One and Done? Get Real!

  • Really? Powell wasn’t prepared for such a basic question?
  • Stocks tank, then reverse: Bad news is good news again
  • This is the first rate cut, but it won’t be the last
  • Dollar soars, gold sinks — it’s only temporary
  • Central banks back up the truck for gold
  • “Rich” rewards for recovery of stolen business vehicle
  • Maybe central bankers do know what they’re doing?

Wall Street’s Fed-induced hissy fit sure didn’t last long.

At the close yesterday, the Dow had tumbled 333 points. As we write this morning it’s regained 265 of them. The S&P 500 is back above 3,000. The Nasdaq has recovered all of yesterday’s losses and then some.

To the surprise of no one, the Federal Reserve’s Open Market Committee ended four years of efforts to “normalize” interest rates — cutting the benchmark fed funds rate by a quarter percentage point.

But then Fed Chairman Jay Powell strode before a gaggle of reporters. By the time he was done, he probably regretted his decision to start holding press conferences after every FOMC meeting, instead of just four times a year. Under the old system, he would have just repaired to his favorite watering hole after the meeting yesterday.

Jay Powell

Probably drinks very dry martinis — twist, no olive

The obvious question, for which he seemed manifestly unprepared, was where the Fed goes from here. Is this “one and done,” or are more cuts to come?

If he didn’t want to tip his hand, he could have simply followed the practice set by President Dwight Eisenhower in the 1950s: As the story goes, Ike’s press secretary Jim Hagerty was worried about how the president would answer a thorny foreign policy question one day. Ike told Hagerty, “Don’t worry, Jim… I’ll just confuse them.” (Alan Greenspan was a master of this art.)

Powell didn’t rule out future rate cuts — the message Wall Street was eager to hear. But all the same, he emphasized that the FOMC did not view this cut as “the beginning of a long series of rate cuts… You would do that if you saw real economic weakness… That’s not what we’re seeing.” Rather he portrayed this cut as a “midcycle adjustment.”

So there you go. Just some halftime adjustments… while Wall Street wanted the quarterback pulled and half the coaching staff fired!

“Ham-handed” was how one money manager described Powell’s performance to The Wall Street Journal. The president, for his part, accurately captured the mood…

Donald Trump tweet

But now it’s all over, less than 24 hours later? The market has recovered? What gives?

The market meandered for the first half hour this morning. Then the Institute for Supply Management came out with the monthly ISM manufacturing survey.

As a reminder, numbers above 50 with this survey indicate a growing factory sector; those below 50 points signify contraction. The number has been steadily sliding from more than 60 a year ago… to 51.2 this morning. Growth, yes, but the weakest growth in nearly three years…

Factory Gears Slowing Down chart

Not what you’d call “real economic weakness,” to borrow Powell’s phrase. But it’s weak enough to spur the bad-news-is-good-news phenomenon we saw so often in the years after 2008: A punk economic number fueled a Wall Street rally because the lousy number signaled the likelihood of more easy-money Fed policy. Feels like old times!

But really, the sell-off yesterday was an overreaction: If this is a case of “one and done,” it will be a first in at least a quarter century.

This is the fifth time in 25 years the Fed has pivoted from raising rates to lowering them. On all four prior occasions, there was always more than one cut.

The betting in the futures markets this morning is that this time will be no exception — there’s a 61% probability of another quarter percentage-point cut at the next FOMC meeting on Sept. 18.

The only question is whether now will be analogous to 1995 and 1998, when the Fed made only minor cuts as the economy was still growing (“midcycle adjustments,” as it were)…

One and Done Would Be a First

… or 2001 and 2007, when the Fed slashed rates to record lows in the face of an oncoming recession.

In any event, the Fed’s attempts to reclaim something approximating “normal” interest rates are over. The hope was to get the fed funds rate close to 4%.

Instead, we topped out at 2.5% and it’s downhill from here. The relentless punishment of savers is resuming — if it ever really ended.

Meanwhile, “quantitative tightening” ends today — two months ahead of schedule and long before the Fed would have liked.

As we explained yesterday, the Fed’s post-2008 efforts to stoke the markets and the economy entailed nearly six years of “quantitative easing” — the Fed buying Treasury debt and mortgage-backed securities, thus blowing up the Fed’s balance sheet fivefold to more than $4.5 trillion.

Words alone don’t do it justice; we have to rerun the chart we shared just yesterday…

Unprecedented Experiment

As you can see, the Fed began to sloooowly reverse that process in early 2018 — an act that amplified the Fed’s interest rate increases and contributed to Wall Street’s withdrawal pangs.

There was zero hope of bringing the total back to pre-2008 levels, but Fed leaders hoped they could bring it down to, oh, something less than $2.5 trillion.

