FREERIDING

Free riding is a common practice in the financial industry. Most brokers and advisors do it in some form or fashion.

Freeriding – Using the ideas and strategies built on the work of others without putting any capital at risk.

At times the originator of the product gets paid, and at times the risk to capital is not recognized. Not as common in the world of central bankers, but the US Fed has one, at least for now. Being able to increase rates while Japan and the ECB remain accommodative presents the Fed with an opportunity to normalize US rates. Whether it’s a need to have “dry powder” when the next downturn occurs, or an attempt to reduce the potential for a bubble in an asset market, the Fed can continue to raise short term rates. But for how long? Without any evidence of inflation, and foreigners continuing to buy US Govies, flattening of the yield curve will continue. Many will warn of a recession based on the predictive power of the yield curve. It has a good record, but it’s not perfect. The Fed could manage this transition, but it will be a tedious path on which they’ve embarked. Inflation could also take root and lift the long end of the curve, but there are many factors that say this is unlikely.

Growth is better, employment is good, corporate profits are good. Need I go on? Inflation is having a problem getting any traction. And globalization and technology have insured supply will be ample. It would be risky for the Fed to invert the yield curve. It doesn’t seem likely that this will occur.

LaSalle St. Investment Advisors, LLC
940 N. Industrial Dr.
Elmhurst, IL 60126