Pro Perspectives 12/18/19

December 18, 2019

It was a year ago that the Fed dealt damaging blow to the economy and the stock market, systematically hiking rates for the eighth time (in the post zero interest rate era), and promising to continue to systematically extract liquidity from the global markets. 

The stock market didn’t like it.  It went from ugly (down 10% for the month of December) to dangerous (down 18%) very quickly.

Heading into that December 19th Fed decision, there was already evidence that the Fed had miscalculated.

Here’s an excerpt from my December 17, 2018 piece, the day before the Fed’s two-day meeting:

This is all setting up for a very big Fed decision on Wednesday.  The Fed has hiked three times this year.  They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.  

With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns).  And it’s the first time since 1994 that cash has been the highest returning asset class.

It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recovering economy — in anticipation that inflation would quicken.  It didn’t happen.  They ended up choking off growth.  The scenario this time looks very similar.  The Fed paused back early 1995, and then ended up cutting rates.  Stocks boomed, returning 36% on the year.”

Here we are a year later, and the Fed was indeed forced to reverse course, and stocks have indeed boomed: up 27% on the year.  Take a look at what the economy did following that Fed flip-flop … it averaged 4.5% growth through early 2000!  Who’s predicting this type of scenario for the next several years?  Not anyone I know, hear or read.