Happy Halloween, All!
Happy Halloween all HAI readers! With plans to hit the spooky streets of Durango, Colorado with wife and little one for the first time later today, this HAI will be brief.
In this week’s main event, Jay Powell and the Federal Reserve faced a spooky situation of their own at Wednesday’s FOMC meeting. Heading into the meeting, Powell was facing what he described as “a challenging situation” in which “there is no risk-free path for policy.” That, in HAI’s view, is true—but is very much putting it mildly!
Powell has a stuttering employment situation increasingly threatened by corporate adoption of artificial intelligence. He has an inflation problem (CPI inflation at 3% vs. the 2% Fed target), with inflation well over target for more than four and a half years. And he now has a shadow third mandate pressuring him to cut interest rates (despite inflation) to help ease the financing burden for a government in a fiscal crisis. That’s not just a challenging situation; that’s a full-on mess.
But that mess gets a whole lot messier. When Powell cut the Fed funds rate again by 25 basis points on Wednesday, he not only did so with inflation at 3%, but with the stock market posting a new all-time high on Tuesday. In addition, the Schiller cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 just reached a nose-bleed 41 for the first time since the 2000 dot.com bubble.
To say that this is a curious and unorthodox moment for a rate cut under normal circumstances would be to grossly understate the issue. But these are not normal times—not by a long shot!
By historical standards, the times are nothing shy of stupefyingly abnormal. In fact, despite years of elevated inflation across the globe, with record high stock prices and stock valuations, central banks collectively over the last two years have quietly cut interest rates 313 times. To put that fact in proper context, that’s the exact same number of emergency rate cuts made during the entire global response to the Great Financial Crisis!
Critically, those post-GFC rate cuts were emergency response cuts to the greatest financial disaster since the Great Depression. In stark contrast, this present round of record rate slashing appears to be aimed at preventing a future crisis that would sink the fiscal ship.
So despite what sounded like a surprisingly hawkish Jay Powell at the post-FOMC press conference, HAI would suggest that readers now focus on what the Fed does over what the Fed says.
In that light, what the Fed did was cut the fed funds rate by 25 basis points for the second meeting in a row, with the market expecting another rate cut in December. What the Fed also did was agree to a very dovish end to quantitative tightening (QT) balance sheet reduction on December 1st.
What the Fed said sounded quite different. In his statement, Powell assured hearers that, “in the Committee’s discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a foregone conclusion—far from it. Policy is not on a preset course.” Following that sternly hawkish assertion, market-based predictions for a December rate cut dropped precipitously from a 91.7% chance to 63% at week’s end.
But HAI discounts Powell’s hawkish rhetoric. In HAI’s view, whether the Fed cuts (very likely) or not in December, the overall forward rate-cutting writing is very much on the wall. The direction on rates is clear, and it’s lower. This Fed—regardless of all the traditional reasons not to do so—looks very set to slash rates significantly over the next year or so.
Given the Fed’s fundamental predicaments, HAI strongly agrees with what Rabobank Senior Strategist Benjamin Picton said this week; “You can bet your bottom dollar that the Administration will be lobbying Powell and Co to go harder on cutting dollar financing costs [interest rates]. Inflation is a secondary concern.”
That Rabobank take echoes exactly what BCA Research said last week in declaring that “the Fed is undergoing a regime change in which the primacy of price stability is displaced by the primacy of ultra-low real rates.” BCA also added that the “breakdown of this 50-year framework presages perhaps the biggest macro event in decades.”
HAI wants to be absolutely crystal clear. What Wall Street is just beginning to acknowledge (i.e., a major monetary regime change now underway) is beyond unprecedented. It is, in HAI’s view, the biggest macro event in decades.
In light of the preceding, and in HAI’s view, we have finally reached the endgame for what was always an unsustainable system. Despite what the Fed says, it now seems that policymakers will move heaven and earth to preemptively avert any potential crisis. This means that the unprecedented and unsustainable crisis response of 2008 has progressed into the desperate and unsustainable crisis prevention dynamic of the present moment. Again, the release valve for this government stance will almost certainly be much higher inflation and even more accelerated currency debasement.
In other words, the fiscal crisis has taken priority over inflation and any other concerns. In HAI’s view, that represents a massively important new secular era in which gold is likely to reemerge as the new (albeit old) primary global reserve asset. Why? Because gold is monetary trust, and we’re very likely to have a powerful bull market in trustworthy assets as the “inflate the debt away” playbook is rolled out—increasingly obviously—over the next decade.
In HAI’s view, Jay Powell can speak as hawkishly as he wants, but words won’t change the fundamental reality. The West must inflate away its crippling debt loads, and the Fed (inflation mandate or not) is going to have to accommodate (overtly, or more likely covertly) that necessity. As the Fed’s spooky predicament becomes increasingly frightful, and that reality gets progressively marked to market, expect gold to continue to thrive. Happy Halloween, all!
Weekly performance: The S&P 500 was up 0.71%. Gold was off 2.76%, silver was up 0.13%, platinum was lower by 1.63%, and palladium lost 1.31%. The HUI gold miners index was down 1.54%. The IFRA iShares US Infrastructure ETF was down 2.57%. Energy commodities were volatile and mixed on the week. WTI crude oil was off 1.01%, while natural gas surged 24.52%. The CRB Commodity Index was nearly flat, down 0.14%. Copper was nearly flat, up by 0.03%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 3.39%. The Vanguard Utilities ETF was down 2.55%. The dollar index was up 0.78% to close the week at 99.73. The yield on the 10-yr U.S. Treasury was up 6 bps to close the week at 4.08%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
