The Federal Reserve is done hiking interest rates and will definitely flip to rate cuts in next year’s first half – or at least, that’s what the market has assumed and priced into large-cap stocks. Now, the burden falls upon the stock buyers to justify their optimism. It’s a heavy burden, given the actual facts and circumstances.
For one thing, Federal Reserve Chairman Jerome Powell has made it crystal clear that he doesn’t think his “job” is done yet – not even close. He wants 2% inflation, and he’s unafraid to go back to interest-rate hikes, while also letting the Fed’s balance sheet of government bonds mature or “roll off.”
If raising borrowing costs and sucking liquidity out of the banking system ruins the U.S. economy, so be it. Powell only sees himself as having one job and one objective, which is to hammer inflation down to 2% and keep it there regardless of the costs to individuals and businesses.
There are numerous problems with this, one of them being the contradiction between Powell’s objective and the print-and-spend policy of Bidenomics. As long as career politicians paper over the nation’s problems with dollar bills, getting and keeping inflation down will be an impossible task for the central bank.
Of course, Powell is himself a career politician and he will be under enormous pressure to pivot to interest-rate cuts during the 2024 election year. Powell chickened out in late 2018 when Trump put him in his place, so don’t be too surprised if the Fed chairman returns to ultra-accommodative monetary policy just in the nick of time for the elections.
It would be foolish, however, for investors to wait until the Fed pivot happens. As you can see in the chart shown above, gold is preparing to break above its long-standing $2,000 resistance level, and commodities traders only need an excuse to kick off a buying frenzy.
While short-term traders who bought high-flying tech stocks are praying for a “soft landing,” gold investors are preparing for the inevitable. When the you-know-what hits the fan and Powell is forced to cut interest rates and start buying government bonds in huge quantities again, the moves in bond yields and gold will be sharp and extremely quick.
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With the U.S. government having to pay high interest rates on its debt, to the tune of $1 trillion per year on $33 trillion of sovereign debt, there’s no chance that Powell can keep interest rates elevated for the long term. Sure, Powell will talk tough and threaten “higher for longer,” but ask yourself: Have Powell’s threats and forecasts been spot-on in the past? Whatever happened to “transitory inflation” in 2022?
This explains why stock traders give no credence to Powell’s hawkish talk. Even though he’s recently threatened to hike interest rates again if there are any signs of inflation perking back up, stock investors continue to operate under the assumption that Powell is all bark and no bite.
Assumptions are already baked into the pie, as interest rate futures now predict a 0% chance of interest rate hikes in December and in January. Additionally, the market is starting to price in the start of interest rate cuts as early as March.
Yet, odds-making is the domain of speculators. For sensible investors, trying to time a Fed pivot isn’t necessary or productive. Remember the old but still relevant principle: It’s time in the markets, not timing the markets, that brings success.
That’s certainly true with gold, especially since you’ve been given one last chance to buy it under $2,000. The idea isn’t to jump in when bond yields crash and large-cap stocks wobble, as those changes will be lightning-fast and most people will be late to the party with gold.
By then, gold at $2,000 will be a fond memory. To prepare for generational returns on your investment, all you need is a starter position in gold now – no assumptions needed, except that governments and central banks will continue to promote errors and lies in the coming years.
Chief Editor, CrushTheStreet.com
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