It is universally agreed that on Wednesday, June 25, the FOMC will release the announcement that they have once again agreed to cut US interest rates. The biggest surprise in decades of financial surprises would be the stunned disbelief which would greet any announcement that the Fed had NOT cut rates.
This cut WILL happen. It will be the second rate cut since the end of the sequence of eleven consecutive cuts in 2001. It will take the "intended Federal Funds rate" to either 1.00% or (as more and more people are expecting) 0.75%. Whichever the rate is, it will be as low as the Fed Funds rate has EVER been, and far further away from any rational MARKET set level than it has EVER been.
With this rate cut, the Fed would have the world believe that the future is no longer uncertain. A little over ten years ago, there was a short-lived fashion in US intellectual circles to talk about "the END of history". The Fed certainly bought the argument. The totality of economic and financial history, going back thousands of years, has never shown any circumstances remotely resembling the present one, in which the world's most indebted nation sports interest rates which, for all practical purposes, do not exist.
There is NO WAY that a nation's government can profligately borrow and spend, ignore both their funded and unfunded future committments, and hang a financial yoke around the necks of their dwindling productive citizenry (especially their YOUNG productive citizenry) which gets heavier each day - in perpetuity. When they do it while at the same time denying that there is ANY risk to holding their currency or assets denominated in their currency, they are walking with unseeing eyes towards a financial precipice while pretending that they can literally defy gravity. They cannot - and they will not.
The most amazing aspect of the week's trading has, of course, been the recovery of the US Dollar. At least, it would be amazing in a market which retained any shred of either rationality or knowledge of economic and financial history. But economic history has long since been pronounced clinically "dead" on Wall Street. And as for rationality, that is in very short supply indeed. The reason for this is simple. Looking at the present situation for WHAT IT IS is too scary by half.
Most pundits actually expect that THIS rate cut (as opposed to the previous TWELVE rate cuts) will be the rubbing of the magic lantern which releases the long awaited return to "growth". They expect it with a glazed-eyed fervour. Why? Again, the answer is simple and has absolutely nothing to do with either history or rational economic theory. This rate cut HAS TO do the job. If it doesn't, Wall Street will be left with no retreat from the fact that, especially if the Fed cuts by 0.50%, they are at the end of the rate cut line.
The world has been watching Japan do exactly what the US is now doing - borrow, spend, and eliminate interest rates - for more than THIRTEEN YEARS with no result. They have watched the Fed cut interest rates ELEVEN TIMES two years ago with no result. They know that shortly after the Fed cut rates for the last time in 2001, the $US bull market topped out. They know that the last time that the Fed cut rates - in November 2002 - the $US dive steepened dramatically. They prefer to give no recognition to ANY of this knowledge.
That was then - THIS IS NOW! This time - IT'LL WORK!
Whenever the political climate in any nation becomes increasingly irrational (and the level of irrationality is ALWAYS directly proportional to the level of unreasoning fear), the more outlandish the "panacea" offered, the more slavishly it is accepted. No one wants to talk about the REAL reasons why the US economy is in its present state. The panacea is a blind clinging to, and intensifaction of, the economic interventionism which has been tightening its grip on the world ever since the 1930s.
Economic interventionism was made "palatable" by the introduction of the welfare state. The welfare state was introduced in Germany in the 1870s by Bismark and had spread to the US and the other English-speaking nations by the 1930s. In 1922, more than ten years before the advent of Roosevelt's "New Deal", Ludwig von Mises had published a book in which he PROVED beyond any shadow of a doubt that interventionism CANNOT work. He called his book "Socialism". His proof has never been refuted, for the very simple reason that it CANNOT be refuted.
But because the political and economic climate IS irrational, new lights continue to be hung at the end of the tunnel and the investing population continues to flock towards them like moths to a flame. Watching what happens when the poor old moth actually HITS the flame ain't pretty, but the moth has no way of knowing any better.
Moths cannot turn their brains off - people can. And the majority of them have. That's the present situation. The problem for the Fed is that there is no way that they can entice, cajole, or threaten enough to get EVERYONE to turn his or her brain off.
Some people have an amazing capacity to refuse to see what is right in front of them. Others can only do it to a point, the point where the situation becomes too irrational and/or scary to ignore any longer. And then there are those who were never fooled in the first place.
Just about all of the last group have accumulated physical Gold by now. And an increasing proportion of the second group are starting to at least seriously consider the idea if they have not already started to accumulate Gold. The strain of the approaching fact of another Fed rate cut can be seen in the steepening of the Treasury yield curve over recent days. The tenacity of the "true believers" can be seen in the recent upturn in the $US.
Or can it? If one wants to lighten up on an investment which one has also hedged against, one usually sells the hedge before selling the actual investment. Selling the hedge (in this case - Dollar shorts) tends to increase the value of the investment in the short term, allowing one to sell the actual investment into a rising market.
It is a very good bet that this is what has produced the upward move in the $US this week. If it is, then the Dollar's newfound "strength" and Gold's newfound "trading range" in the $US 355-365 area will not long survive the Fed's announcement on June 25.
We'll see.