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From Greg M
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A rate cut with the 10YY below the FED Funds would send the markets back to 1966, which was the last time the FED cut rates prematurely. By cutting rates prematurely, it caused core inflation to skyrocket to the point where the FED had to keep raising rates until the 10YY finally was higher than the FED Funds Rate in 1981, and then the FED swiftly cut rates to bring inflation back under control. If this happens, then within this decade core inflation will be rising to its fastest pace not seen since the early 1930's, with the velocity at which it rises reaching close to the 1920's.
With national debt higher than GDP now, compared to the 1920's-1940's and 1960's-1980's, when the National Debt was "insignificant" to GDP...this would cause the markets to decline more now, not rise to new highs like 1966-1981...the markets also had risen after they finally got it under control from 1981 to present, but because of the Debt/GDP ratio, this time it will be worse for equity's. It means the FED will have to turn the money printers off to fight inflation, which will gut the markets.
When the FED cut rates in 1966, the FED Funds rate was at 5.6%, with the 10YY at 5.4%. Depending on where the 10YY is when the FED cuts rates next, this will show the real impact of the situation. The lower the 10YY is when the FED cuts rates, the more inflation will persist and grow exponentially.
I already covered that National Debt being higher than GDP now is one variable proving that the markets will not be propped up as much as then.
However, another variable that proves why is by taking the market capitalization of corporations that govern the price action equity's then and comparing it to their size now. What we are seeing now is less and less consumer demand, as corporations ramp up prices from the rise of inflation since 2021. If we are anywhere near prior to 1966, then this means that prices will continue to increase while demand goes to zero. How can corporations in modern day make profits if there is no consumer demand and the money printers are turned off?! The market capitalization of the company's in equity's will significantly decrease, bringing the overall market down with it, as consumer demand becomes non-existent.
The final variable to consider is consumer debt, not just national debt. When inflation keeps rising, bond yields and interest rates continue to rise, which means the consumers have to pay more to borrow. Credit cards and consumer borrowing is already maxed out, which strengthens the scenario of variable two. No loans, no deals, no transactions. Which is why we will most likely experience real bank failures no matter what the FED does moving forward. This increases downside risk in equities.
The market cannot sustain being bullish through this time period, for these exact reasons, which is why this time the market will keep falling even after the FED gets inflation under control, whenever it may be. The only reason why the market had risen in the past was because the numbers were minimal, and during that time between 1966-1981, the DXY was in much better condition than it is now. This time, the dollar strength is much weaker...and it would require exponentially more cash in existence to keep the markets propped up...as well as consumer demand was still persistent, not non-existent like today.
However the silver lining is that in 1969, Gold topped at $43, then collapsed before rising 1,927% (from peak to peak) to $872 in 1980. Bitcoin since 2021 has prematurely been pricing in what Gold was in 1969. This means that a 1,927% increase (from peak to peak) to where Bitcoin was in 2021 puts it at $1.3 Million in value over the next 15 years. The only problem is that it has been prematurely pricing another scenario similar to 1966-1981, therefore when the FED does cut rates with the 10YY below the FED Funds, Bitcoin could collapse before exploding to this valuation. Back then Gold was reactionary to what was happening to the dollar. This time Bitcoin is pricing it in before it happens...so it will create an implosion before the explosion. This may have something to do with the insolvency of banks at the current moment.
Bitcoin and Gold are rallying because smart money see's a weaker dollar over the next 15 years, and these asset classes are the safest place. However, as i mentioned earlier, no matter what the FED does, there will be a banking crisis. Upon this banking crisis, you can expect to see Bitcoin and Gold fall substantially, more so Bitcoin because Precious Metals are physical assets. After the banking crisis is over, Bitcoin then has room to reach the estimated value explained in the paragraph above, as a banking crisis fuels more cash into places that are decentralized.
There are a lot of moving pieces that have more to do than the FED cutting rates and money printers going wild for no reason, and many of the pieces say that the next 15 years is going to be bumpy, but a wealth transfer like never seen before...as long as you are on the right side of history. Most people seem to think that no matter the economic condition or how upside this world becomes, that we are living in today, the markets will keep rising because they have been for over 100 years. Let's not forget that the Central Planners put us in the position to where we believed that nothing matters except inflated markets forever. They have planted this concept into the minds of the masses, and have the ability to take a 180 degree turn any second, while thriving from the suffering of others. All of this only holds true if the FED cuts rates with the 10YY below the FED Funds. But look at where the 10YY is heading?! It's heading downwards...so, even if the FED doesn't cut rates and pauses, it all depends if the 10YY will ever move back over the FED Funds. The longer the FED waits to react, the banking crisis grows exponentially. The FED can raise rates, but then the 10YY will still have catching up to do. No matter how you look at the scenario, the FED can either react or wait for things to turn from bad to worse, and then be forced to react. This is why everything is melting up. The reaction comes now or later...later only means "worse off"
Like half my portfolio is in oil and gas so it’s been a brutal couple months. Should I just keep riding it out Greg?