GoldFix Weekly: Inflation Backs Off, Gold Rallies
Rate-Hike Cycles and Stocks
HouseKeeping: Thank you for reading our work. This Report is meant to be read like Barron’s Weekend or Sunday papers were back in the day. Some data, some market concepts, some history. Enjoy
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SECTIONS
Market Summary: weekly recap
Precious: analysis
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Technicals: active trading levels
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Charts: related markets
Calendar: next week
1. Market Summary
Stocks started the week softly. This was partly from speculative selling anticipating a bearish reaction to Wednesday’s upcoming Fed announcement. Translation: people got bearish and sold early.
Wednesday at 2p.m. the Fed announced what all were expecting. Powell announced they were doubling the amount of tapering and cutting the duration of it in half. So, they basically accelerated the rate at which they would reduce buying corporate and government bonds. They also made it clear that they would raise rates faster if needed. We expected this.
Why did stocks rally right after the news? They rallied because the knuckleheads that were bearish were impatient and ran for cover. It has been happening forever. Speculators have good ideas they just implement poorly.
Raising interest rates is bearish. It is that simple. But the people betting on that eventuality got ahead of themselves as usual. They paid the price. And what happened after they covered? Stocks went back down of course.
The Fed's hawkish statement left rate-hike odds all higher on the week with May 2022 now the most likely 'liftoff' for rates.
Although stocks knee-jerked higher on Wednesday, this hawkish shift ended up dragging markets lower on the week.
Fed Fallout in Red
Nasdaq was the week's biggest loser
The Dow suffered least.
Shorts were squeezed this week.
Gold held its own gains from the Fed announcement.
Rate-Hike Cycles and Stocks
For perspective, what does happen when rates go up?
Almost every time the Fed raises rates it is a precursor to a market swan dive and almost always a significant market crisis accompanies that. Rate-hike cycles, in our opinion, are designed to deflate overvalued bubbles with no concern for the lives they disrupt. We begrudgingly sort of live with that.
But what is very concerning is the Fed essentially hasn’t had a real rate hike cycle in years since the 2007-09 Subprime crash. They are just too afraid to do a wholesale bubble-popping anymore. What are the choices?
How bearish is raising rates? This bearish…
Either they raise rates as stated and risk a crash, or they stop mid-stream as soon as the stock market shows signs of collapse. Covid stopped the last attempt to hike rates. Before that the subprime crisis terminated a rate hike attempt.
It is not unreasonable to assume the Fed will slowly raise rates while closely monitoring the broader markets for cracks. If a rising tide in the form of Fed money printing floats all boats whether they deserve to be or not; what is it called when a tide goes out?
Only when the tide goes out do you discover who's been swimming naked.- Warren Buffet
And unless a systemic event like Covid again happens, we will see a lot of current naked companies be allowed to fail. This is the economic retooling part of the reset coming. The tide will go out now for some companies and no bailout will come.