Money Makes The Mare Go, Momentum Makes It Go Go

The Fed raised interest rates to their highest level in 22 years yesterday.

As expected.

Markets were mixed after the announcement…except for the strong runoff into the bell.

Do you think someone(s) knew META’s earnings or more importantly their guidance?

Between the lines is what the Fed is really saying.

1)      The economy is stronger than they expected given their aggressive and historic rate campaign. Fed policy has failed to reduce inflation sufficiently.

This means they will continue to raise rates in the future. They define inflation as “elevated," a very strong word to describe true inflation which contradicts the Labor Dept’s understated CPI and PPI figures.

To call inflation elevated is a correct description, as anyone who can fog a mirror and pays a bill can testify to.

Home prices are rising despite a doubling of mortgage rates in one year. Grocery and food price increases are ludicrous.

Sot the Fed’s attempt to cool inflation through historic hikes has failed.

You don’t have that much power and fail.

Speculators scoffed at the Fed throughout 1929 and forced their hand.

And their response then was pale compared to the current hike trajectory.

Powell: “Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to 2% HAS A LONG WAY TO GO.”

The conundrum is that some of the inflation is caused by the cost of borrowing increase by businesses which have to pass this cost along to consumers.

Cost Push Inflation.

The cost of money rising has produced more inflation.

The rising interest rate policy fails to increase supply which is the underlying cause of inflation.

But one thing you can count on---the Fed will stay the course of raising rates until there is blood in the streets.

Then they will declare success.

Powell thinks he is acting like Paul Volker. But during Volker’s reign of terror, there was NOT an aggregate supply problem. Today there is.

2)      The Fed said “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain.” Translation---it’s going to be much harder to borrow money from banks.

Lines of credit for consumers and businesses are in the 12% region, when they were 6% a year ago. Yet deposit interest rates have risen only to at most 3% and most banks are under 1%.

Lending shut-down time has arrived.

Market momentum doesn’t care about these fundamentals at tops.

The restriction on bank lending to business is being imposed by bank regulators at the behest of the Fed.

You can bet on that. This will worsen the shortage of goods as businesses will not be able to expand their operations to meet demand. Supply will shrink from already inadequate levels.

This is the tool the Fed uses when raising interest rates is not working to slow the economy or reduce the “elevated” level of inflation. Without public knowledge, they shut down bank lending through intimidation by bank regulators.

MSM either is unaware or ignores this as conspiracy theory. Like the market…for the moment.

But what the above guarantees is that we are going to have a hard landing recession/depression.

The Fed is hellbent on it.

Every single time banks curtail lending, every time, the U.S. economy heads into a deep recession or worse.

Money makes the mare go.

THERE IS A LAG TIME OF AROUND ONE YEAR.

Let’s see where the market is in October/November and March 2025.

Could the momentum extend into the end of August like 1987 and 1929?

Yes.

Remember we flagged those flat years UNTIL MAY lows followed by parabolic blow-offs in June.

Speaking of 1987, the DJIA’s win streak of 13 days has not happened since 1987.

This 13 day run has all been about the anticipation of a peak in Fed Funds rate.

I believe this 12 days of expectation is flawed for two reasons:

1)      The Fed has raised the Fed Funds rate by 525 bais points already and the impact on the economy which normally follows some 12-18 months after the raising cycle starts is just about to begin as we are 16 months beyond where the hiking started

2)      Powell made it clear yesterday that there is no reason to believe we’ve seen the end of rate hikes.

13 days of buying in anticipation of something that may not happen and will not erase the 525 points of past increases yet to be felt in sales, employment and other economic data ahead.

So the question is to pick one historic example: did the 1929 crash occur because it was discounting an economic disaster or did the 1929 crash perpetuate the depression?

Markets have been “buying the rumor.” Soon they will “sell the news.”

This belief is also based on extreme greed:

It is based on falling momentum.

Markets have bought the rumor that we would have a soft landing or no landing.

They have bought the rumor that the Fed would start to cut rates before year-end.
Cycles, sentiment and momentum suggest a down turn is on deck.

Yesterday I mentioned that I did not see any square-outs at this SPX/SPY region.

However, using the number grid on the Square of 9 Wheel as YEARS we see that 2023 squares a price of 462 (4620) should META spark a further rally.

It must be said that the year 1929 squares late August.

Interestingly, the year 1987 squares October 29^th, the day of the crash in 1929.

There was beaucoup synchronicity between those two crashes.

Interestingly, 1987 is 180 degrees straight across and opposite July 29^th.