The timing could not have been worse for the Federal Reserve, which kind of makes it hilarious for those of us who criticize the Fed and the whole central planning game in general. If I take delight in any of this, it is not because I wish economic pain on the general public. That pain is already baked in the cake. I just want to ridicule the so-called experts, including those at the Fed.
The FOMC finished its meeting on Wednesday, July 31, 2024. The policy statement said that the Fed would hold its target federal funds rate steady. There were indications that the Fed was ready to drop its target rate in its September meeting as long as price inflation showed signs of subsiding more. On that day, stocks rose.
Starting the day after, stocks started to plummet. It only got worse over the weekend, and Monday was a huge down day for stocks and most other assets. In such a short period of time, the entire conversation changed. There is talk of recession again, and pundits and investors are wondering if this is just a blip down or the start of a bear market.
With it, there are a lot of calls for the Fed to step in and reduce rates. But this is where it is quite a predicament for the Fed. If the plunge in stocks was just a short event that spanned three business days, then the Fed can live with that. That is the scenario they are hoping for.
The problem for Fed officials is if this continues at all. In order to have a rate cut now, the Fed would have to have an emergency meeting. But then you are using the word “emergency”, which can only serve to panic investors. If the Fed doesn’t have any kind of emergency meeting, then it would have to wait until its next scheduled meeting on September 17-18. We’ll find out if there is more trouble on Wall Street before that date arrives.
The Fed would prefer to do nothing at this stage, but if there are really bad economic signs out there, Fed officials also don’t want to get accused of “doing nothing”. They do not handle this criticism of doing nothing as well as libertarians do.
Yields
Both long-term and short-term market interest rates have come down since August 1. The yield curve had already turned positive when comparing the 2-year yield and 30-year yield. In other words, the 2-year yield, at least for now, stands lower than the 30-year yield, which is the way it typically works.
But the yield curve has been mostly inverted for all of 2023 and so far in 2024. Even now, the yield on the 30-year is lower than the 3-month yield. This screams recession, but the recession does not typically come or become evident until after the yield curve “uninverts”.
Sometimes it isn’t clear which is the dog and which is the tail. The reason short-term yields will likely go down from here is because the Fed is will for down short-term interest rates by lowering its federal funds rate. This will eventually make the yield curve “positive”. But the Fed is only likely to do this because of fears of a recession. It certainly isn’t because price inflation is fully under control.
So maybe the yield curve just turns positive or is no longer inverted because the market knows a recession is coming, and the Fed is essentially forced to act and lower short-term rates. Either way, we can see how things quickly change and that we could be looking at a recession sooner than was imagined by most just a week ago.
At the beginning of 2023, I thought we would get the downturn before the elections in November 2024. If you asked me a week ago, I would have said that the Democrats may be out of the woods in terms of a major crash before the November elections. Now it is not so clear.
Either way, the economy is bad. Middle class America knows it’s bad because their wages are not keeping up with the rise in consumer prices, including insurance premiums. But at least the Democrats could point to a strong stock market and pretend GDP numbers showing a good economy. A continuing fall in stocks would ruin that line for them. The public tends to credit or blame the party in the White House for the economy.
Bitcoin and Gold
I can’t end this without mentioning Bitcoin and gold. They were both down when stocks tumbled, especially on Monday. But while gold was down maybe 1 to 2 percent, Bitcoin was falling heavily.
Don’t be surprised by the fall in the gold price. A deep recession will drag almost all asset prices down, as there is a rush to liquidity. But gold will hold up better than stocks. It will not go down as much in percentage terms.
Bitcoin on the other hand is extremely volatile. Maybe it will have fully recovered by the time you read this. But the broader point is that Bitcoin crashed with stocks. In fact, it went down even more in percentage terms. I believe this indicates that Bitcoin is part of the speculative bubble.
Incidentally, there was just a Bitcoin conference where Donald Trump delivered a message in an attempt to get Bitcoin enthusiasts in his camp. But there was less attention given to Edward Snowden, who warned that people who transact in Bitcoin should not expect privacy and that all transactions are recorded. Doesn’t this defeat one of the primary reasons given for using Bitcoin?
Most people buying Bitcoin with their dollars or other currency are not planning to transact in Bitcoin. Their only plan for a transaction is to convert it back into dollars or some other currency in order to make a profit. Bitcoin is not money, and it never was money, and it likely will never be money. It is part of the speculative bubble created by many years of loose monetary policy from the Fed.
Conclusion
Time will tell if this was just a blip down or the start of a bear market. Either way, the yield curve is still inverted and is screaming that a recession is coming. I’m not sure why investors are just now starting to realize that.
It will be interesting to see if the bottom falls out before the November elections. Either way, the statistics can’t cover up what the average American is feeling. Americans know where they stand when paying their bills each month. It doesn’t come from GDP numbers.