Fed Up The countdown for the first Fed rate hike this year — and only the second in a decade — has begun.
But the Fed is already far behind the curve, as the economic outlook has completely transformed while they’ve been twiddling their thumbs. Dear John, It just doesn’t matter.
When the Fed announces a quarter-point rate hike tomorrow, traders and investors across the world will glance up at their screens…but not much more. Unlike the great fanfare that has accompanied Fed meetings for years, this will be a ho-hum event. And not just because it may be the most telegraphed move in FOMC history. It’s also because it’s perhaps the most irrelevant decision they’ve ever made. A New Reality Facing
Unassailable Facts Instead of the market chasing the Fed, the Fed is now chasing the new realities of the market.
Interest rates are already rising and the dollar is strengthening considerably against its major trade partners. Both market developments have effectively tightened monetary policy without any input from the Fed…and to a far greater degree than their quarter-point move will accomplish.
Moreover, we now have the reality of Donald Trump headed for the White House. The prospect of a resurgent U.S. economy has the stock market galloping ahead, despite the prospect of higher rates.
The animal spirits have been unleashed, and the Fed will be playing catch up for years in any attempt to get the beasts back in the corral.
Now, as I noted a couple of weeks ago, no one has any idea of what the future holds under President Trump.
There’s no doubt that Trump is going to change a lot of things. But he isn’t going to change the major, secular trends that decades of easy money have set into motion.
Just since 2009, the Federal Reserve has acquired about $3.5 trillion in assets, essentially using its “magic checkbook” to create those funds out of thin air. In the meantime, the Federal debt has soared to $20 trillion, ensuring some very significant level of U.S. dollar depreciation to slash the value of that crushing debt load. These were the facts before Trump won the election. And of all that’s been said of Trump from across the political spectrum, no one is claiming that he’s going to cut spending once in office. If anything, with visions of a $1 trillion infrastructure plan dancing in his head this holiday season, he’s going to break the bank. Pricing In Perfection These are not popular views. Instead of recognizing that the bill from decades of profligate spending remain to be paid, the markets since the day after the election have been rejoicing over a new economic renaissance ahead.
That may come, at least to some extent. As I’ve said, I think Trump’s policies, by and large, will be much better for economic growth. Not as good as they could be, but better nonetheless.
The markets, however, have taken it to extremes. Both the equity and bond markets are priced to perfection according to the scenario investors see ahead. And in today’s volatile stock and bond markets — each perpetually seeming like a balloon balanced on a pin — it won’t take much to pop the bubbles.
Judging from history, the popping is already overdue. As our friend Ron Griess has noted at TheChartStore.com, the S&P 500 experienced similar rallies after both Nixon and Reagan’s initial election victories.
But those rallies were short-lived, with the Nixon rally devolving into a 37.3% bear-market decline and the Reagan rally tipping over into a bear market that lost 28.5%. Judging from those experiences, the Trump rally is already long in the tooth. For now at least, investors have assumed that the new Trump economy will mean rising interest rates, accelerating economic growth and the end of the easy-money era that buoyed gold.
It wasn’t always the case. As it became increasingly apparent that Trump might win on election night, gold soared over $60 and the Dow crashed over 800 points. At virtually that moment, I tweeted “Stocks crashing, gold soaring on Trump surge. Not just an over-reaction, but a wrong reaction.”
The next day, I retweeted my message (I know — bad form), but with this comment: “Too bad I don’t trade futures overnight....”
That’s because those market reactions were stunningly short-lived. The U.S. stock market pulled out of its nose-dive and ended up gaining altitude the next day. Gold, for its part, began an extended sell-off that has since been dubbed the “Trump Dump.”
The decline in gold has shaved about $120 from the price since the day after the election. The Prospects For Gold
Are Still Bullish Again, as Donald Trump’s election promises the roll-back of the anti-business, economically depressing policies of the past eight years, the new over-arching investing theme is based upon the anticipated reversal of the easy-money policies that have supported precious metals.
The market is focused on rising interest rates which, as the talking heads tell us, are exceedingly bearish for gold. Never mind the fact that the single data point perhaps most correlated to the gold price is the real, inflation-adjusted yield. Low real yields are bullish for gold. Negative real yields are like rocket fuel for the metal. And it seems certain that, with inflationary pressures rising and the Fed promising both a gradual pace of hikes and a desire to overshoot on inflation, we will have negative real yields for years to come.
In terms of history repeating, you’ll remember that the Fed also raised rates a quarter-point at its December meeting last year, and that decision represented the launching pad for the 2016 run in gold, silver and mining stocks.
The similarity to last year has many expecting a repeat performance after the Fed squeezes in this year’s quarter-point rate hike. In fact, I’ve been predicting this for months. But the way this view has attracted such a crowd over the intervening weeks has it acquiring the smell of a consensus view.
As a devoted contrarian, this gives me pause…and leads me to question the prediction.
On balance, though, the Fed announcement should release significant shorting pressure on gold.
I should note that the structure of the “paper gold” market has already improved as the price has fallen. The open interest in gold has fallen about 35% from its recent peaks, as speculative longs have sold and as large commercials have covered much of their aggregated short position.
This is constructive for gold, as long-time readers know well.
More important in the (very) near term, the shorts will be watching and waiting to collect any further gains if/as the Fed announcement drives gold lower. But having traded the rumor, a goodly number of them will exit on the news. Thus, the bottom for gold could — once again — be coincident with the Fed’s rate hike. We’ll see if these near-term events play out as we expect. Regardless, it’s important to remember that the big-picture secular trends that we’ve also been discussing for many months remain in play.
And these trends, decades-in the making, will not…can not…be diverted by any one president or Congress. All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference |
