MAY 25, 2018
It’s less a question of if there will be a crisis sparked by the Fed’s rate raise regime than what that crisis will be. History has shown that it’s very difficult to predict the details, but not to the event in general.
Corporate bad apples who were able to hang around by borrowing zero-interest loans to pay their previous loans will start to fall. The fragility of the more debt-laden corporate balance sheets, loaded to the hilt with ZIRP debt, will be made ever more evident with each successive rate hike.
Whenever the Federal Reserve embarks on a round of rate increases, it’s a lot like shaking an overripe fruit tree.
That’s the analogy offered by Deutsche Bank macro strategist Alan Ruskin in a note late Wednesday, in which he urged clients not to “overcomplicate” the macro picture.
“A starting point should be that every Fed tightening cycle creates a meaningful crisis somewhere, often external but usually with some domestic (U.S.) fallout,” he wrote.
“In current circumstances, this good U.S. asset news is actually bad news for select (overripe) assets abroad because it emboldens and frees the hand of the Fed to shake the tree more,” he said. “In this regard, U.S. dollar strength is finally tightening financial conditions in the U.S. a little, and is a necessary (but as yet not nearly sufficient) condition to slow the Fed down.”
When shaking a tree, it’s usually not obvious what will fall out, Ruskin said, “but that there is ‘fall out’ should be no surprise.”