$XAU, $GLD, $USD
Mr. Market started seriously pricing in the possibility of interest rate cuts.
To be fair, the signal came from the Top of the economic politburo that matters that being the Federal Reserve.
Speaking at an event at the Chicago Fed last Tuesday, Chairman Jerome Powell hinted that the Fed would likely cut rates to keep the economic expansion going.
With stocks still within 10% of their all-time highs, the soothing words may just be enough to avoid another selloff.
But it may also finally spark the final late-Bull market rally that gets fearful investors to throw away the fear and embrace the greed.
That’s how Bull markets die, not of old age. They die on speculative greed, as in Y’s 1929, 2000, and 2008 among other dates in between.
Consequently, the market is vastly increasing the odds of a cut in interest rates by the end of the year, maybe even 2 years.
Given that interest rates are at 2%, and at this stage in past market rallies they have been averaging closer to 4-6% that is not a huge vote of confidence on the economy right now.
In other words, the Fed is spiking the punchbowl while we’re still riding the euphoria of the near-Zero % interest rates of Ys’ 2008-2015.
The job of the Fed is to be just the opposite.
Fed Chairman William McChesney Martin, who headed the agency from Ys 1951 to 1970, is best known today for saying it’s the Fed’s job to take away the punch-bowl as the party gets going.
But that is the Fed at work. Rather than try to act as a brake on the economy when it’s running hot, or getting things going when it seems cool, as designed, it just does not happen that way.
The Fed is the biggest blower of bubbles, as any government agency with little political oversight and Top-Down decision making is apt to do. The Fed’s structure is more at home in the failed Soviet Union, not the land of the free.
But when the Fed says dance, Mr. Market dances. Stocks had their 2nd-best day of the year when Mr. Powell spoke, and continued to rally all of last week.
Powell also mentioned that the Fed’s other monetary tools, which were unusual when first used during the housing bust a decade ago will likely see use again.
We cannot eliminate the economic cycle, as it runs in part on human fear and greed. But we can curb it and its effects if we want to.
But why would we want that, as it means lower stock prices now, even if it means a milder recession later.
In a market where a 5% pullback from the Top sends fear soaring, the Fed is laying the groundwork for the kind of market where greed can potentially lead to the last, big, speculative Top of this current cycle.
With thinking like that, it is no surprise that gold has started to catch a bid in the past week. The metal is now at a 2-month high, and has continued moving higher even as the markets have bounced and consolidate.
Now trading at $1,344.25 it may not get above our maximum buy price of $1,400 anytime soon, but it might. The Fed just gave participants a big and powerful reason to buy some market fear and inflation insurance, exactly what gold delivers.
By Andrew Packer
Paul Ebeling, Editor
Have a terrific weekend