This is the Worst Policy Mistake Since 1929.
Summary
TLDRThe script discusses the Federal Reserve's prolonged maintenance of interest rates above the neutral rate, a move historically associated with economic downturns. It highlights past mistakes leading to the Great Depression and the 2007 recession and suggests current restrictive policies may be repeating these errors. Despite signs of stabilizing inflation and deteriorating employment, the Fed plans to delay non-restrictive rates until 2025. The script also contrasts the irrational exuberance of the stock market with the Fed's cautious approach, noting market signals that contradict an impending recession.
Takeaways
- 📉 The Federal Reserve has maintained interest rates at the same level for the past 12 months, a move historically only done once before the global financial crisis.
- 😔 Former Federal Reserve Chair Ben Bernanke regrets not cutting rates sooner before the crisis, as keeping rates above the neutral rate led to restrictive monetary policy.
- 🔍 Historically, the Fed has made mistakes by keeping rates too high for extended periods, contributing to economic downturns like the Great Depression.
- 🚫 Despite the current short-term interest rate being above the neutral rate, the Fed's restrictive monetary policy has been in place for nearly two years.
- 📈 Inflation has been significantly reduced and is now at levels considered too low by the Fed, suggesting a need for a change in policy.
- 📊 Core inflation data shows a substantial decrease in 2024, aligning with the low inflation rates of 2009-2020.
- 📉 The economy is showing signs of deterioration, with employment ratios rising and hiring levels dropping to the lowest since 2020.
- 💼 The Fed's dual mandate of full employment and stable prices suggests that current policy is not aligned with the current economic situation.
- 🗓️ Despite plans to cut rates, the Fed is not expected to reach non-restrictive levels until April 2025, which may be too slow.
- 📈 The stock market is showing strength and hitting all-time highs, which may not reflect the true economic situation.
- 📊 Stock market behavior has historically been irrational, with pre-crisis highs followed by severe downturns, suggesting current optimism may be misplaced.
Q & A
Why has the Federal Reserve kept interest rates at the same level for the last 12 months?
-The Federal Reserve has maintained the same interest rate level in an attempt to control inflation that was running high in 2022 and 2023, aiming to bring it down to more reasonable levels.
What is the historical precedent for the Federal Reserve's current interest rate policy?
-The Federal Reserve has only once before kept interest rates at the same level for an extended period, which was before the global financial crisis. Additionally, they kept rates above the neutral rate during the late 1920s, leading to the Great Depression.
What is the 'neutral rate' in the context of the economy?
-The neutral rate is considered the long-term interest rate that neither stimulates nor restricts economic growth. If short-term rates are above the neutral rate, monetary policy is tight and can have a restrictive effect on the economy.
Why did Ben Bernanke, the former Federal Reserve Chair, regret not cutting interest rates sooner before the global financial crisis?
-Bernanke regrets not cutting rates sooner because keeping rates above the neutral rate for an extended period had a restrictive effect on the economy, which may have contributed to the severity of the financial crisis.
What is the Federal Reserve's current stance on interest rates according to the recent Jackson Hole meeting?
-According to the recent Jackson Hole meeting, the Federal Reserve plans to begin interest rate cuts starting in September but does not intend to cut rates down to non-restrictive territory until April 2025.
What economic indicators suggest that the Federal Reserve's current monetary policy may be too restrictive?
-Indicators such as the ratio of employed to unemployed people rising aggressively throughout 2024, showing businesses beginning to lay people off, and hiring levels dropping to the lowest since 2020 suggest that the economy is deteriorating rapidly.
How does the Federal Reserve's dual mandate affect its decision-making regarding interest rates?
-The Federal Reserve's dual mandate requires it to focus on both the economy and labor market, striving for full employment, and also to control inflation. Both of these mandates suggest that the Fed should be cutting interest rates given the current economic conditions.
What is core inflation and how has it been performing in 2024 according to the script?
-Core inflation is a measure of inflation that excludes volatile items such as food and energy prices. In 2024, core inflation has moved down substantially and is now at the lowest levels since the pandemic, hovering around 0.1%.
Why might the stock market's current strength be misleading in terms of predicting the economy's health?
-The stock market can be irrational about the future at times and has historically soared into economic downturns, such as in the 1920s and at the beginning of 2009, indicating that it may not accurately predict economic conditions.
What is a 'molen bre thrust' and what does it suggest for the stock market?
-A molen bre thrust is a bullish development for the market, occurring when the molen oscillator goes from being very oversold to being very overextended in a short period of time. It suggests that the market has gone from being extremely panicked to being very strong and typically leads to high returns looking forward.
