This is the Worst Policy Mistake Since 1929.

Game of Trades

27 Aug 202406:17

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

00:00

📉 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.

05:00

📈 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

The Federal Reserve, often referred to as the Fed, is the central banking system of the United States. It plays a pivotal role in setting monetary policy, including interest rates. In the video, it is mentioned that the Fed has kept interest rates at the same level for the last 12 months, which is a rare occurrence historically, and is related to the lead-up to the global financial crisis and the Great Depression.

💡Interest Rates

Interest rates are the cost of borrowing money and are a key tool used by central banks to control inflation and stabilize the economy. The script discusses how the Federal Reserve's decision to maintain interest rates at a certain level can have a restrictive effect on the economy, as seen in the lead-up to the global financial crisis and the Great Depression.

💡Neutral Rate

The neutral rate, also known as the natural rate of interest, is the rate at which monetary policy is neither expansionary nor contractionary. The video script explains that if short-term rates are above the neutral rate, monetary policy is tight, which can be restrictive to the economy, as was the case before the financial crisis and the Great Depression.

💡Monetary Policy

Monetary policy refers to the actions of a central bank, like the Federal Reserve, to control the supply of money and credit in an economy. The script discusses how the Fed's tight monetary policy before the recession of 2007 and the Great Depression was a policy mistake that should have been eased sooner.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video mentions that the Federal Reserve was initially keeping interest rates high to control high inflation in 2022 and 2023, but now there is evidence that inflation is stabilizing, suggesting a need for a change in policy.

💡Economic Recession

A recession is a period of negative economic growth that lasts for at least two consecutive quarters of a fiscal year. The script refers to the recession that began in December 2007 and the Great Depression as historical examples of economic downturns that were exacerbated by tight monetary policy.

💡Employment Mandate

The employment mandate is part of the Federal Reserve's dual mandate, which also includes price stability. It requires the Fed to promote maximum employment. The video script indicates that current employment data, such as the ratio of employed to unemployed, suggests that the economy is deteriorating and that the Fed should consider this in its policy decisions.

💡Core Inflation

Core inflation is a measure of inflation that excludes the prices of food and energy, which can be particularly volatile. The script discusses how core inflation in the United States has moved down substantially in 2024, suggesting that the Fed's restrictive monetary policy may be excessive.

💡Stock Market

The stock market is a place where shares of publicly traded companies are issued and traded. The video script contrasts the strong performance of the stock market with the potential for an economic downturn, highlighting that the stock market can sometimes be irrational and not always a reliable indicator of economic health.

💡Mclen Oscillator

The Mclen Oscillator is a technical indicator used in stock market analysis to measure the rate of change of momentum. The script mentions a 'mclen thrust,' which is a bullish signal when the oscillator goes from being oversold to overextended in a short period, suggesting that the market could see high returns in the short term.

💡Bre Thrust

A Bre Thrust, as mentioned in the script, occurs when the Mclen Oscillator rapidly moves from an oversold to an overbought condition, indicating a strong market reversal. The video uses this term to argue that despite economic indicators, the stock market may continue to perform well for some time.

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.