Former Money Manager Kessler: Fed Rate Rise Will Cream Stock Market

Friday, 22 Feb 2013 11:38 AM

By Dan Weil

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The Federal Reserve may begin to reverse its massive easing soon, and when interest rates finally rise, the stock market will get hammered, says retired hedge fund manager Andy Kessler.

He doesn’t think the easing program has accomplished much. “The experiment to kick-start the economy with near-zero interest rates has failed,” Kessler writes in The Wall Street Journal.

“Maybe our central bankers have figured out that low rates are what is holding back lending and hiring and growth.”

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

When the Fed implemented a series of rate hikes in 1994, stocks plunged 9 percent in three months.

At this point, “the prospect of higher interest rates is like the Sword of Damocles hanging over the stock market,” Kessler writes. “Be advised that in selloffs, stocks fall into the valley of despair.”

Kessler doesn't believe the stock market is going to crash, “though dropping 1,000 points in a few weeks would not be surprising.”

When rates increase this time around, the bond market will drop initially, he explains. After the 1994 tightenings, long-bond prices plunged almost 9 percent.

But, “foreign investors seeking a safe haven from their messes may continue to pile in [to bonds] and limit the damage,” Kessler writes.

James Rickards, senior managing director of Tangent Capital Partners, posits that Fed easing has created a bubble in the stock market – and housing too.

“Equity prices are higher, housing prices are higher, but they’re higher for the wrong reason,” he tells Newsmax TV. “They’re higher because of money printing. In other words, these are new asset bubbles forming.”

Major stock indices touched five-year highs Tuesday, and home prices, as measured by the S&P/Case-Shiller 20-city index, rose by the most in six years during the 12 months ended in November.

The prevailing sentiment at the Fed, as conveyed by the minutes of its January meeting and by members’ recent remarks, is that the central bank’s efforts to pump tens of billions of dollars into the economy every month should not end anytime soon.

A number of officials said that their evaluation of costs and benefits of the policy “might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred,” according to the minutes.

“Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor-market outlook had occurred,” the minutes show.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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