How should investors approach the current stock market conditions according to the script?
-Investors should be cautious, taking advantage of the market's strength while also hedging and protecting against downside risks. The script suggests that the stock market could remain irrational for a few more months, but investors should be prepared for a potential downturn.
Outlines
📉 Historical Monetary Policy and Its Impact
This paragraph discusses the Federal Reserve's current monetary policy, which has maintained interest rates at the same level for over a year, a rare occurrence historically seen only before the global financial crisis. It highlights past mistakes of keeping rates above the neutral rate, leading to economic downturns like the Great Depression and the 2007 recession. The speaker argues that the current restrictive policy, despite initially being necessary to curb high inflation, may now be a mistake as inflation appears to be stabilizing. The Federal Reserve's plan to cut rates slowly until April 2025 is criticized as potentially too slow, given the economy's deteriorating signs, such as rising unemployment and reduced hiring, which contradict their dual mandate of full employment and price stability.
📈 Stock Market Resilience Amid Economic Concerns
The second paragraph examines the disconnect between the stock market's strength and the underlying economic concerns. Despite evidence of a potential downturn, the stock market is near all-time highs, which the speaker attributes to its imperfect reflection of the future. Historical examples from the 1920s and 2009 are given to illustrate how the market can be irrational, soaring before a crash or bottoming out before a recovery. The speaker points out a recent bullish signal in the S&P 500, a 'mclen bre thrust,' indicating a shift from panic to strength that often leads to high returns. While acknowledging the market could consolidate, the speaker suggests that, barring a significant economic shock, the irrational optimism may persist, and they plan to navigate this with their members, balancing profit and protection against future downturns.
Mindmap
Keywords
💡Federal Reserve
💡Interest Rates
💡Neutral Rate
💡Monetary Policy
💡Inflation
💡Economic Recession
💡Employment Mandate
💡Core Inflation
💡Stock Market
💡Mclen Oscillator
💡Bre Thrust
Highlights
The Federal Reserve has maintained interest rates at the same level for the past 12 months, a move only done once before, prior to the global financial crisis.
Former Federal Reserve Chair Ben Bernanke expressed regret for not cutting interest rates sooner before the crisis, as keeping rates above the neutral rate led to restrictive monetary policy.
The Federal Reserve's policy of keeping short-term rates above the neutral rate was identified as a mistake that contributed to both the Great Depression and the 2007 recession.
The current short-term interest rate has been above the neutral rate for the longest period since the two historical financial crises, indicating restrictive monetary policy for nearly two years.
Monetary policy was initially tight to curb high inflation in 2022 and 2023, but there is now evidence that inflation is stabilizing.
Federal Reserve Chair Jerome Powell announced plans for interest rate cuts starting in September, but not reaching non-restrictive levels until April 2025.
Economic indicators such as the employed-to-unemployed ratio and hiring levels suggest the economy is deteriorating rapidly, contrary to the Federal Reserve's dual mandate.
Core inflation in the United States has significantly decreased in 2024, aligning with pre-pandemic levels considered too low by the Federal Reserve.
Both employment and inflation data suggest the Federal Reserve should cut interest rates sooner rather than later.
Despite economic concerns, the stock market is showing strength at all-time highs, which may not accurately reflect the future economic situation.
Historical examples show that stock markets can be irrational and misprice future economic downturns, as seen in the 1920s and 2009.
The recent market behavior, including a 'molen bre thrust' in the S&P 500, indicates bullish sentiment despite potential economic risks.
The 'molen bre thrust' is a technical indicator that has historically led to high short-term returns in the stock market.
While stocks may be overextended, the market could remain irrational for a few more months without significant economic data shocks.
The speaker intends to guide members through the current market environment, focusing on profit while hedging against potential downsides.
