Predicting the Market’s Response to the Inept Federal Reserve

The Fed Seems Eager to Cut Rates… How Will That Shake Out?

The rumors are swirling…

The Fed’s 21 months of tyranny and torture are over!

Well, at least that’s what the markets think. Stock prices have been heading higher in recent days. Bond yields are headed lower (the bond equivalent of stock prices heading higher). Inflation seems tamer (at least for now). The jobs market is weaker, which, in the bad-is-good world of Wall Street, is a ray of sunshine. And the dollar is in retreat, an indication that currency traders now expect U.S. interest to start coming down.

I can’t say if that reading is right… or just wishful thinking because of the recent inflation and jobs numbers.

I’m kinda hoping it’s right, if only for the sake of financial stability in D.C.

As I’ve written many times over the last year, higher interest rates have a no good, very bad impact on Uncle Sam. I want to say “I predicted” we’d be in this position we’re in now, where U.S. debt-repayments costs would suddenly become problematic.

But frankly, that’s sort of like predicting busy times in a port-side brothel when a naval fleet comes to town.

Blindingly obvious.

Now, however, Mr. Market is saying the jig is up. The Fed is relenting—even though the Fed has not come out and said that. Indeed, the Fed has pretty much maintained the same stance it has had for the last many months: The job ain’t done ‘til the fat lady sings, and she might not even be warming up yet.

As recently as November 10, bond yields were soaring, not falling, because Jerome Powell, leader of the Fed Gang, said in a speech that America’s central bankers are “not confident” that monetary policy is “sufficiently restrictive to bring inflation down to two percent.”

But in a game of “on the one hand this, but on the other hand that”, Powell noted that there is a “risk of overtightening,” and added that “monetary policy is generally working the way we think it should work.”

We can quibble with “generally working the way we think it should work.” But for now, the markets have decided to block out the first part of Powell’s statement—that monetary policy might still need to be even more restrictive—to focus on the hopeful idea that the Fed sees the “risk of overtightening” as the bigger boogeyman these days.

Like I said, I am hopeful the market is right on this one.

I, for one, am in the camp that thinks interest rates are coming down. Not necessarily because inflation is tamed—because I don’t think it is. The 1960s are a pretty good analog to today, and inflation oscillated between hot and mild before exploding higher in the 1970s.

Too much money sloshing through the system takes years to play out, not months.

But we shall see.

In the meantime, I’ll stick to my belief that rates are coming down because the Fed cannot allow higher rates to crush the U.S. consumer, businesses, and particularly, Uncle Sam’s finances. I won’t rehash all the ways higher rates are hurting the economy; you read that column here.

As rates retreat, we’re going to see stocks, bonds, and crypto all soar.

The “risk-on” mentality we saw in the free-money COVID months of March 2020 through December 2021 will return. During that narrow stretch of time, the S&P 500 gained 107%. A ridiculous showing.

During that same period, bitcoin was up 1,125%.

The dollar fell 13%.

I’m not saying we’re destined for those kinds of numbers again.

We’ll see more sober, though still fat returns.

So here at the bottom, let’s turn today’s dispatch into an early 2024 Prediction Letter.

My bet is that the Fed will cut rates, likely a few times in 2024. As a result, this is where I think we go with stocks, the dollar, and crypto:

Stocks: The S&P rises to about 6,000 from 4,500 today, notching a 33% gain to set a new all-time high.

The Dollar: Right now, the U.S. Dollar Index, which tracks the buck against a basket of major currencies, sits at a reading of 104.4. Downside is somewhere in the 90 range, which is the base off of which the dollar began its post-COVID ascent. That would mark a 13% decline.

Assets priced in foreign currencies—stocks, bonds, real estate—will do well.

Crypto: Not only are we moving into a Fed rate-cut cycle, but we’re also a few months away from the so-called “bitcoin halving.” I won’t numb your brain with the technical details of that. I will only say that halvings make new bitcoin coins harder to create, and the previous three have seen the granddaddy of crypto rise between 688% and 9,900%.

Each of those established what was then a new all-time for bitcoin.

This time around, I’m projecting another all time high about 500% higher than today’s $37,000 price. So, we’re looking at bitcoin in the $185,000 range by the end of 2025. That will propel one of the greatest bull markets in the history of financial assets as prices for all crypto surge higher.

And if we don’t see that?

Well, look out below. Because it means the Fed is blind to the pain it has caused, and it will continue raising rates… which will destroy the economy, crush the consumer, prompt even more business bankruptcies, and foment a fiscal crisis in D.C.’s halls of government.

In other words: 2024 is on the way.

Beware!