Salient to Investors:

David Stockman writes:

Artificial monetary bubbles always crash. However, if the Fed listens to Wall Street and does not raise interest rates expect a short-lived run to the May 2015 highs before the ultimate day of reckoning.

ZIRP has not caused a credit fueled inflation of either the business or household sectors – instead it has fueled the third and greatest financial bubble of this century.

The Keynesian chorus is warning against a Fed rate hike. Paul Kasriel at The Econtrarian says that monetary policy has become restrictive, while Larry Summers says the markets have already done the job of tightening, and that financial conditions are helping the economy less than in previous years when interest rates were much higher.

The Goldman Sachs Financial Conditions Index components are so powerfully influenced by Fed policy that they are the closest thing to an auto loop. The inevitable collapse of the Fed’s bubble cycle causes the Index to go vertical in the direction of tightening. Like the boy who killed his parents and plead mercy as an orphan.

The Fed has been cutting or holding money market rates constant at mostly ultra low levels 80% of the time. Real interest rates are a fiction because households borrow at market rates. 90%+ of households are saturated with debt and cannot borrow more regardless of the interest rate. Household debt is 3% lower than it was in early 2008.

Corporate executives have put virtually any and all incremental borrowings into stock buybacks and other financial engineering, thereby inflating the secondary markets for existing financial assets, and not investing in real, productive assets. Since the mid-2008 peak, business sales have expanded at only a 1.1% annualized rate versus 4%-6% annual gains during the two prior cycles. Net business investment in Q2, 2015 was lower than it was in Q2, 2000.

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