What happens after the March US rate hike?

Gold and silver, along with shares, are seeing downward pressure as the market becomes more convinced the Fed is going to hike rates next week.  ALL eyes are on tomorrow night’s US non farm payrolls employment figures.  Anything but a shocker (and lead indicators indicate this isn’t on the cards) would cement a March rate hike in.

That is a catch twenty two for many as on one hand it reinforces the ‘everything is awesome’ narrative but on the other hand it is raising the cost of debt when stupendous amounts of debt is what fuelled the perception of the very same ‘awesome’.  As we reported yesterday the OECD are predicting subdued growth (circa 3.5% against 20 years of 4+%) but with a very big caveat of ‘but that could all unravel because of inherent “financial vulnerabilities”’).

Jim Rickards recently wrote of his views for Money Morning.  Here’s what he had to say:

“….markets are now pricing in nearly a 75% chance of a March rate hike. My estimate is now 90%.

But there’s a big difference between the dynamics behind my view of a rate increase and the market’s view. In effect, markets are saying, ‘The Fed is hiking rates, therefore, the US economy must be strong.’

What I’m saying is: The Fed is tightening into weakness (because they don’t see it), so they will stall the economy and will flip to ease by May.

My view is the US economy is fundamentally weak [by the way… last night the Atlanta Fed dropped its Q1 GDP estimate yet again to just 1.2%... Jim’s right], the Fed is tightening into weakness. By later this year, the Fed will have to flip-flop to ease — via forward guidance — for the ninth time since 2013. Stocks will fall, while bonds and precious metals will rally.”

Another thing not openly discussed is the end of tenure for a number of members on the US Fed, all of whom will be replaced within Trump’s presidency.  Rickard’s explains:

“Something else to remember going forward is that Trump will have a minimum of three, and perhaps as many as four or five, chances to appoint members of the Fed board of governors, including a new chairman in the next 10 months. I expect these new governors will be dovish based on Trump’s publicly-expressed preference for a weaker US dollar.

The Senate will definitely confirm Trump’s choices. So get ready for an extreme makeover at the Fed, with the likelihood of easy money, more inflation, higher gold prices and a weaker US dollar right around the corner.

That combination of Fed ease (due to slowing) and Fed doves flying into the boardroom on Constitution Avenue in Washington will give gold prices in particular a major lift in the second half of the year.”

Rickards has a lot more cred than many of the so called analysts out there.  Agree with him or not, but he certainly makes sense if you look at it objectively.