Last Wednesday, breaking news crossed the CNBC wire: <\/p>\n<\/p>\n
NASA discovered seven earth-shaped planets orbiting a red-dwarf star in our galaxy a mere forty light-years away. According to this article on NASA's site: <\/p>\n
Scientists are pondering the possibilities after this week's announcement: the discovery of seven worlds orbiting a small, cool star some 40 light-years away, all of them in the ballpark of our home planet in terms of their heft (mass) and size (diameter). Three of the planets reside in the \"habitable zone\" around their star, TRAPPIST-1, where calculations suggest that conditions might be right for liquid water to exist on their surfaces-though follow-up observations are needed to be sure. <\/p>\n
We were surprised that not much attention has been devoted to how this may impact the Fed's decision on whether or not to hike rates in the upcoming decade. <\/p>\n
We believe that a nodal analysis will allow us to understand the Fed's optimal strategy. Let us review the alternatives. <\/p>\n<\/p>\n
Node A: there is sophisticated life on one or more of these planets, they are hostile, and they know about us. Now what would you rather call home: a puny old Dwarf star, or a beautiful yellow middle-aged reclusive star like ours? <\/p>\n<\/p>\n
This can only mean that they're on their way folks!! It's just a matter of time. If an interstellar war is at hand, the last thing this planet needs is to offer people an incentive to save for their future: we may not have one! <\/p>\n<\/p>\n
Source: Forbes <\/p>\n
Node B: there is sophisticated life, they are hostile, but they don't know about us yet. We want their first impression of our planet to be one where interest rates do not thrive. After all, interest rates are themselves a statement about future growth prospects and the economy. <\/p>\n<\/p>\n
Source: Dr. Aswath Damodaran <\/p>\n
Do we really want to go around advertising our beautiful high rates to any hostile group of M-Dwarf invaders? We argue no, and we are positive the Fed will agree. <\/p>\n
Node C: sophisticated life that is peaceful, they know about us, but they are not on their way. We need to consider that we have a possible set of new friends and allies! Why aren't they rushing out to meet us? Duh! Their economy must be suffering. What if they too are experiencing 4.8% unemployment like we are? <\/p>\n<\/p>\n
Do we want to blast our new-found friends with a nasty dose of poisonous interest rates? We don't want any gamma exposure from our economy radiating into the new Macro 2 economy: lower for longer, at least until we know more about why they have not come to visit us. <\/p>\n
Node D: what if they are coming right now to share their knowledge with us about how to cure cancer or live peacefully with artificially intelligent robots or introduce a new and exciting mud wrestling segment to all meetings between the president and the press? <\/p>\n
Furthermore, what if their spaceship cannot withstand merely low (as opposed to ultra-low) interest rate atmospheres? Our very own economy seems not able to bare them for the last decade: imagine the disastrous effects of a noble race, steadily inching closer to us on a fragile spacecraft that can only safely operate in ultra-low-rate environments. <\/p>\n
The Fed needs to ensure that options-adjusted spreads on CCC-and-below junk bonds stay absurdly tight, like this: <\/p>\n<\/p>\n
Node E: only simple life forms exist. In this case, their economy is likely very undeveloped. The last thing that these poor cousins of our prokaryotic and eukaryotic brethren need are higher rates. After all, just what is the labor force participation rate for single-celled organisms these days stateside (No Fed data available for this series: what are they hiding)? <\/p>\n<\/p>\n
Now, that would mean that their jobless claims have been under 300,000 for the last 103 weeks: just like here in the US! <\/p>\n<\/p>\n
Source: Bespoke Investment Group <\/p>\n
If we cannot take higher rates here in our own country, then how can we expect this simpler economy to flourish into our future friends (or enemies: see nodes A or B)? <\/p>\n
What if they have just recently elected a new leader who has \"big league\" plans for cutting taxes and introducing massive fiscal policy? Furthermore, what if the general mood among the other single-cell organisms is that this leader will absolutely succeed in his goals beyond any question or shadow of doubt (see lift-off on Feb 9 announcement): <\/p>\n<\/p>\n
SPY data by YCharts <\/p>\n
What would you want under said scenario: a policy rate that is still below the very bottom rate of the last recession, or one that could potentially counteract any inflation that may be close at hand? <\/p>\n<\/p>\n
Now you might be concerned at Node E that a further delay in rates may cause inflationary pressure on their budding economy. No no: it's okay to let the economy overheat. This too can have some really great effects. No rate hike after all! <\/p>\n<\/p>\n
