Now you know what a desperate Fed looks like.
Big Rate Cut—Markets Don’t Applaud
On Tuesday, the desperate Fed lowered rates by 50 basis points, the largest single rate cut since the 2008 crisis.
We forecasted this cut in our last report, but never expected it to be this desperate, i.e. double the expected amount.
This places the desperate Fed Funds rate at just below 1.25% which means there’s very little ammo left in the Fed’s arsenal to quell the next recession, other than hitting the zero-rate bound figure (to come) and more money printing, which is equally to come.
Folks: The Fed is nervous. Terrified in fact. And despite Powell claiming the economy is still fine, we all know this is mathematically not true.
More importantly (much more importantly in fact) the markets went down rather than up on the “stimulus” which may indicate that the desperate Fed is running out of juice.
That’s a very bad sign in a stock market that has essentially became a “Fed Market” since 2008.
For now, it’s far too soon to tell if this is the big “uh-oh moment,” as markets love to buy dips until the dips just keep dipping.
The central banks are going to throw everything they have at these markets, and it’s never wise to “fight the Fed” –even a desperate Fed–until the trend down is clearly signaled by the market, not the pundits.
One thing, however, is certain: These markets are nearing the “end of the beginning” of a new cycle in which we can now expect far more risk and volatility than reward ahead.
Blame It on a Virus?
As every headline, sound bite and media outlet have by now confirmed, the Coronavirus has been the obvious trigger for raising global anxieties, disrupting business travel, hammering supply-chain dynamics and, of course, triggering extreme market volatility, with 1000-point swings from green to red occurring in single trading days.
Hence the Fed’s Emergency Mode.
We are not, cannot and will not underestimate the perceptive as well as intrinsic power which this virus has over our capital markets, but as we’ve also said with equal conviction, these same markets were deeply ill well before the viral outbreak.
In September, when we examined the wide range of indicators acting as neon-flashing warning signs of a recession ahead, we listed unforeseen black swan events as one of many possible market risk triggers pointed at these sitting duck markets.
The Coronavirus, of course, is a classic example of precisely such a swan…
But as for recessions, or even economic depressions, the hard data confirms that based upon GDP per capita, the U.S. was and is already in an economic depression despite an ironically record high securities market.
That disconnect between the GDP and the S&P, of course, is just plain crazy, which is why we define the current market backdrop as an obvious Twilight Zone…
As for more black swans ahead, the fact that Saudi Arabia needs $100.00 oil to keep its empire lubricated, one wonders if tensions in the Middle East might “suddenly” increase, creating a supply-shock to boost oil prices.
Keep your eyes out for a convenient “black swan number 2”…
The Natives Were Getting Restless—But Now They’re All Indoors
Here at home, hard realities at the Main Street level explain the popular unrest as well as political divisions in the U.S., and further explain the growing popularity of semi-socialist/extreme-left figures like Bernie Sanders who is once again making the Democratic Party scramble to halt his momentum in this key election year.
Of course, the U.S. is hardly alone when it comes to internal unrest and political extremes, left and right, but for now, the Coronavirus is at least keeping protesters in Hong Kong at home, prompting some pundits to question if the empirically broke Chinese regime is exploiting virus hysteria as a political and media tool to quell rising tides of human protests.
The Banks Have Every Reason to be Restless
With the DOW facing dramatic gyrations and banks like Goldman Sachs projecting zero earnings growth for 2020, and other banks, like HSBC heading toward a Deutsche-Bank-Moment with 35,000 layoffs projected and a derivatives ticking time bomb under its banner, banks have every reason to be nervous as these markets send yields to the basement of time.
A bank’s life-blood is to make money by borrowing short-term cheap and lending long-term expensive, but with rates stapled to the floor, they can’t lend at higher rates, which means a bad bottom-line for their balance sheets.
Needless to say, the bank stocks took have taken a beating.
Running Out of Safe Havens
Investors of late have been sprinting toward US Treasuries as the “safe haven” in a storm, and thus rising demand and rising bond prices have pushed nominal yields on the 10-Year Treasury to lows not seen in over a century.
Folks, when adjusted for inflation, this means you are getting a negative return on what was once considered the safest bond in the world.
In short, things are getting ugly. There’s nowhere to hide, as bonds are just “quasi bonds” in this “new Abnormal.”
The yield curve, which inverted in 2019, inverted again in 2020, never a good sign.
More Stimulus to Come
In this backdrop, informed investors and Wall Street were expecting further rate cuts from the major central banks, including the desperate Fed. Boy did that desperate Fed deliver on Tuesday.
