The world is descending into chaos.
But damned if the trading and investing opportunities aren’t as good as they’ve been in a long time.
Will all of this go away if the Fed pivots back to the way things were in 2020?
Let’s take a few different angles on this.
Where Are We?
The Fed just hiked rates 75 basis points yesterday. That’s .75%
There was a small chance it was going to be 100 basis points. It wasn’t, so the market (stocks AND crypto) went nuts to the upside. About as fishy as it gets.
But anyway, there will be no Fed meeting in August, so they will have a chance to sit back and watch the carnage or lack thereof until September 21st before having to make another decision.
Two CPI reports will have been reported before this decision has to be made.
But will it even matter? Is the agenda already set?
The whole “let’s try and figure out what the Fed is going to do” is a miserable, go-nowhere game. Fund managers and CNBC wonks only follow it because they have to, not because they want to. We are happier, and we are correct for not paying it much attention.
But if is something that worries you, allow me to give some thoughts on it all.
Why It’s So Good Right Now
It’s not good for long-term stock investors who never took profit and don’t understand how cycles work.
It’s bad for fund managers who are forced to show great results year over year, despite what the market is doing.
But for Forex traders, Crypto traders (most of the time at least), contrarians, and value investors who like to camp out in the bushes and wait, this is what we’ve all been waiting for.
On a very base level, it works like this…
When the interest rate for the USD is near zero, nobody wants to put their capital into cash, because it doesn’t earn them anything. This is bad for spot FX traders, because that’s where a lot of our liquidity comes from.
On the other hand, a low interest rate also means the cost of borrowing is so low, you can take chances on things (home, business, crypto) that you normally wouldn’t, because you can borrow the money almost for free.
This is why during these times, stocks and crypto went up a lot, and the FX market was a lot more difficult to trade than it was in the past.
Believe me, the Fed would have kept it this way forever if it wasn’t for inflation.
In 2022, there finally became consequences for consistently stupid actions, and inflation started to rise without any sign of reprieve.
During normal times, you could just simply go and raise the interest rate on your country’s currency, and inflation go back down, hooray!
But they raised rates, and it didn’t. Hmmmm.
So they kept raising, and it still didn’t go down. In fact, the inflation rate kept rising! Whoopsie.
Now what we have is a situation where investors are getting scared, so when they get scared they put their capital into the one place everyone puts their capital when things get spooky…
Cash. And mainly the US Dollar. Ever wonder why USD pairs are so liquid, and then only get more liquid compared to cross pairs as the amount of FX traded world wide increases?
This brings money BACK into the Forex market that had gone vacant for so long, giving us traders the volume, volatility, and electrolytes we need as trend traders.
This also makes stocks and crypto go down because those are seen as riskier assets. Crypto especially so, which helps explain the sharper decline. Not to mention all of the things legacy finance did to make it crash harder.
This causes liquidations for irresponsible investors/firms first, which accelerates losses, then even mediocre stewards of capital can get pinched later on as price drops further.
This is why we at No Nonsense Forex and the 10-Minute Contrarian Podcast have been advising listeners to sit back and stack cash (and some gold) whilst trading your ass off during this time.
Getting cute and trying to call bottoms here, when there is overwhelming pressure to the downside, is not our preferred way to go, you can call us stupid all you want.
If It Happens Soon…
There are people in the dumb media (MSM), and the slightly less dumb media (Twitter/YT) calling for a Fed pivot before the end of the year, maybe even as soon as the start of the 4th Quarter.
This means instead of raising rates, the Fed will start lowering rates again, in an attempt to restore things back to the good ol days of cocaine and Lambos.
They expect this to be coupled with more money printing, because why not? No possible consequences there, if we can’t afford it in real life, just print the money out of thin air, right?
(If you can’t tell by now, this is not the direction I think things will go.)
But if it does happen, you can expect the stock market to get a really nice boost.
Remember, you have fund managers that desperately need to show their clients some alpha for the year. Not one of them can do that right now.
If they can’t do it, they’ll lose out to their competition who either did manage to show some gains, or at the very least were able to lose their clients less money over the fiscal year.
They will JUMP on this opportunity. Because who knows when it will come around again. This will goose the markets a LOT.
Needless to say, I don’t think it will solve anything long-term however. Because….it’s not a real solution. You could get away with this shit before without consequence, but now you cannot. The house of cards has already begun to fall.
Printing money and keeping rates too low for too long is the whole reason we’re in this mess. It’s the whole reason the Fed had to do all of these things they didn’t want to do.
And none of it is working.
It’s crystal clear that the one thing they are trying to curb more than anything is inflation. It’s the main voting issue in the US. So if they can’t suppress it, most of them, and the masters they serve, will lose their jobs soon enough, and may never get the chance to repair their soiled reputations.
Imagine going into the history books as the people who caused the next Great Depression. Assuming the dumbass administration doesn’t do this of course…
They should just get ahead of things and change the definition of "Great Depression" now instead of later.
— No Nonsense Forex (@This_Is_VP4X) July 27, 2022
So in a nutshell, expect FX traders to get nervous, and expect people to FOMO into stocks and crypto as they rise as a result of this pivot.
But understand what is ultimately going to happen when none of it works, and just ends up pouring gasoline on this out-of-control wildfire they’ve created.
If They Don’t Pivot
I think Jerome Powell is trying to become the next Paul Volcker.
If you don’t know or didn’t want to click the link, Paul Volcker was responsible for quelling out-of-control inflation back in the early 1980s. During this time, on his watch, inflation spiked to over 20%, but eventually came back down to 3% over time due to his plan.
I’m sure 20% inflation didn’t feel good at the time, but Volcker is widely known as a hero for doing what he did, bold as it was.
I have a feeling Powell is trying to do the same thing. So this would involve NOT pivoting, and just making things worse and worse, until inflation finally taps out and starts going down again for good.
Yes, there will come a point where congress may not be able to pay the interest on its own debt if this happens, but if the Fed just assumes it’s temporary (or transitory), they may just plough forward anyway.
Don’t forget, the hubris of the fed, assuming this wasn’t already obvious by listening to people like Powell, Kashkari, and Bullard speak for five seconds, is extraordinary.
And they have all of the bankers and fund managers who get interviewed on CNBC telling us how smart they are and how they’re doing a great job. Powell has buttered their bread and paid for their yachts for the better part of 6 years now, of course they love him.
You’re not an “outlier” sir, every mungo they interview loves Powell and Yellen. For example…
This video is pretty astonishing. So much fun to go back in time just a little bit to see how far off these people are every time, and how cocksure they are about their wrongness. They don’t call CNBC “Can Never Be Correct” for nothing.
They love Powell because he’s hinting to them that rates are going to rise again. Don’t worry about what he’s doing to humanity as a whole or anything. Totally not important at all. Worry about your portfolios, which you’re invariably going to fuck up anyway.
Powell has enough built-in hubris and enough high-profile cheerleaders on the sidelines cheering on and applauding every bad move he makes.
So why stop now? He’s already in too deep. The only direction I see him choosing is trying to become the next Volcker.
If this happens, expect really awful things in the market. Expect trading to be amazing for a very long time. And hold USD until it starts to crash, then up your gold holdings a lot, and possibly some BTC.
I’m wrong about shit all the time. I am not a financial advisor, don’t do anything I say.