The FED’s Weird Pause
The FOMC meeting is scheduled to take place this week, and the new consensus that’s forming is that the Federal Reserve will skip a meeting.
This wasn’t even discussed until recently, but after the debt ceiling vote passed, the markets realized that by holding the FED Funds Rate steady in June, Jerome Powell can come back in July and raise it, thus continuing on the path of fully defeating any urge to borrow and expand, be it in industry or housing, with the purpose of deflating any remains of the bubble that are still out there.
Courtesy: Zerohedge.com, Bloomberg
As you can see, interest rates are so high compared with the S&P 500’s earnings yield (reverse P/E ratio) that for the first time in this century, income investors are being rewarded handsomely.
You can now earn 10% to 12% by lending to real estate funds or private equity!
The name of the game is cash.
If you’ve got cash and dry powder, you’ll be able to win in this new environment where credit is so expensive.
Going back to the FED, if you see what the bond market is forecasting, it is clear that we are in a “higher for longer” world, meaning investors now assume there will be no rate cuts in 2023!
If that’s the case, one must consider the implications:
- The housing market: many think that we’re about to see a tremendous crash, but what some think is more likely is a realization that high interest rates are here to stay, therefore postponing the purchase of a home for the family doesn’t really change anything.
Today, mortgage applications are as low as they were during the 2009-2015 era, and investors have also become suspicious of prices.
Even so, no one can deny the fundamental fact that America needs many new homes!
- Regional banking: we may see more hiccups, but the panic is over.
- Russia: the war is waging on. This will impact commodities because the Ukrainian counter-offensive is on, and production in the “breadbasket” of the world will be challenging.
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We are in a situation where high interest rates have not deterred stocks from bottoming and climbing to a new bull market.
This reminds me of previous periods when bear markets have ended and funds moved from cash to equities.
In both 2001 and 2009, each resulted in major rallies for precious metals.
The FED’s “skip a meeting” routine in June virtually guarantees a last rate hike in July, and that introduces the certainty that precious metals are looking for if they’re going to rally again.
The dynamics are clear: if we’re hitting the bottom on risk-averseness and investors return to the market then the reflation era that’s like 2001 is upon us, and that bodes well for gold.
Bear in mind that the sentiment towards precious metals is weak, so we’re certainly not in any sort of late-stage bubble mania.
The next leg is up.
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Governments Have Amassed ungodly Debt Piles and Have Promised Retirees Unreasonable Amounts of Entitlements, Not In Line with Income Tax Collections. The House of Cards Is Set To Be Worse than 2008! Rising Interest Rates Can Topple The Fiat Monetary Structure, Leaving Investors with Less Than Half of Their Equity Intact!
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