Markets dropped sharply in reaction to Jerome Powell’s comments yesterday on the Fed doing nothing. Oddly enough, there wasn’t much reaction to the Fed’s announcement itself. It was after Powell said in his press conference that, looking forward, the Fed didn’t see any reason to raise or lower rates that markets dropped.
This is quite striking, given that:
- The US far exceeded expectations for Q1 GDP growth—despite the government shutdown.
- Unemployment figures remain at record lows.
- Inflation remains tame.
- Wall Street is booming again.
Now, I share the view that government economic numbers are cooked. If I want more credible numbers, I look to John Williams’ ShadowStats.com. But whatever the official numbers mean, they were up.
So how could Mr. Market be surprised that Powell didn’t sound as dovish as he did before? If he had talked rate cuts in the face of a visibly improved economy, the contradiction would have damaged Fed credibility. People would have said the Fed caved to Trump’s tweets. Really, what else could he do?
It seems crazy, stupid, or both. But remember that the market is not one person of one mind. It’s composed of millions of people, each with his or her own perspective and goals.
Many of the institutional market participants were evidently betting on rate cuts coming sooner than they now seem likely to come. Some of these were short the US dollar, because lower rates and QE are bearish for the USD.
Then things didn’t go to plan, and the USD shot up. It was such a sharp move, I suspect there was some short covering going on, not just changes in near-term outlook. That’s when gold really got hammered yesterday.
The vertical drop was impressive, but its actual magnitude wasn’t that large—about $15 per ounce. Gold is under greater pressure today, which seems overdone. Yes, I did just warn about a near-term correction in gold, but Fed inaction was not the risk I wrote about. Given that the Fed didn’t actually do anything, it seems to me that the odds favor a gold rebound in the near term.
But I’m not writing today to tell you what gold is going to do next. Nobody can do that reliably. I’m writing to update my take on the potential melt-up on Wall Street in the months ahead.
You see, there’s something more important than some market participants having been overconfident that the Fed would soon cut rates. It’s the strong resurgence of “good news is bad news” thinking on Wall Street. Yesterday’s retreat on Powell’s comments was just before the market closed. Today, as I write, an attempted rally has failed, and the red ink is getting deeper.
It makes sense for commodities to drop on a stronger dollar, but not the Dow and S&P 500, especially given how much the US imports. That major stock indices are falling shows that Wall Street is not being driven by fundamentals, but by its expectations of easy money. That’s what makes good news like surging GDP numbers “bad”; if business fundamentals keep improving, the Fed will go back to choking off the easy money.
To me, this is clear evidence of that Wall Street’s record bull run will come to an ugly end in the not-too-distant future.
These developments do not mean the melt-up I wrote about before won’t happen first, but I would say the odds have dropped slightly.
When does the bull finally fall to the matador?
Some economists think he’s already received the fatal blow. The blood is flowing, and he will keel over at any moment.
But I’ve heard that before, and that before, and that stubborn bull keeps charging back up again. I refuse to lead readers astray with some persuasive argument for X, Y, or Z deadline. Instead, I’m going to say this: whenever this bull falls, he will fall hard and fast. That makes it critical to prepare early, rather than be forced to scramble late.
Specifically, I want to:
- Accumulate physical gold and silver—this is for prudence, not speculation.
- Speculate on the very best precious metals plays, because they will soar after the Wall Street bull goes down—with or without a melt-up first.
- Hold off on buying any more industrial metals plays until it’s clear that the real global (not just US, paper-based) economy is heating up again.
- Build positions in the best uranium picks, which I see as largely immune to economic and stock-market fluctuations.
As always, if you want to know which stocks I consider best, please subscribe to The Independent Speculator, but no arm-twisting. You now have my take.