Markets: Fed talks dovish, bad things gonna happen
yes, we’ve seen markets like this before
Speaking as someone who is deeply involved in the markets, I track a very large number of financial indicators. But, as I’m fundamentally lazy I refuse to manually visit web sites or manually consult various services to see what’s going on. So long ago I programmed, either via Application Program Interfaces, APIs, Remote Site Syndication, RSS or web scraping when absolutely totally necessary, a set of bots.
Each focused on a different way to find me the data I need, they run on a cloud resident Linux server I own, and, at various frequencies, inform me of events I really gotta know about when I really gotta know about them. And
AS I WRITE THIS AT ABOUT 0810 GMT GOLD HIT
a new record high perhaps 1H ago.
The metal is likely to push higher. I moved 71% of my retirement capital into gold and silver in March, 2019, as I was concerned about US budget deficits and national debt in general, and specifically what I consider a reluctance on the part of elected officials to address these problems in a rational manner. Which means raising taxes or cutting spending or, in the kind of bipartisan type of win / win solution we rarely see these days, a little bit of both. But
INSTEAD OF RATIONALITY
for years we saw both political parties introducing, voting for, or otherwise supporting policies that resulted in too much money whizzing being injected into the financial system. This is obvious when we look at a chart of what is called “monetary base”, or the total amount of currency in circulation or held in reserves.
When the Global Financial Crisis hit in 2007 and 2008, the policy solution was to lower interest rates, effectively to zero, and add massive amounts of liquidity to the system. it worked, preventing a deep and perhaps prolonged depression
and this would have been ok for perhaps 3M or 1Y, but once the money started to flow Americans became addicted. The money never stopped flowing and interest rates never reverted to the long run average.
When The Pandemic erupted in 2020 the policy solution was already known: more money and lower interest rates. This sharp increase in liquidity, combined with sporadic shortages of goods due to supply chain problems caused by pandemic, gave rise to the highest inflation we’ve seen since the 1980s
And yesterday, at the second Federal Reserve meeting, we saw The Fed talk dovish; despite the hot CPI and PPI numbers we’ve seen recently. It is clear
THE FED IS SIGNALING
but not directly saying — they will tolerate higher inflation. During Mr Powell’s press conference it was clear they are aware of hot inflation numbers, as he reported “inflation continues to decline, but the path has been bumpy of late”. He actually dismissed direct questions about hot inflation readings in January and February, suggesting they needed to see more than two inflation numbers, and he still feels the 2% target is achievable. The Fed Open Markets Committee, FOMC, is still suggesting three rate cuts of 25 basis points for this year, which would lower Fed Funds from 5.25% — 5.50% to 4.50% — 4.75%, so going into 2025 we’ll see consumer interest rates at perhaps 6.50% — 6.75%. Mr Powell refused to criticise the current level share prices, which kicked off a strong rally as the intraday chart of The S&P 500 and the Nasdaq shows
and given the existing rally as well as the immediate market reaction to his dovish press conference, it seems the well documented wealth effect
is going to kick the US economy into a further frenzied state of consumption and inflation. When is likely why we saw gold rallying, strongly on his comments. Far too often people associate rallies in the price of gold as some kind of ominous sign. But they don’t track gold in sufficient detail to see sometimes it tells us things. And this rally in gold is telling us Central Banks are making the wrong decision with respect to inflation. Not doomsday, just prices tracking higher and for one simple reason: The US economy is already awash in liquidity, and once rates fall it will be turbocharged with money. Keep in mind, presently there are no signs of economic weakness
So it’s not clear why The Fed is talking dovish. We had such hopes for Jerome Powell’s stewardship of The US economy, he both talked the talk and walked the walk, until yesterday. Now it seems he’s playing the part of the bartender pouring more booze, and encouraging a crowd of already drunk people to keep drinking; in fact, to drink faster. These markets seem to be in whats called a “melt-up”, all sorts of irrational valuations.
And when we see irrationality like this
BAD THINGS ARE GONNA HAPPEN
Having seen many bad things happen in the stock market since the 1980s (I had just started working on Wall Street about six months before the crash of 1987, I had front row seat for that crash) I can tell you when bad things happen they happen when everyone is pushing as much money as possible into the markets in the classic fat / dumb / happy way, and bad things happen FAST. Keep buying overpriced stocks and indexes. You ain’t gonna be selling the overpriced stocks and indexes you paid a premium for at the market top. Everyone thinks they’re smarter than the market, and they will “know when to sell”. I don’t think so. And a chicken wing restaurant trading like a tech stock?
Bad things are gonna happen. This is why I don’t keep all my wealth in Financial Assets, and neither do a lot of wealthy people (not that I’m rich, I’m poor, its a state of mind)
only chumps are rapidly moving into this market, engaging in FOMO and all sorts of risky activity.