Powell has been hijacked

There is no more important event than this one in the world, which will occur next week. Basically all the eyes will focus on this event and the whole financial world will react one way or the other thereafter, potentially violently. If you still don’t know what I’m talking about, then you really don’t know anything about finance and should not be in the trading/investing business at all, to say bluntly! But I’m sure everyone knows what is coming next week, the most important meeting in the past few years indeed—the July Fed meeting. Why it is so important? Well, it will be the first time in the past 4 years that Fed will be virtually sure to cut the Fed fund rate again! If you recall well, the Fed had started rate cut for nearly 10 years since 2006 which brought the rate down to zero by 2015, when it started to raise rates again in Dec 2015.  

You may recall Powell was still quite hawkish late last year for further increasing the rates and he was scared by how the market had reacted to his hawkish tone and had a 180 degree about-face to calm down the market. That was the time I wrote Powell was scared and confused! (See here, here and here). It was successful by his drastic direction change with the market shooting up by 20% by now.  So is there good reason for the Fed to cut rates now? Yes and no, depending on how you look at it. Purely from the economy’s front, there is really no rationale to cut rates now with a so robust economy going so well at the moment in the US, thanks to the pro-business policies by the current administration. However, Powell/Fed has no choice but to cut rates as he is just like being hijacked now regardless whether it is against the economic norms or not. Two reasons that are forcing the Fed to do so:

• US is the only major economies in the world that is doing so well. All the others are still struggling and are all renewing the easy money policy one way or the other outside of the US, including EU, China, and Japan. The US will be significantly losing its competitive edge if it still keeps higher interest rates.
• A related complication with a strong economy and relatively higher interest rates is the ever strengthening US dollars, which is also making the US goods less competitive in exporting.

So it is just a matter of when, not if, the Fed will cut the rate. Next week, we will see the first rate cut in 4 years, which has been priced in for 100%. If Powell does not do that, he can immediately leave his post I think as the global markets will tank to the extend he cannot stand for. Based on what he did in the past few months, he has no gut for doing that! So the real question is how much and how the market will react. I personally think the reaction will likely be negative regardless.

If the Fed cuts rate by 25 basis points (0.25%), this has already been priced in and we may see a “sell the news” reaction. The more interesting reaction is what happens if the Fed surprises the market by cutting 50 basis points (0.5%). The more logic speculation is that the market will be more happy with this more aggressive move by the Fed and the market will jump. But I feel less so positive. I think the market will be frightened to see such a deep cut as it may mean the Fed is seeing something the market is not knowing that is more troublesome economically and therefore people will likely opt to run first before asking questions. This is how I see the market for the next week and how I’m positioning myself as of now. This is also consistent with what my VIX crystal ball is telling me now! 😝😍😘