INSIDE THE FEDERAL RESERVE 117We’re seeing signs of deflation.
The setup is as follows. The Fed says they want to raise
rates but they also say they want inflation. Meanwhile, defla-
tion is stronger which means if the Fed raises rates, they will
get more deflation.
How can raising rates work? The answer is, it won’t work.
You can’t reconcile those three things.
There are only two ways out. One is that the Fed does raise
rates — of course, that’s what the market expects. If they do,
watch out below — the U.S. is going to have a major recession
because the deflationary powers are too strong. Raising rates
strengthens the dollar and makes the deflation worse.
I think the Fed will see that — perhaps by the first quarter
of 2015. They will back away and not raise rates. My expecta-
tion, contrary to what most people on the market say, I don’t
think they’re going to raise rates in 2015 at all.
Right now the market thinks they will, however, so that
sets up a shock. If by March or April — somewhere in there —
the data is weak and the Fed starts to signal they’re not going
to raise rates, all of a sudden everything could flip.
That could be very bullish for oil, gold, and hard assets.
You could see the euro strengthened and the dollar go down.
Right now it is set up for the opposite. We are looking at a
strong dollar, weak gold, weak oil. But that’s because everyone
thinks the Feds is going to raise rates. But if they don’t, which
is why I expect, that’s going to flip.