0,25%, QE4 or Japan 2.0?


Raise rates: 25% probability

I don’t think the economy can support higher rates, but the FED may well do it to preserve credibility and load up some bullets to use in the upcoming crisis. A much more relevant question though is: Where will rates be by end of 2016? My guess is 0%.

Keep the game going (i.e never raise, Japan 2.0): 50% probability

This is still clearly the base case scenario. I think the FED will keep the rates at 0% for decades to come, following Japan’s path. WE simply can’t afford higher rates than that in the long run. Unless debt levels reverse course (nothing suggests they will), but otherwise rates have to stay low to keep debt servicing levels sustainable. If you want to raise rates you have to bring debt levels down, it’s that simple. But how will you bring debt levels down if rates keep coming down? You won’t.

QE4: 25% probability

This would be hitting the panic button, it is a wild card but one we can’t dismiss. I believe it will happen soon, not sure if 2015 or 2016. It’s when not if.

Bottom line:

If you trade the markets, then I won’t underestimate the importance of tomorrow’s decision. However if you’re a long term investor, then it’s irrelevant what the FED does now. The script is written on the wall and there’s little the FED can do now (and they know that). We will have massive deflation followed by unlimited QE, followed by hyperinflation. The only question is the exact timing and what the trigger will be (China debt explosion, failed Abenomics, Greece, refugees, black swan, etc). The wisest thing to do is to prepare yourself for any scenario, i.e. diversify. Buy physical precious metals (in case there’s financial Armageddon), buy stocks (if FED panics and launches QE4), buy government bonds (deflation hedge), buy RE (good store of value to ride the hyperinflation cycle) and keep liquidity in cash (when there’s blood on the street you want to have cash to pick up bargains).

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