If markets continue to swing violently, we expect further concerted monetary policy efforts in a now undeniably open case of central bank support whenever markets sneeze, sniffle or cough.
Sympathy for the Devil
Although we have been extremely critical of such desperate Fed support for the markets given the long-term, can-kicking dangers that always follow debt-driven “solutions,” we nevertheless have some sympathy for Powell, as he knows how much is at stake.
If markets tank, then already-busted pension funds, and millions of Americans will suffer, and Powell knows this, and we believe he feels the pressure.
Readers should also keep in mind that three top global asset managers—Blackrock, Vanguard and State Street–collectively account for $17+ trillion in assets under management (or “AUM”).
If their investors get nervous and see increased declines in the market (due to ETF risks, algo risks and debt risks), they will eventually be forced to redeem large percentages of their holdings to cover their losses, meet expenses or protect their exposure risks in times of fear.
Readers should also keep in mind that if those top-three “mega-players” were to ever experience a 20% redemption/withdrawal (or “Lehman-like” margin call) and/or loss from the current assets under management (AUM), this would lead to a direct loss of $2-4 trillion worth of sell-offs in a matter of days—based solely on just these three asset managers alone.
Needless to say, such a snow-ball effect loss would be devastating to the markets and the larger economy.
At that point, the central banks here and abroad simply can’t fight such a tide.
Again, Powell knows this, which is why Powell and his colleagues at the desperate Fed will and must say and do whatever they can to ensure that markets never get too nervous and that such a redemption or AUM loss never occurs.
In short, everything is at stake now.
Given such risks and pressures, one could almost feel sorry for the Fed.
But again, I can only say “almost,” because the now desperate Fed had ample opportunities in both 2008 and the many years since to take away the low-rate/QE punch bowl and temper the debt-driven speculation and asset bubble creation that has followed.
Instead of licking our wounds in 2009 and taking our lumps (as well as jailing a few bank execs), we went on a debt-binge, market party, thereby numbing ourselves to the risks that come from too much binging on cheap debt—which just got even cheaper.
On the Top of the Mountain…of Debt
Today, the US and global markets and economies are sitting atop the largest debt bubble and stock bubble ever recorded, which means those same markets are sitting atop an equally unprecedented “all-or-nothing” level of risk.
By postponing short-term discipline (i.e. placing a reign rather that spurs on Wall Street accommodation) for near-term market highs, the desperate Fed and the other central banks of the world are thus directly responsible for creating too much euphoria, too much cheap debt and hence too much risk.
Today, we are thus staring down the barrel of a fragile US and global market backdrop, covered in the gasoline of debt, and thus any foreseen or unforeseen “match” (including a viral panic) could burn this market system to the ground.
Again, the desperate Fed and others know this. Hence the historic rate cut on Tuesday.
They are desperate. Which means more desperate measures, including outrageous money printing (think MMT) is likely ahead.
Luckily, we’ve been recommending smart allocations of gold to insure against the inevitable currency dilution that follows money printers.
What to Do?
Given this obvious risk, as well as the hundreds of other fundamental indicators we track daily at Signals Matter for our subscribers, we have no choice but to invest sensibly in the backdrop of a capital market structure that is anything but sensible.
Our current portfolio recommendations, which now rely upon even greater cash allocations as per our proprietary Storm Tracker tool, are designed to manage risk not chase tops.
As markets swing 1000 points up or down on any given day, we see no point in chasing these tails.
On Tuesday, our portfolio was in the green and positive while markets were in the red and negative.
Because we are a portfolio service, not a day-trading enterprise.
Our approach, though complex in its compilation, is simple in its signals and theme: We preserve capital during volatile swings and make our real money when markets tilt toward bottoms not dangerous tops.
Our job is to protect you from this fall to bottom, and then make money, gobs of money, when we get to that bottom, which is where the real wealth is made—by avoiding losing money on the melt-down, capturing discounted securities at the bottom, and then enjoying the cyclical trend up thereafter.
So simple, yet almost no one does this.
Right now, again, we are and remain at dangerous tops. We are also capturing some of this upside without experiencing the losses most traditional investors recently suffered.
But the real opportunities ahead require discipline and patience in this environment of increased uncertainty and Emergency Mode policies.
Informed investors understand why prudence rather than rashness is a critical component of winning the long-term game, one which is currently rigged to fail.
Subscribers to Signals Matter get this. It’s not doom or gloom—just common sense with a twist of market skill.
We’d love to have you in our community of informed, patient and smart investors.
In the interim, we remind our subscribers to visit their dashboards and see what my colleague, Tom Lott, has to tell them in more detail of what’s happening now, what’s ahead, and what to do about it.
Be safe—things are falling apart for now. No surprise here…