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Just when will the US hike rates?

Viv Govender, portfolio manager at Rand Swiss, isn’t convinced it’ll be soon.

SIMON BROWN: Chatting now with Viv Govender from Rand Swiss. Viv appreciate the early morning. The [US Federal Reserve’s James Bullard (president and CEO of the Federal Reserve Bank of St Louis). The Fed folks are always talking and engaging. But yesterday he was giving a speech and he got quite hawkish on us. And essentially he said that tapering could potentially increase to $30 billion a month. That would then open the door to rates [being hiked] by the end of the first quarter of next year, which is very hawkish and a lot quicker than most have been expecting.

VIV GOVENDER: …Certainly. But I would take that with a pinch of salt. Yes, he’ll be a voting member next year in the [Fed], so he’ll have some impact on the decisions. But … remember Jerome Powell who is in charge of the US Fed right now was a Trump appointee. [US President Joe] Biden will probably face pressure if we see the Fed’s going to hike rates and that has obviously the likely negative connotations of slower growth, probably a drop in the stock market, et cetera. He’s probably going to be under pressure to try and change Powell for somebody else or put pressure on Powell, even though it’s supposed to be independent, to not raise rates. I strongly believe right now the central banks aren’t truly independent at the moment. They do take a lot of feedback from government and from society as a whole.

And I don’t think any central bank governor out there is going to try and be too aggressive with regards to tapering all rates, even in the face of slightly higher inflation.

SIMON BROWN: So is that, I mean, are you then thinking maybe second half of next year or you in the 2023 camp for US rate increases?

VIV GOVENDER: I do think we might have some increase next year, but I think it’s going to be very tentative and very slow. I don’t think we’re going to get back to normal rates anytime soon and any tantrums thrown by the market till some drop in terms of employment or in terms of economic growth etc will probably be taken as an immediate sign to reverse tack. I just think that the long-term high inflation, that pain that comes from inflation takes a long time to come about and in a political environment, long-term negatives are usually ignored longer than they should be.

SIMON BROWN: Yeah. And you said central banks aren’t particularly independent. They’ve almost got two masters. One is governments, presidents. The other is the market. I mean, if the market throws a tantrum, we have certainly seen the Fed quite quickly reverse rates before.

VIV GOVENDER: Oh yes. Most certainly. I mean the reason that we had such low rates for so long – I mean 2008 was 13 years ago … and yet we weren’t right back at normal interest rates at that time [pre-Covid-19]. Markets had done a huge run for a very long time. I do think that prominent [yes] inflation like I said, it’s a long-term crucial factor and any political institution has really big issues in trying to tackle any long-term political pain. Inflation will be a problem if it gets out of control, you know, five years down the line or 10 years on the line, as we start worrying about double-digit plus inflation. And I think that’s the problem: the guys that are in charge of these things, really have no incentive to care about the long term.

SIMON BROWN: Yep. And then, I mean, a quick, last question: markets then an all-time highs, my thought was if we start seeing rate increases in early next year it could get messy. But if [there are] no rate increases, this market can carry on running?

VIV GOVENDER: It could be, it could be. If we do see rate increases, remember a lot of the growth has come from really speculative results. I mean, look at something like Tesla for instance. A lot of its performance is based on future growth. If you have high inflation rates, as an economist will tell you, the discount rate goes up, but is it that all future growth is discounted to a bigger degree? And that means that you’re going to see share prices under pressure. So we could see the tech sector, especially stuff that’s more speculative, under a huge amount of pressure because of this.

SIMON BROWN: Absolutely. So we will wait and see, we’ll keep an eye on that. But Viv Govender says, he’s not convinced about those early rate increases. Viv Govender at Rand Swiss, appreciate the time.

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An increase in the nominal interest rate per se does not necessarily mean that the share indexed will correct or that lending will contract.

It is the real rate that matters. When the inflation-adjusted rate is negative, then credit is free of charge, even in an environment of rising interest rates. Governments cannot afford positive real rates when their Debt/GDP levels are at record highs. They will interfere in the market to keep rates low while they let inflation run. In this way, inflation will drive up the GDP to levels that make the Debt/GDP more manageable. Take note, this does not imply that the economy will grow in real terms.

It is a game of smoke and mirrors where the purchasing power of the currency goes up in smoke and where bondholders see their behinds in the mirror.

End of comments.

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