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4 Experts’ Views on Fed Rate Hike: Sell & Cash Out
Aspire, Thought Leaders | 27 November 2015
By: Lim Si Jie
Articles (169) Profile

In the aftermath of the financial crisis, the Fed cut its target rate to near zero and conducted three rounds of money printing during which it expanded its balance sheet to $4.5 trillion. While renowned hedge fund manager and head of Duquesne Capital Stanley Druckenmiller is convinced that the first round of QE was necessary to stem the financial crisis, he thinks that the Fed has taken its cheap-money policies too far.

Druckenmiller:  Fed Has Created a Bubble

And now, Druckenmiller believes the Federal Reserve has created a type of bubble that would not end well i.e. he believes that the central bank has created a bubble of excess short-term investing through its near zero interest rates and quantitative easing. According to him, such a boost is not permanent because the Fed is borrowing from the future.

“I think there’s been such a misallocation of resources that this has gone on so long and unnecessarily (and) the chickens will come home to roost”, said Druckenmiller. The problem is that the Fed’s policies have not only encouraged risky behaviour, but also have added to income inequality problems by shifting wealth to asset owners.

Carl Icahn: Warning, Market Decline Ahead

Druckenmiller is not alone in worrying about the direction of the market.

His view is also echoed by another activist investor, Carl Icahn. Like Druckenmiller, Icahn also predicts that the Fed’s policies are going to cause woes for the market. Carl Icahn warns of a Fed ‘minefield’ ahead in which he predicts a sharp market decline partly fuelled by speculation. He also highlighted the dangers of junk bonds and inflated corporate earnings.

Bill Daley: Market Will Be Surprised By Rate Hike

And if the direction is almost certain, the next worry would be the extent of the decline.

Former White House Chief of Staff Bill Daley believes that the Fed could create a bigger splash than market watchers think if the central bank’s policymaking committee raises interest rates in December.

According to Bill Daley, “if an initial 25-basis-point rate increase causes an over-the-top market reaction, it may create the impression the US economy is in worse shape than people think”.

Peter Schiff: The Fed’s Hands Are Tied

The same sentiment was voiced by Peter Schiff, CEO of Euro Pacific Capital.

Peter Schiff believes that the Fed has to talk about raising rates to pretend the whole recovery is real, but they cannot actually raise them. “Fed Chairwoman Yellen can’t admit that she can’t raise them because then she’s admitting the whole recovery is a sham and that the policy was a failure”, according to Peter Schiff.

Investors Takeaway: Sell and Cash Out

And if Druckenmiller is right in his analysis, it is now a good time to sell your holdings while valuations of stocks are bubbly high. Long term investors should keep cash holdings and wait for the potential market crash to buy low again.

Amid the volatility, the current market conditions are not suitable for long term investments. Investors such as Mel Karmazin have come out saying that they are no longer invested in the stock market, and are basically holding cash.

Risk-taking investors can short the markets by longing inverse ETFs, which move in the opposite direction of the index that is tracked by the inverse ETF.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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