All Eyes Turn to Jerome Powell
All Eyes Turn to Jerome Powell by Jim Rickards – Daily Reckoning
It’s been a wild run lately. Watching U.S. stocks plunge at one point over 10% in the past 10 days has certainly been a sobering experience for investors.
After a nearly nine-year bull market, stocks have just experienced their fourth 10% correction. But as I’ve been reminding people, it wasn’t the end of the world. U.S. stocks suffered 10% corrections in August 2015 and January 2016 and bounced back quickly both times.
Yet this correction is the most mysterious of all, since there is no easily identifiable cause such as the Chinese devaluation that triggered the stock market corrections in August 2015 and January 2016.
At the same time, interest rates are surging and bond prices are plummeting, yet there are no signs of inflation. Finally, gold has mostly been moving in a narrow range, which is actually quite bullish considering the head winds arising from Fed rate hikes and higher interest rates generally.
So what’s going on? How can we connect all of these dots?
On Feb. 8, I had an interview with Stuart Varney on the Fox Business Network. I make the point that the catalyst for the stock market correction is much higher interest rates.
But higher interest rates are not due to inflation. In fact, there is no inflation anywhere in sight. The jobs report on Friday, Feb. 2, was much weaker than was widely reported.
The reason for higher interest rates is the sudden fear of huge deficits arising from the Trump tax cuts, the congressional budget-busting deal and surging defaults on government-guaranteed student loans.
The deficit implications of this triple-whammy are so horrendous that gold is showing strength despite higher rates, on fears that huge deficits and credit downgrades will erode confidence in the U.S. dollar itself.
So there you have it.
Higher deficits = higher interest rates = lost confidence in the dollar = plunging stock prices = higher gold prices. It’s all connected.
As I mentioned, in August 2015 and July 2016, stocks quickly rebounded after suffering corrections. But I also caution that this time may be different.
Stocks may have further to fall and may not bounce back so quickly, especially if the “Fed put” does not materialize on March 21. That’s the date of the next FOMC meeting.
As of now, the Fed is expected to raise rates. But if disorderly markets continue, the Fed could give the market a boost by not raising rates. Janet Yellen did this in September 2015 when she delayed the “liftoff” in rate hikes to end a stock market correction. She did this again in March 2016 when she delayed a rate hike to help stop another stock market correction.