The Macro Market Wrap Up With The Mad Genius, Vol. 23

The last two days and three volumes, I talked about the Fed’s decision to raise interest rates again, how it will probably affect your investment and retirement assets, and what the takeaways were from the press conference.

I want to clarify one more point about the rate hike and press conference, and then I’ll get into looking back at my predictions for this year as well as what I am expecting for 2019.

The one thing that is lost on most people in the financial industry is this. If you are looking backwards, into the economic rearview mirror, things look pretty good, and that is why you think the economy is humming along nicely. The stock market is up. Your house appreciated in price. Other asset prices have risen. Consumer spending has increased (although that number is also jerry-rigged). And maybe your income is also rising little by little. But if you’re looking in the rearview mirror, you’re looking in the wrong direction. After all, who drives their car while staring into the rearview mirror?

For the few people who are looking at the forward looking data, and they see weakening, they don’t understand the depth of weakness in the economy. And granted if you don’t look in all the right places that would be hard to figure out, but some of these people are Ivy League PhD economists or they are running the funds you’ve invested your money into, and they don’t see it! They think stocks and home prices are fleetingly in a correction. They don’t understand either what the final consequences are going to be with the current policy of the Fed.

Remember the Fed said that they are sticking with autopilot on selling bonds, and regardless of economic conditions, that won’t change. Admittedly, the only other tool they have is lowering interest rates. If you look at the history of recessions in the US, the Fed lowers interest rates by 6% on average into a recession. 

But does anyone really think that lowering interest rates back to 0% from where it is now at 2.5% will be enough to restimulate the economy? In reality the Fed will have to go back to buying bonds, known as quantitative easing (QE), and not only that, the Fed will probably have to take interest rates below zero which means that if you deposit cash into your bank account, not only will inflation erode your purchasing power, but the bank will also charge you for the privilege of depositing, even if you don’t bounce any checks.

Why will the Fed be the one to have to buy up Treasuries? If we go into recession, that means that the tax revenue to the government will fall, and on top of that the government won’t resist the temptation to dump cash into the system. Remember in 2008 the first bail out was $787B. That’s why the Mets play at bail-out ballpark! Budget deficits and cash dumps easily could exceed $2.5-$3.0 trillion a year.

So again, the Fed will not just pause the rate hikes and continue on auto pilot selling treasuries and mortgage backed securities. Rather the Fed will be forced to do a complete one-eighty, and begin buying bonds as well as lowering interest rates. 

The next meeting in March will be the supposed pause they are calling for, but then the next rate increase which would be June, will likely turn out to be a rate decrease instead. When the Fed does this, which will be after the onset of the coming crisis, the Fed will lose all credibility, not just with investors and Wall Street, but with the rest of the world as well.

Tomorrow I’ll talk about what it means when the Fed loses its credibility, as that will be one of my forward looking assessments for 2019. I’ll also be speaking about my January 2018 forecast, including credit card debt and why increased balances are a bad sign not good one, corporate over indebtedness, tax cut bonuses, treasury sales putting upward pressure on rates as well as who is and who isn’t buying those sales, flattening of the yield curve, where banks are earning profits, removal of liquidity, current stock market fireworks, and more. Don’t worry it won’t all be at once, it will be spread out over several episodes.

That’s it for today. Let me know what you think in the comments. Thanks for reading Volume 23 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, there lies opportunity.

#economics #Fed #ratehikes #YearInReview2018 #Forecast2019