MAR 13, 2018
The Fed is behaving as if they believe if get the feng shui exactly right on the Titanic's Lido Deck, maybe the sucker won't sink. A tweak here, a raise there, an unwind over yonder.
It's a veritable Star Trek navigation panel of mindlessly blinking lights and mysterious levers, but there is no magic combination of actions that can save a fundamentally broken and doomed system. The ship is sinking.
The Fed is preparing for the next crisis. The evidence is clear that it takes 3% to 4% in rate cuts to pull the U.S. out of a recession. The Fed cannot cut rates even 3% when the fed funds rate is less than 2%.
So, the Fed is in a desperate race to raise rates before a recession arrives so they can cut rates to cure the recession. In short, the Fed is tightening monetary conditions now so they can ease conditions in the next crisis without destroying confidence in the dollar.
The Fed’s attempted finesse in financial markets could well result in a market crash as bad or worse than 1929.
The impact of such a market crash will not be confined to the U.S. In fact, a stronger dollar resulting from tight monetary policy could precipitate a crisis in emerging markets dollar-denominated debt that transmutes into a global liquidity crisis through now well-known contagion channels.
The Fed has no good choices, but investors do. Now is the time to reduce holdings of stocks and diversify into cash, gold, silver, and real estate.