
All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars