Financial Markets and U.S. Federal Reserve Rate Hikes

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In Business Valuation Posts

Ian R. Campbell is one of Canada’s most respected business valuators and the mind behind the family business transition planning and valuation website and the business succession book website 50 Hurdles.

On Financial Markets and U.S. Federal Reserve Rate Hike(s)

The following three articles speak directly – or indirectly in the case of the third – to future financial markets efficacy. Each is worth taking the time to read and think about if you are a financial markets participant, a business owner, or an advisor to business owners.

These three articles, published in the past three days, discuss issues that are not time-sensitive.

Financial markets uncertainty in face of possible U.S. Federal Reserve rate hike – first article, estimated reading time 3 minutes

A December 6, 2015 Reuters article titled “Uneasy calm in markets about upcoming U.S. rate increase, BIS says” quotes a Bank for International Settlements source as saying: “There is a clear tension between the markets’ behavior and underlying economic conditions. At some point, it will have to be resolved. Markets can remain calm for much longer than we think. Until they no longer can”.

In our new economic and business normal:

  1. Economic growth in most developed and developing countries is subdued.
  2. Importantly, whether its government and citizens choose to believe it or not, the United States is as much – or arguably more – a part of our globalizing world as any other developed or developing country.
  3. When all the layers are removed the United States economic recovery likely is much more fragile than the U.S. government, the Federal Reserve and mainstream media would like us to believe.
  4. Financial market traders and investors (an important distinction seldom made) are chasing financial market yield and capital gain returns in a virtual zero interest rate environment.

At some point financial markets find equilibrium with macro-economic, country-specific economic, macro-business, and company-specific “value reality”. Today’s financial markets seem “out of sync” with that reality, and if that is in fact the case Federal Reserve interest rate increase(s) may prove to be a “volatility tipping point” or more.

Further support for U.S. Federal Reserve interest rate hike uncertainty – second article, estimated reading time 2 minutes

By way of further background, you might want to read a December 4, 2015 New York Times article by the market-savvy and thoughtful Yale professor Robert Shiller titled “For Any Fed Action on Interest Rates, an Unforeseeable Reaction”. In that article Dr. Shiller discusses what he sees as the unpredictability of what impact a Federal Reserve interest rate hike of “only” (my word) 1/4 of 1% may have on the U.S. equity markets if and when that rate hike happens.

Bank off-balance sheet risk – third article, estimated reading time 4 minutes

While arguably only indirectly related to financial markets behavior, you might also want to read a third article dated December 6, 2015 titled “Global Crisis Beyond Bank Balance Sheets”.

This comparatively “easy to read” article on off-balance sheet bank risk is educational, and may be entirely relevant to and impactful on, future financial market performance given where the real underlying financial positions of many world banks likely sit today in the face of the derivatives trades in particular.

Accordingly, this third article should be of interest to anyone currently participating in today’s financial markets, and by all business owners and their advisors where any significant drop in world equity markets is likely to impact pretty much anyone on the planet – and hence all businesses to varying degrees.

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