The Macro Market Wrap Up With The Mad Genius, Vol. 22

I’ll get to the big picture of today momentarily, but first, my last two posts were about the Fed’s rate hike today, that it’s not good for the economy and your retirement savings. And in fact the Fed did raise interest rates again today. With the announcement stocks immediately sold off within just 5–6 minutes.

Once Fed chairman Jay Powell arrived at the podium and started to speak, the shit really hit the fan on stocks, led lower by consumer discretionary companies and transportation. And the reason for the reaction is I think two factors. One is that Powell said the Fed will continue to raise rates next year. Even though the Fed will move to two rate hikes instead of three, rates are still going up. Which means there will be negative consequences for the economy, as I’ve been saying. The second factor is that he kind of implied that the Fed thinks the economy is beginning to slow. So if the economy is slowing, why should the Fed hike?

One thing really caught my attention, and almost no one else caught it. I thought I was the only one, until the next to last question at the press conference. and the TV talking heads didn’t day anything about it either. I missed who the reporter was, but her question to Powell was essentially, how have you gone from being very hawkish at the September meeting to stay the course with 3 hikes next year, to backing off that stance in October in what were considered dovish statements, and today you said the Fed intends to back off to just two hikes next year and pay closer attention to the data than it has in the past. Essentially, she politely called him out on going from hawkish to dovish in such a short period of time.

Powell’s response was to reiterate that his Fed has finally arrived at the bottom of the range of “neutral” interest rates. 

I think that comes off as awfully dovish. Here’s why. In the last couple months, the Fed started using this new phrase “neutral range of interest rates”. If he thinks we have hit paydirt on interest rates, he has no reason to continue raising rates. If he does raise rates further, he is basically admitting that he will make it harder for the economy to grow.

So the Fed is now really damned if it does raise rates, and damned if it doesn’t raise rates. If it does, like I’ve been saying, economic conditions will continue to deteriorate. If it doesn’t then the Fed is admitting that conditions have already deteriorated and it can’t afford to continue with its plan of hiking rates.

Don’t forget also that the Fed said nothing about continued sales of Treasuries and Mortgage Backed Securities. It wasn’t in the official statement and it wasn’t in Chairman Powell’s official remarks to the press either. The sale of these assets is continuing to flood supply into the market, on top of the Treasury itself selling over $1 trillion per year to make up for the federal budget deficit. This should put continued pressure on interest rates to rise as well.

The big picture of all this is totally being missed by just about everyone. And the big picture is that with all the rate hikes and all the asset sales, this will cause a massive deflationary death spiral. If you’ve been following me, you know that the Fed raising rates and selling assets takes cash out of the system for several reasons, which I won’t rehash here. 

Additionally, banks are about to turn off the lending spigot, as the announcement alone today flattened the yield curve from 17 to 13 bps, which is a 23.5% delta on the yield curve in just one day. If the goal of the Fed is to create 2% inflation and full employment, they’re doing all the wrong things, because the economy is now in for the shock of a lifetime caused by the Fed’s very own deflationary policies which will cause massive unemployment.

I’d like to end on a positive note by saying over the next few editions, I’ll break down my predictions from 2018, made this past January, and I’ll go over a few things you can do to position yourself to profit handsomely from what is going on as well as how to set yourself up for the coming year 2019. I’m looking forward to that, and I’m also looking forward to hear your input and reactions to my profit suggestions.

That’s it for today. Let me know in the comments what you think of what Powell said. Thanks for reading Volume 22 of The Macro Market Wrap Up With The Mad Genius. Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis, lies opportunity.

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