Context For the 75 Bp Rise

Were you forwarded this email? [Sign-up to Rude Awakening here.]( [Unsubscribe]( [The Rude Awakening] Context For the 75 Bp Rise - Yup, Powell and Co raised rates by 0.75% or 75 bps. - Yes, the market reacted “positively.” - For context, let’s see what actually happened. Recommended Link [Rickards: “Dollar doomsday plot” revealed]( [Click here for more...]( Jim Rickards made some spectacular financial predictions in the past… In 2016, Jim predicted Brexit would pass. He was right. That same year, Jim predicted that Donald Trump would win the U.S. Presidential election. Jim was right again! And in 2019, Jim didn’t just correctly predict a pandemic — he also predicted exactly how the government would respond! Now Jim is forecasting a “dollar doomsday plot” you won’t believe. [Go Here Now To See]( Sean Ring Editor, Rude Awakening Happy Thursday! By the time you read this, I’ll be on a high-speed train to Milan. (Note: I just went to the Stazione to find a train strike for tomorrow, so I’m stuck in Asti!) In the meantime, the Fed indeed hiked 75 basis points. That puts the Federal Funds Rate Band between 1.5% and 1.75%. For this piece, I’ll just use the upper band rate of 1.75% for ease. I’ve said that a 75 basis point hike this month and next would be disastrous for the markets. Despite the positive reaction to today’s news, I stick to my call. This is the Fed popping the very bubble it created by raising rates too quickly. Reasonable people disagree with me. Good friend and quantitative finance Ph.D. Ollie wrote, “Nice to see a half decent f_cking rate hike at long last.” Yes, but… I don’t think anyone agrees with rates staying low. Almost all have seen the damage price inflation is causing and wants higher rates. But how fast do you make the changes? For those economists with physics envy, I’d put it like this: - Position: our rates were all wrong, and we’ve been in the wrong place for a long time. - Speed: yes, we need to move to “normal” rates quickly. But that should’ve started to happen years ago. - Acceleration: No. If we move more quickly than the market can handle, then we’ll crash it. Making up for “lost time” is a posterior-covering activity for a slow-moving Fed Chairman who wants to remain gainfully employed. But the market disagrees with you, Seanie! Does it? Or has Mr. Market forgotten about 1994? The Bond Market Debacle of 1994 “We’re not trying to induce a recession now. Let’s be clear about that,” Fed Chairman Jerome Powell said at a news conference. Ok, Jay. Got it. But the last time the Fed raised interest rates this quickly, it crashed the bond market. From [Wikipedia]( The immediate trigger of the crash in the US occurred at the Federal Open Market Committee (FOMC) on February 3 and 4, 1994, although bond prices in Japan had started plummeting just a month earlier. Led by Chairman Alan Greenspan, the Committee reached a consensus to slightly raise its federal funds rate target from 3% to 3.25%. It was the Fed's first move to shrink the money supply since 1989. Over the rest of 1994, the Fed agreed to several other contractionary moves. It increased its target by 25 basis points in March and April, 50 [basis] points in May and August, and 75 [basis] points in November. By its last meeting of the year, the rate resided at 5.5%. The Fed's first announcement of the year, combined with an array of other factors within and outside the US, prompted a mass sell-off of bonds and debt funds worldwide. Starting in March, as the bond market's newfound turbulence became more settled in investors' minds worldwide, homeowners were discouraged from refinancing their properties further due to the rise in long-term rates. As a result of the crash, bonds lost about $1.5 trillion in market value globally. And that’s when the dollar was worth something! Greenspan not only raised rates quickly, but he accelerated the size of the rate hikes from 25 bps to 50 bps to 75 bps. Of course, he had a higher base (3.00%) to start with than Powell has. But I think today’s investors genuinely don’t get that rates haven’t just moved 75 bps, but 75% (1.75 / 1.00 - 1 = 0.75 or 75%). It’s an enormous move and one that will almost certainly be followed by another 75 bp move in July. Just have a look at what’s happened to bonds so far this year: That blue line in the bottom shows you how underwater they are this year. This isn’t supposed to happen to safe-haven investments like bonds. And remember, bonds are the bedrock of the financial system. What about equities? Yesterday’s Market Recap Courtesy of the [Journal]( here are the markets’ reactions: To quote Mrs. Ring all too often: “That’s it?” Let’s put this in more perspective: That last little candle is all that happened. So not much at all. (Note: as I write this, SPX futures are getting hammered. Currently, they’re down 2.5%. It may get ugly during today’s US trading hours.) Recommended Link [Urgent: Website Giving Away Free Crypto Today!]( [Click here for more...]( Crypto expert, James Altucher, has found a little known website that allows you to collect up to $167 FREE crypto! He’s put together a short [2 minute video clip]( walking you through the easy process on how to get yours. [Click Here To Learn How To Claim Your Free Crypto]( The USD held steady: And the 10-year yield came off a bit: So, really nothing of consequence happened, despite the green lights. That’s fine. It’s a case of “Sell the rumor, buy the fact.” So while we had an up day yesterday, the stock market is still in a clear downtrend. And what does that portend for the future? Divining the Future No one knows what’s going to happen. And that’s why it’s important not to make hasty decisions. As the Fed was hiking 75 bps, [retail sales unexpectedly fell 0.3% in May](. And [GDP likely won’t grow this quarter](. That the Fed didn’t see this coming is more evidence the Fed’s in-house economists are incompetent. But here’s what I think. Over the coming weeks and months, these rate hikes will start hitting businesses’ ability to cover their cash shortfall. As this continues, you’ll see more businesses get conservative with their cash. That’ll start cascading into an overall slowdown. This will adversely affect the stock market, where most Americans’ retirement savings resides. And by November, you’ll have a country full of unhappy voters. I agree we need a slowdown/recession to wipe out the malinvestment central banks have created with their zero interest rate and other expansionary monetary policies. Those policies, combined with the government’s reckless fiscal spending, have created the inflation maelstrom we’re seeing today. After all, what did we think those stimmy checks were going to do? They drove prices up. It really is that simple. Now, we’ve got a Federal Reserve that’s not fit for purpose. And one whose employees are frantically trying to justify their paychecks. Jay Powell, first and foremost, needs to answer for his poor leadership. Wrap Up Yes, the stock market rallied yesterday. But was there a change of character? No. We’re still in a steep downtrend. I don’t think that’s likely to stop and consolidate for the time being. As for bonds, they’re already a mess. It’s 1994 for them all over again. Bonds are the foundation of our financial system. Watch them, and you’ll have an idea of where equities are heading. And it doesn’t look good. There will be no soft landing. If we get to November in one piece, we’ll see our Red Tsunami. But before then, I suspect we’ll see more red in the stock markets. My 3,213 call remains intact. Until tomorrow. All the best, Sean Ring Editor, Rude Awakening [Whitelist Us]( | [Archive]( | [Privacy Policy]( | [Unsubscribe]( Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [unsubscribe](. 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