EXHAUSTED FED in a Vicious Cycle: Collision Course With No Way Out!

Dear Reader,

I’ve always been into following the weather, but this time every year, I’m tuning into the weather channel more times than not because of hurricane season. Hurricane Dorian heading for land has my attention, as do all hurricanes that head towards Florida.

For me, it gets personal when weather ramps up in Florida because I own property in the area and as my interests come under attack, my ears perk up.

It looks like this one will side step the Fort Meyers area of Florida where my properties are and they will live to see another day.

The fact is that as natural as hurricanes are, they are still utterly devastating for those in their path.  

Just like hurricanes, studying areas outside of finance has, ironically enough, taught me a great deal about finance. For instance, when learning about the human sleep cycle I’ve come to the conclusion that the economy functions much like an organism – an unhealthy, dysfunctional one, but an organism nonetheless.

You could even say that the economy experiences cycles of activity and rest, much like a person does – or it’s at least supposed to have these cycles and is liable to break down if the system gets out of whack. For instance, scientific studies have shown that when a person doesn’t get enough sleep, their immune system is weakened and essential bodily functions are at risk.

Sleep is essential because that’s when your skin cells regenerate themselves. In other words, that’s when your skin replaces itself and grows. Sleep is also important because you’ll be susceptible to cognitive problems – memory, problem solving, decision making, mood, etc. – if you’re not getting enough sleep.

And just as the human body needs to rest in order to rebuild and rejuvenate itself, the Federal Reserve – which is supposed to be the brain that regulates the American economy – needs to cycle between activity and rest in order to function properly. Unfortunately, the Fed is now akin to an insomniac hopped up on Red Bull that hasn’t had a good night’s sleep in months.

People aren’t supposed to run at full throttle 24 hours a day, 7 days a week – and neither is the Federal Reserve, which hasn’t given the economy time to rest (or even breathe) lately. What America’s central bank needs to do is get some rest; it’s utterly exhausted and must allow for some normalization to occur, otherwise the entire system breaks down:

What we’ve witnessed is the U.S. Federal Reserve cutting the 10-year Treasury interest rate by more than 50% in less than a year, and they’re only getting more aggressive with the pace of the cuts. They’ve gone into beast mode with the interest rate cutting like a lumberjack on steroids, with no indication that they’ll be taking a breather anytime soon.

As the Fed sees it, there’s no time to relax, ease up, or normalize – the pressure to continue feeding liquidity into the banking system is too great to slow down now. There’s also tremendous pressure coming from President Trump, who said in August that he wants to see the central bank raise interest rates by “a point, or even a little bit more than that” and stated that this would cause the economy to take off like a “rocket ship.”

As the President continues to put pressure on the Fed to cut bond yields and thereby prop up the equities market, actual justification for cutting rates is scarce. The U.S. inflation rate, which the Fed would like to see at 2% in order to provide a plausible excuse for an interest rate cut, remains stubbornly below that target:

Because of this, the central bank is trapped: pressure to “accommodate” weighs heavy but they know full well that it’s not the right thing to do. But if they relax and allow for some normalization at this stage of the game, they’ll send the economy into a full-blown recession – the 20% stock market drop from Q4 2018 would pale in comparison.

Therefore, the Fed will stay up and stay on its tragic course, day after day and month after month until the entire system breaks down. As always, too many sleepless nights will invariably be followed by a massive crash – it’s lights out and time to say “good night” to the markets.

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