Naturally the Fed doesn't want to surprise these markets (or our own for that matter). After all, if surprising markets could do this to our markets in late August 2015: <\/p>\n<\/p>\n
what could it do to theirs? <\/p>\n
On the other hand, the Fed should at least talk about higher rates. Certainly lots and lots of contradictory chatter would be nice. <\/p>\n
Now, for awhile at least these simple organisms might believe the Fed that higher rates are around the corner. But sooner or later they will figure out the game theoretic structure of the Fed's problem, and realize that they never actually intend to raise rates: <\/p>\n<\/p>\n
Source: CME FedWatch Tool <\/p>\n
Now we do have rising inflation here in the US: will our Fed be as aggressive in keeping core PCE rates close to 2% when they are above 2% as when they are below? <\/p>\n<\/p>\n
We wonder whether the Fed will adopt an ultra-hawkish rate stance if core PCE reaches, say, 2.3%. After all, 2% is the golden number. <\/p>\n
If 1.7% PCE corresponds to 65bp-rates, then shouldn't 2.3% require something like 1,650bps? The Fed incessantly refers us back to the deflation of the 1930s; isn't price stability a two-theatre war? <\/p>\n
How vigilant do you suspect they will be from protecting us from foes on the other side of the magic 2% line? <\/p>\n<\/p>\n
Node F: No life. We're too late (or too early)! Our former high rates already devastated the economy of our seven earth-sized friends. We may already have the reputation among other M-dwarf stars and their planets as a galactic rate braggart and bully. <\/p>\n
In September 2015 the Fed did not raise rates because China's economy seemed to be flagging, with real GDP falling perilously below 7% per annum. Well certainly somewhere out there is an economy that may or may not be in trouble. <\/p>\n
Analyst Conclusion: <\/p>\n
The Milky Way galaxy is home to approximately 100 billion stars. According to NASA: <\/p>\n
Red dwarf stars -- also called \"M-dwarfs\" -- outnumber others, including yellow stars like our sun, by a factor of three to one, comprising nearly 75 percent of the stars in our galaxy. They also last far longer. And their planets are proportionally larger compared to the small stars they orbit. That means small, rocky worlds orbiting the nearest red dwarfs will be primary targets for new, powerful telescopes coming online in the years ahead, both in space and on the ground. <\/p>\n
In Game Theory, a \"dominant strategy\" is one where each player's choice is optimal given the choices of all other players. <\/p>\n<\/p>\n
The real lesson here is that in nodes A-F, the Fed knows not to hike. This is the very definition of a dominant strategy. <\/p>\n
Given that our galaxy is home to 100 billion stars, it is quite likely that there are hosts of planets that could more or less be categorized in nodes A through F continuously! <\/p>\n
This being the case, the message is that the Fed should never raise interest rates again. Interest rates can become the new \"barbarous relic\", something that loons crow about when they've downed too much whisky and are harkening back to the old days. <\/p>\n
Gold is a relic of Julius Caesar and interest is an invention of Satan. <\/p>\n
-December, 1921: Thomas Edison <\/p>\n
See folks: you heard it from Mr. Edison himself! If interest is an invention of Satan, then the Fed is just doing the Lord's work by keeping short rates at comatose levels into perpetuity. <\/p>\n
\"Thy will be done, on Earth is it is on M-Dwarf TRAPPIST-1.\" <\/p>\n
Finally we have sound leadership in the world's central banks that share the Edisonian perspective <\/p>\n
Thank you for reading. We'd love to hear from you in the comments section below. Please consider following us. <\/p>\n
Disclosure: I am\/we are short SPY. <\/p>\n
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. <\/p>\n
Additional disclosure: We actively trade the futures markets, potentially taking multiple positions on any given day, both long and short. It is our belief that the S&P 500 is meaningfully overvalued. As such, we typically carry a net short position using ES options and futures. <\/p>\n
<\/p>\n
View original post here:<\/p>\n
NASA Discovers Seven Earth-Sized Planets: Fed Ought To Stay On Hold! - Seeking Alpha<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Last Wednesday, breaking news crossed the CNBC wire: NASA discovered seven earth-shaped planets orbiting a red-dwarf star in our galaxy a mere forty light-years away. According to this article on NASA's site: Scientists are pondering the possibilities after this week's announcement: the discovery of seven worlds orbiting a small, cool star some 40 light-years away, all of them in the ballpark of our home planet in terms of their heft (mass) and size (diameter) Continue reading