Seek Refuge in Hard Assets Amid the Fed's Rate Cut
The Fed’s Shocking Move
Last Sunday, we warned you that we were about to experience one of the most important weeks of the year, and that’s exactly what happened.
As many of you know, the FED announced a 0.5 basis point rate cut, the first one in over a year, and much more abrupt than what we’re used to.
From our perspective, they are merely correcting the mistake of not having started to lower rates back in July.
What does this imply? On one hand, people will now have access to much cheaper credit, which acts like pure caffeine for high-risk assets. This week, we’ve seen the Nasdaq rise by 2%, and Bitcoin nearing double-digit growth.
Although so far, everything may seem like a fairy tale, not all that glitters is gold (gold has also appreciated by 1.5% this week). Critics have quickly pointed out that this could be the beginning of the end.
They all rely on the same chart: whenever the Federal Reserve has decided to cut rates by 0.5 points in the last 30 years, it has almost always signaled the start of a major crisis.
With more than 50% declines in the Nasdaq in 2000 and 2008, the historical record shows that abrupt rate cuts have often been followed by steep downturns.
In fact, whenever the first 0.5% rate cut has occurred, within a year, we’ve seen markets drop by 20%.
But how much truth is there in these charts? From our point of view, and after discussing this topic for quite some time, we believe that the long-term outlook is bleak. We’re looking at a historical trend that should not be ignored. However, it’s also important to remember that history doesn’t necessarily repeat itself exactly.
Each economic cycle has its own nuances and unique characteristics. This time, we’re dealing with a post-pandemic scenario, where global economic dynamics differ from previous crises.
A key point that many overlook is the immense liquidity still circulating in the markets. The expansive fiscal and monetary policies of recent years have created a cushion that may dampen the impact of these rate cuts, at least in the short term.
As we’ve seen, unemployment often precedes recessions. Typically, this unemployment occurs when fiscal deficits are contracted. However, we are still in a phase of very high deficits.
But the cycle always repeats, and currently, we are at point 6 of what we’ve been forecasting:
Pandemic
Print money and cut rates
Stop printing and hike rates
Stop printing and keep rates stable
Keep rates stable
Cut rates
Cut rates and print money
(Hyper)inflation of the USD
Debt becomes worthless
Let’s not forget the double inflation cycle that occurred in the 1970s.
From our perspective, this will only lead to the revaluation of hard assets, and the social gap will continue to widen.
Now, as we do every Sunday, we’ll tell you how we do it: