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FOMC: Fear Of Missing Crash

This is a special report to discuss the FOMC meeting scheduled for next week, March 19th and 20th.

But first, this was the Barron's cover this past week:

Recall that the entire rally from the October 2023 correction lows was predicated upon Fed rate cuts by next week's meeting in March. That goalpost of course got moved by the Fed earlier this year. However, once again, the Fed is flipflopping on rates. Most recently, Fed officials went from hawkishly pushing rate cuts into the back half of the year just two weeks ago, to now more recently once again pulling rate cuts forward. One wonders, what does the Fed know about the economy that would make them reverse course again?

FR: We can take this headline as prima facie proof that the Fed is now messaging Wall Street to go ahead and put risk back on. Likely because something is breaking in the real economy. Friday's jobs report was hot on the headline number but beneath the surface the market interpreted it as weak. Clearly the uptick in the unemployment rate was an important factor, as was the large downward revision to January jobs.

All told, the bond market is clearly signaling rate cuts sooner than later.

I would be remiss if I did not point out that Fed policy has been almost a continuous disaster since the pandemic, the net effect of which has impinged entirely upon the middle class. During the pandemic they increased the balance sheet too much, setting off rampant asset inflation. Subsequently, they raised interest rates to a level three times what they were pre-pandemic, while keeping their balance sheet far larger than it was in 2019. What Fed policy error has caused is far too much economic inflation, too much asset inflation AND too much interest rate inflation. Now we are watching speculators chase asset bubbles ever higher on the belief that rate cuts will be market friendly. However, historically that has seldom been the case. Of the seven times the Fed cut rates in the past 40 years, only one time did markets go higher in the year following - 1995. Every other time directly followed or directly preceded either recession or market crash, and usually both. I am of course referring to 1987 (crash), 1990 (recession, bear market), 1998 (crash), 2001 (recession/bear market), 2007 (recession/bear market), 2019 (recession/crash). One could make the case that the Fed rate cuts in 2019 would have turned out fine without the pandemic, but we don't know. Without the record pandemic stimulus, it's possible there would have been an even longer recession.

This chart is a good reminder that rate cuts are not usually market friendly:

In summary, it was inevitable that global central bank exit from tightening would cause a global asset melt-up echo bubble of the pandemic, as speculators started to front-run the next easing cycle.

Which means that central banks have no REAL exit strategy from their rate hikes. Why? Because their actions of signaling impending rate cuts have created ever-greater market risk and speculator leverage ahead of the event.

All of which means that the market is now the biggest risk.

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