Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Investors Should Brace for the Fed’s October Tightening Gambit

Stock-Markets / Stock Market 2017 Sep 29, 2017 - 05:00 PM GMT

By: MoneyMetals

Stock-Markets

September’s Federal Reserve meeting left interest rates unchanged but sounded a hawkish tone. The Fed seems intent on hiking interest rates again come December.

Following Fed chair Janet Yellen’s remarks this Tuesday, interest rate futures markets bumped up the odds of a year-end rate hike to 81%.

The more immediate – and perhaps more important – policy move pending from the central bank is its plan to gradually reverse its Quantitative Easing bond buying program starting in October.


Yellen calls it “balance sheet normalization.” She is right in acknowledging that there’s nothing normal about the $4.5 trillion balance sheet the nation’s currency custodian has built up following the financial crisis of 2008.

Whether the Fed’s bond portfolio ever will get “normalized” to pre-crisis levels will depend on how markets react to the Fed’s attempt at Quantitative Tightening beginning next month.

The Fed technically won’t sell bond holdings into the market. Instead it will let bonds mature without rolling them over. The effect on the market will be as if a regular, reliable, very big customer stopped buying.

Initially, the Fed will allow $10 billion in Treasuries and mortgage-backed securities to mature off its balance sheet per month. Over the next year, the pace of “normalization” will accelerate. It is slated to eventually reach $50 billion per month.

Quantitative Tightening, if it goes through as planned, will withdraw hundreds of billions of dollars’ worth of liquidity from the financial system. Fed chair Yellen thinks the impact on long-term interest rates will be minor.

She has to know that the risks to the equity markets are huge. After all, her predecessor, Ben Bernanke, touted the bond buying program as an effective way to boost the stock market. Since 2009, the stock market has followed in roughly the same direction as the Fed’s balance sheet.

The latest run-up in stocks since the 2016 election has been different in character. The Fed’s balance sheet hasn’t expanded during this period. Instead, optimism toward the prospects of stimulus in the form of tax cuts has helped lift equity valuations.

Monetary Tightening and Another Failure on Capitol Hill Could CRUSH the Stock Market

This fall, investors could get hit with political disappointment on the tax front (if recent legislative let downs are any indication) coupled with monetary tightening. We may soon find out how much the stock market can take... until it finally breaks.

As for precious metals markets, they are less sensitive to changes in interest rates than bonds or equities. Conventional wisdom is that quantitative tightening and higher rates will be bad for gold and silver. That conventional wisdom seems to be confirmed by the pullback in metals since the Fed’s September meeting.

A pullback, however, does not make for a trend!

Gold and silver prices are still up since Janet Yellen first raised rates back in December 2015. In fact, that rate hike coincided with a major cyclical bottom in the precious metals.

It’s worth recalling what happened back when the third round of Quantitative Easing (“QE3”) was announced in September 2012. At the time, many analysts assumed that QE3 would provide an immediate boost to gold and silver prices. Instead, the metals markets responded counterintuitively. They declined for several months following the Fed’s announcement.

The lesson is that precious metals markets don’t move in direct sympathy with Fed easing or tightening. Nor are they necessarily hurt by rising long-term interest rates, as is the conventional wisdom (at least among precious metals naysayers and ignoramuses).

Gold and Silver Have Almost No Correlation to Nominal Interest Rates

Metals show virtually no correlation to nominal interest rates. What matters is real interest rates – which is to say, interest rates relative to the inflation rate.

There is also the safe-haven factor. Demand for physical precious metals has been soft since the “Trump rally” began. As the stock market hits record after record and the bond market chugs along, conventional investors see no need to seek the safety of sound money.

Of course, it’s inevitably the case that the masses will be extremely bullish at market highs (and extremely gun shy at market lows).

It’s been a long time since any real fear has entered the conventional markets.

Nobody on Wall Street seems terribly concerned about the Fed’s plans to tighten in the fourth quarter. But the bond market is starting to reflect some preemptive selling.

October and November are known for their potential to get volatile. A jump in volatility would mean downside for stocks. Precious metals markets could go either way. Given the risks to conventional financial assets posed by the Fed, owning gold and silver is a smart way for investors to hedge themselves.

Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2017 Stefan Gleason - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in