But no dice. It’s stuck for the duration at $3.8 trillion now. As we said a couple of years ago after our face-to-face encounter with Minneapolis Fed President Neel Kashkari, it’s gonna be real interesting to see how much more the balance sheet can be blown up during the next financial crisis.

If the action in stocks yesterday has been reversed today, that’s not the case with either the dollar or gold. Both of those post-FOMC moves are holding firm for the moment.

The dollar index pushed above the 98 level for the first time in more than two years — which surely can’t please the president, eager for a weaker dollar to boost U.S. exports.

As the dollar strengthened, gold weakened. But at $1,415 the Midas metal is no weaker than it was two weeks ago. Gold has held the line on $1,400 for nearly four weeks now.

In the longer term, lower interest rates will push the dollar down and gold up.

“As the Fed cuts interest rates lower and lower,” says our income maven Zach Scheidt, “investors naturally want to move money out of U.S. dollar accounts because they’re not earning anything from their savings.

“This causes the value of the dollar to drop… which leads gold and silver to trade sharply higher. Over the past several weeks, we’ve already seen gold and silver prices spike higher. And the spikes happened before the Fed officially announced its interest rate cut.

“Now that the move is official, I expect gold and silver’s rally to pick up momentum. And that’s great news for the gold and silver mining companies.”

Indeed. Even as gold is steady today, many of the mining stocks have already recovered their losses from yesterday, bouncing 3% or more.

Besides, the globe’s central banks see which way the winds are blowing.

“Central banks purchased a record $15.7 billion of gold in the first six months of the year,” says the Financial Times, “in an effort to diversify their reserves away from the U.S. dollar as global trade tensions continue to simmer.”

That figure comes from the World Gold Council. It’s the highest ever for the first half of a year, topping 2018’s record.

The big buyers were Poland, China and Russia. In the case of Russia and China, it’s the continuation of a decade-long trend. Check out this chart we’ve been sitting on for a few weeks as we waited for the right moment to lay it on you…

Ditching the Dollar Chart

Not exactly a new story if you’ve been keeping up with these daily missives. Russia and China are eager to get out from under the U.S. dollar’s thumb and they no longer have to kneel before “the economic policeman of the planet,” to borrow the French finance minister’s phrase.

Thieves have struck an iconic British business. That said, the stolen item of capital equipment shouldn’t be hard to track down…

Hotel Chocolat Tweet

Sometime late Tuesday or early Wednesday, the “Chocmobile” disappeared from the headquarters of the luxury chocolatier Hotel Chocolat in Royston, Hertfordshire. The custom-made van shows up regularly at events around England to sell the company’s ice cream, candy and hot drinks.

Per the BBC, the rewards for information leading to the Chocmobile’s recovery are, shall we say, rich — “a visit to its ‘Inventing Room’ at Hotel Chocolat’s factory, where it comes up with its recipes. It is also offering a five-year subscription to its Chocolate Tasting Club, a mail-order chocolate service.”

Security video shows three men smashing a window before making off with the van. And yes, there was a heaping helping of the company’s wares inside.

“To be honest, it’s pretty hard to miss,” says a company spokeswoman. “And we want it back.”

“It’s a rare day when I don’t agree with Jim Rickards,” writes one of our regulars after yesterday’s preview of the FOMC decision. “He is a thought leader who has forgotten more about this stuff than I’ll ever know.

“But I believe central banksters do know what they’re doing. They’re abrogating their original mandate (which was a smoke screen to begin with), stealing our wealth and purchasing power with a stealth tax called inflation and lying to us as a matter of course.

“Otherwise, I’m sure they’re good people. It’s just that lately their role has more to do with plunge protection — read ‘bubble perpetuation’ — than safety or stability of our economic system.”

The 5: Hmmm… Just going by the government’s official inflation numbers, a dollar’s worth of goods purchased in 2008 would require $1.16 today. And for way too many Americans, their pay hasn’t kept up.

Recall, however, the Fed has a target of 2% inflation. It was an unofficial target for many years; it became official policy under Ben Bernanke in 2012.

If the Fed had met that target consistently, the dollar of goods in 2008 would cost nearly $1.22 today.

So the Fed has totally screwed-up priorities (a loss of our purchasing power) — and can’t even get those right!

Best regards,

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Life comes at you fast: As we go to virtual press, the president just announced a 10% tariff on another $300 billion in imports from China. The Dow has gone negative for the day. More tomorrow…

P.P.S. In recent weeks we heard from 574 readers about the astonishing gains they collected from one of our premium services.

There was the handsome check for $10,473 collected by Ray Loach. Tracy Smith ran off with just over a 500% gain… totaling $10,055. And Robert Harrington says he scored a huge 600% gain…

Have you ever felt the thrill of a 600% gain before?

It could be yours… but we can’t keep the opportunity available to everyone forever. The publisher of this service has just told me he’s shutting down access at midnight tonight.

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Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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