Part 4: Stocks Will Hold Up a Week of Two More, Then Look Out
As I’ve noted over the last week, the markets are entering a “risk on” period.
What do I mean by “risk on”? Stocks and other risk assets rally.
Yesterday I noted that the drivers behind this move were:
- The fact that President Trump reached out to the CEOs of the largest banks in the U.S. during last week’s sell-off.
- Hype and hope of a potential “cease fire” between the U.S. and China regarding their trade war.
- The Trump administration “dangling the carrot” of a potential capital gains or payroll tax cut.
Having outlined the drivers behind this “risk on” move for most of the last week, yesterday we began to assess the reason this move will end.
That reason is simple: the Fed is going to disappoint the markets.
The Reluctant Fed Doesn’t Want to Cut Rates More
On Wednesday, the Fed released the minutes from its July 31 meeting: the one where it cut rates by just 0.25% after considerable political pressure from the President.
The minutes reveal that the decision to cut rates was highly conflicted, with multiple Fed members believing the move wasn’t warranted.
This view hasn’t changed since July either.
The Fed is currently staging its annual Jackson Hole meeting. Yesterday, three Fed officials told CNBC that they didn’t believe the Fed should have cut rates.
“As I look at where the economy is, it’s not yet time, I’m not ready, to provide more accommodation to the economy without seeing an outlook that suggests the economy is getting weaker,” said Kansas City Fed President Esther George.
Philadelphia Fed President Patrick Harker followed up saying he voted to cut rates “reluctantly…I think we should stay here for a while and see how things play out.”
Then came Dallas Fed President Robert Kaplan who would “… like to avoid having to take further action.”
Put simply, the Fed is not about to embark on a series of interest rate cuts.
Meanwhile, the stock market believes the Fed is about to start a MAJOR cycle of moentary easing. The current data shows that investors think there is a 98% chance of the Fed cutting rates in September and another 65% chance of the Fed cutting rates again in October.
So we’ve got stock market participants who are almost 100% certain the Fed will cut rates again and again… at a time when the Fed itself isn’t interested in cutting rates at all.
Bottom Line: The September Fed Meeting Will Disappoint
The Fed’s next meeting takes place September 17-18. Based on what the Fed revealed this week, the odds of the Fed cutting rates during this meeting are next to none.
This means stocks have at most two to three weeks before the “floor comes out” beneath this rally. Markets don’t like to be disappointed, and the Fed is about to disappoint the markets in a BIG way.
That’s the bad news.
The good news is that as soon as stocks begin to break down again, central banks will move to intervene directly in the markets.
You see, the Fed WILL start easing again – but only once the stock market collapses. The below chart shows the level at which the Fed will finally be forced to take action.
Those who trade this effectively stand to make literal fortunes.
And as exciting as that is, the opportunity in the currency markets will dwarf even that of the stock markets.
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Indeed, even Warren Buffett, who claims to be a “stocks only” investor, made most of his biggest investments based on what was going to happen in the currency markets (a weak U.S. dollar).
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Editor, Money & Crisis