Will the Fed hold its nerve?

Let’s look beyond the weekend to what is likely to be the defining financial story of next week.

In five days’ time – next Wednesday – the Federal Reserve meets to decide its next move for US interest rates. The Fed is widely expected to raise rates by another 25 basis points.

That would mean Europe and the US treading different paths. Yesterday the European Central Bank (ECB) extended its quantitative easing (QE) programme beyond March (though reduced purchases from $80bn to $60bn). It doesn’t look like we’re seeing a “synchronised monetary expansion” worldwide any longer, to borrow a phrase from Eoin Treacy.

If the Fed does raise rates, it’ll be only the second rise in ten years. Ah, to be a central banker!

If the Fed backs out at the last second it’ll be big news. That seems unlikely right now. But given what we’ve seen over the past decade, during which raising rates was delayed again and again, for virtually every excuse you can think of, I wouldn’t bet the house on it.

It’s worth your time to watch what happens, though. A rate rise on Wednesday would be another data point in the trend we’ve been following for the past month or so. We’re moving into a period of rising rates and rising inflation. Those are significant changes. They require significant responses from us as investors.

Remember, this is all a part of Charlie Morris’ “Money Map” idea. Charlie boiled the key trends of the financial world down to their most basic form and “mapped” them onto a chart. Instead of geographical co-ordinates he used financial trends. Understand the direction those trends are moving in and you see where your money needs to be in response.

I’ve sent you Charlie’s work several times in the last week or so. I won’t keep banging on about it much longer – I’ve given you plenty of chances to take advantage of it.

And to be honest, I doubt this plan will be available much longer. Charlie is an absolute force of nature when it comes to generating new investment ideas. He changes with the facts. In fact, he’s added two new positions to his tactical portfolio since we published his Money Map. This isn’t something that’s going to be around for months. The world is changing too quickly for that. Charlie is changing with it.

Google goes green

An interesting development in an energy story I’ve been following all year – earlier in the week, Google announced that it is moving to 100% renewable energy in powering its data centres next year.

That’s no small amount of energy. And again, it shows that as renewable energy like solar and wind become more economically viable, there’ll be a natural move towards them. A cheap, distributed energy network – rather than an expensive, centralised one – will come sooner or later.

But there’s another layer to the story I find particularly interesting. It involves the connection between energy and intelligence. Harvard biology professor Richard Wrangham published an interesting theory on the role of new energy sources in developing intelligence. This goes all the way back to fire unlocking new calories that led to the development of the cerebral cortex.

As a Smithsonian magazine piece put it, “[Wrangham] believes that fire is needed to fuel the organ that makes possible all the other products of culture, language included: the human brain.”

If that theory holds up – if major leaps forward in intelligence require new energy sources – that begs some interesting questions. Does it hold true for machines as well as humans? Can we develop artificial intelligence without finding a sufficiently large source of energy to fuel it? Perhaps all progress is propelled by the discovery of new energy sources.

Google is an interesting case study for that. Those data centres – where it stores the vast amounts of information it gathers about the world – are what it wants to use in developing artificial intelligence. To create an intelligent machine it seems we need a huge amount of data for it to study, find patterns and develop intuitive connections.

To do that it may well need vast amounts of energy. And it seems that energy is going to be green: solar, wind and other renewables.

From the mailbag

Yesterday’s piece on Mark Carney’s defence of monetary policy brought plenty of mail. Remember, you can always reach me at [email protected]  It is me (a few people asked on Wednesday if emails just go to an unmarked inbox). I read them all. I reply where I can. And I have thick skin – good or bad, it’s great to hear from you.

One email in particular yesterday caught my eye. It quoted something I’d said, which was “I sometimes wonder if Carney is a reader of Capital & Conflict. I think it’s unlikely. My email is [email protected] if you’re out there! You have the right of reply!”

Nick, readers of Capital & Conflict are people who want to learn, he thinks he knows all the answers.

As a mission statement for our humble e-letter, I think that’s fantastic. I’d add “want to think” in there too. That’s my goal with these letters: to make you think, introduce you to new ideas you won’t find elsewhere and to showcase investment research and opportunities that are outside what you’d usually come across.

How am I doing? I’d love to know. My email address is above. If you were summing Capital & Conflict up to someone who’d never read it before, what would you say?

Until next time,

Nick O'Connor's Signature

Nick O’Connor
Associate Publisher, Capital & Conflict

Category: Central Banks

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