Whither the Market in an Era of Rate Hikes?
By Daily Bell Staff - January 06, 2016

The US Economy: Still on Track? … Raw materials and goods need to be transported regardless of how modern or sophisticated an economy is. Every week the Association of American Railways ("AAR") posts a free report on rail volumes transported across North America by major category. This provides some decent clues on the condition of the US economy, almost in real time … The latest reports show a cluster of negative readings (red circle) which is a novelty in this cycle (by count, not magnitude). – Erico Matias Tavares/Linked In

Dominant Social Theme: Things are getting better and better.

Free-Market Analysis: The Baltic Dry Index has received a lot of coverage because it tracks shipping activity worldwide – and it has never been lower. Nobody is shipping much of anything, it seems.

For this reason, Tavares's analysis of US rail transportation may have received more attention than it would have otherwise. It was posted at ZeroHedge, for instance, and reposted at other websites as well.

He concluded that rail transport volumes were showing considerable weakness (see excerpt above). However, the weakness was relatively recent so he declines to draw any firm conclusions.


The rail intermodal traffic category registers the long-haul movement of shipping containers and truck trailers by rail whenever combined with (a much shorter) truck movement at one or both ends … The weaknesses leading up to the 2008 financial crisis is pretty noticeable …

The analysis covers commodity groups within the context of rail traffic. According to the article, rail shipping shows a continued glut of oil and gas. Forest products, a good indicator of construction, have also fallen off significantly. However, motor vehicle shipping has been setting a new high.

His conclusion:

Our analysis of rail volumes provides a mixed picture of the US economy at this point: oil & gas and mining-related sectors are taking a real beating, some consumer sectors seem to be holding up and there are signs of weakness in the housing sector. 2016 should witness some type of a resolution here.

Tavares, as we can see, declines to make any firm predictions. However, over at the CFA Institute, Ron Rimkus writes that "2016 is a turning point for markets," and that while the world's outlook is grim, the US may benefit considerably from Federal Reserve rate hikes.

The Fed … signaled four .25% increases in interest rates are in store for 2016 … Although the Fed has proceeded ever so gingerly, the world is nevertheless at a turning point punctuated by the Fed's historic rate hike.

… With these modest expectations, weak economies around the globe, and a rising dollar, maybe – just maybe — all that global capital sloshing around will find a home here in the US stock market? Think about it . . .

Could Yellen's rate hikes set off the next leg of a US securities boom? We recently reviewed an article by David Stockman that was relentlessly negative about central bank currency debasement (already in play) and the effect it was going to have on indebted governments and large quasi-public entities generally.

According to Stockman – and his analysis is shared by numerous hard-money analysts and economists – as the era of easy money gives way to tighter monetary volumes and higher rates, the world's economy will show considerable stress.

In fact, there are those like Euro Pacific's Peter Schiff who believe that one way or another Yellen and company will be forced to continue easy-money policies because wringing out the leverage of US$175 trillion (Stockman's estimate, printed since 2008) is an impossibility.

We would tend to agree with the hard-money crowd – and have written such – but the suggestion that US markets should benefit from higher rates (not too high, of course) is an intriguing one.

It doesn't mean anything in the longer term, given the mess of US finances. But in the short term, a continued securities rally might benefit large corporations and also enhance the prospects of smaller enterprises and companies that have not yet gone public.

After Thoughts

Certainly a sustained rally, even with considerable volatility, would enhance the prospects of emerging sectors. One such sector – cannabis – has yet to fully debut on the world's stage, but if US markets continue favorable, that process might be considerably eased.

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