Skip to main content

I did not think the Fed would be stupid enough to hike rates 0.75% – effectively doubling their current rate in one meeting – especially after telling us, over and over again, that the hike would be 0.5%. Initially, the market sold off, then it recovered, then overnight we flew higher and then we crashed and now we're recovering. It's madness.

At 2:10 pm, during our Live Trading Webinar, I posted this note to all of our Members:

0.75% hike is too much to risk bullish stance so let's add 300 more SQQQ 2024 $60/80 bull call spreads in the STP for about $4 each ($120,000). That will give us $480,000 additional protection for now.

That flipped our Short-Term Portfolio much more bearish as 0.75% does have repurcussions and I couldn't believe how the market was rallying on the news yesterday but when I woke up this morning – that was all over and the rest of the World was selling US equities hand over fist. Fed Funds Rates are effectively now 1.5% and they Fed reiterated their intention to have us over 3% by the end of the year and there are 4 meetings left so 4 more 0.5% increases are ahead of us – at least.

Even worse, the Dollar is well off it's high of 105.60 (from Tuesday) at 104.75 and that makes no sense as no other Central Bank is keeping up with our Fed's tightening schedule so consider that the other shoe about to drop on the market and now our lows are certainly in danger of being broken.

Capture

We are very well-hedged for this (see Tuesday's: PhilStockWorld June Portfolio Review – Part 1), so we don't really care but we still have a lot of CASH!!! on the sidelines and we'd love to find a reason to deploy it. So far the Fed is not giving us one. As noted by Judy Shelton: "Does it actually make sense to hike interest rates in a deliberate effort to reduce employment and curtail economic growth, all to relieve price pressures?"

The Keynesian logic that underlies the Fed’s analytical framework is fairly straightforward. To stimulate economic activity and lift aggregate demand, the Fed engages in expansionary monetary policy: It lowers interest rates to encourage borrowing. When spending on goods and services outstrips production, causing inflation, the Fed uses contractionary monetary policy to dampen economic activity and reduce demand: It raises interest rates to discourage borrowing.

A major cause of this recent bout of inflation was the federal government’s putting additional money in the hands of consumers, increasing demand, without increasing supply.

Does the Fed’s approach to managing the money supply facilitate the productive use of financial capital? Should the Fed be encouraging financial institutions to keep money idle in depository accounts? How does that contribute to increasing the supply of goods and services? This could be precisely the wrong way to carry out the Fed’s mandate to promote stable prices and maximum employment.

Monetary Policy isn't "normal" until the rate of savings is HIGHER than the rate of inflation. At the moment, you are lucky to get 2% from a bank account and 10-year Bonds are only now starting to pay over 3% but inflation is 8.3%. The Fed's target rate of 3.5% assumes inflation will go back to 2% but what if it doesn't? Will the Fed go to 5%, 6%, 11%? As noted above, the Fed's actions do nothing to improve the supply of goods – in fact, they hinder investment in new facilities and equipment when they raise rates. The Fed only DECREASES demand with higher rates – to discourage you and our Corporate Citizens from borrowing money to purchase things.

Crashing the economy, therefore, is not an unfortunate side-effect of raising rates – it's the expected result. All this hard and soft landing BS is simply about whether the Fed tightens just enough to bring demand in line with supply but, especially with the war raging and supply chains disrupted by Covid – this has become a very myopic way to look at our economic issues. As noted by Shelton, the Fed is applying 1930s logic to 2020s problems.

This morning's sell-off is more of a reaction to EU and Asian selling than US investors as other Central Banks are hiking rates to keep up with the Fed (hence the Dollar weakening a bit). We're hoping to see the bottoms hold again and get a bit of a move back up but our hopes of going into another long weekend without being very well-hedged are now out the window – we can't take a chance like that.

Be careful out there…