Transcripts
the Federal Reserve has been keeping
interest rates at the same level for the
last 12 months this is something that
they've only done once before in history
and that was right before the global
financial crisis Ben banki who was the
Federal Reserve chair at the time said
that he regrets not having cut interest
rates sooner in the leadup to the global
financial crisis that's because back
then the Federal Reserve kept their
interest rate above long-term interest
rates or what we can consider the
neutral rate of the economy if
short-term rates are above the neutral
rate monetary policy is tight and so it
has a restrictive effect on the economy
and you can see in the leadup to the
financial crisis the FED kept monetary
policy tight and restrictive right up
until the very start of the recession in
December of 2007 so that was a full year
and a half of tight monetary policy this
is something by the way that the FED
also did in the late 1920s they kept the
federal funds rate above the neutral
rate of the economy between January of
1928 all the way to O October of 1929
keeping interest rates of very
restrictive levels for an extended
period the FED has also accepted that in
hindsight this was a policy mistake and
that they should have probably cut
interest rates a little bit sooner to
avoid the Great Depression fast forward
to today we have the short-term interest
rate of the Federal Reserve above the
neutral rate for the longest period of
time since these two historical episodes
in financial history monetary policy has
been restrictive now for close to two
full years now at first this was
necessary in order to make sure that
inflation that was running hot in 2022
and 2023 was going to come down to more
reasonable levels but as I'm going to
show you in this video we have strong
evidence today that suggests inflation
is very much in the process of
stabilizing and with each day that
passes it's becoming more likely that
the Federal Reserve is making a big
mistake by keeping their monetary policy
this restrictive now yes at the recent
Jackson hall meeting Drome Powell said
that they would be beginning interest
rate Cuts starting in September but
don't plan to cut interest rates down to
non-restrictive territory until April of
2025 that's another 5 months from now
which could turn out to be much too slow
we're already seeing signs that the
economy is deteriorating rapidly the
ratio of employed to to unemploy has
been rising very aggressively throughout
2024 showing that businesses are
beginning to lay people off while hiring
has now come down to the lowest level
since 2020 now the FED has a dual
mandate they need to pay attention to
the e economy and labor market and
striving for Full Employment and as we
see from the data that's clearly heading
in the wrong direction but they also
need to look at inflation so let's take
a look at the inflation front for just a
second this is a chart of core inflation
in the United States but we're looking
at month-by-month data to understand
exactly what's going on and we can see
what core inflation has done throughout
2024 it's moved down substantially and
is now hovering at the lowest levels
since the pandemic month overon
inflation is currently hovering at
around 0 .1% that is much lower levels
to the
0.3% inflation rate that we've seen over
the last 3 years in fact these levels
are very much align with where inflation
was between 2009 and 2020 a period where
the FED considered that inflation was
running too low so both the employment
mandate and the inflation mandate point
to the fact that the FED should be
cutting interest rates and that they
should begin to do so quite quickly okay
so if the situation is so worrying why
then is the stock market showing so much
strength covering at all-time highs
today and does that mean that we should
be preparing to go leveraged short in
preparation for a large economic
downturn not so fast you may not believe
it but the stock market is not a perfect
machine it can be irrational about the
future at times take a look at the 1920s
for instance markets were soaring like
they had never before in financial
history heading straight into the most
severe economic downturn in financial
history and guess what stocks did when
the recession hit they changed their
minds and started to Trend in the other
direction if investors had known that
the Great Depression was lying ahead the
stock market would have never melted up
like this this chart would have probably
looked a lot flatter and likewise at the
beginning of 2009 right here the stock
market was incomplete collapse but in
hindsight this was just a couple of
months before the end of the recession
where the US economy began a spectacular
recovery so again the stock market
thought something was pricing the end of
the world in February of 2009 but start
started doing just the opposite in March
of 2009 and that's what I believe is
currently happening today most investors
don't believe that a serious downturn is
imminent in fact when we zoom in on the
most recent price action of the S&P 500
the market recently triggered something
called a mlen bre thrust and this is
typically bullish development for the
market we had the same signal in May of
this year which made us double down on
our bullish Bets with our members
between May and July this is the mclen
oscillator and this is what a bre thrust
looks like it's when the melen
oscillator goes from being very oversold
to being very overextended in a very
short period of time now when that
happens it suggests that the market went
from being extremely panicked to being
very strong in a very short period and
from a quantitative standpoint this
typically leads to high returns looking
forward when we add the S&P 500 on top
of this chart we see that this R thrust
triggered in May and this one triggered
in November of 2023 right before a
massive rally on us stocks in fact when
we zoom out just a little bit more we
saw the same signal in October of 2022
and again the same signal in March of
2023 both were followed by upside on US
Stocks now any signal is prone to giving
false signals but this is to illustrate
that this type of behavior tends to lead
to good short-term returns in the stock
market now stocks are a little bit
overextended here and could see a little
bit of consolidation as the market
digests these gains but unless we see
another big shock in economic data it's
it seems that the stock market could
remain irrational for at least another
few months we intend on taking our
members at game of Trades step by step
through this environment making sure
that we're profiting from it but also
hedging in protecting ourselves against
downside when the recession does finally
materialize
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