Musical Chairs Markets

The Fed announced the reportedly hawkish news that the central bank may raise rates, not this year, not next year, but 50 basis points sometime in 2023. The talking about of talking about of tapering which would slow the Fed’s buying of $120 billion of debt securities a month with money created from the ether to some lesser amount. 

People forget the central bank, “kept its benchmark rate on hold for a 10th straight meeting after sweeping into emergency action amid the coronavirus pandemic in March of last year with a full percentage-point cut.”  Yet again emergency government action has become permanent. 

This news sent the dollar screaming upward with the DXY jumping from 90.54 to 92.32 at week’s end.  The price of gold was, of course, bludgeoned. The yellow metal dropped 6.5% over the 5 days. The 10-year Treasury bond finished the week at a paltry 1.44%. Meanwhile, financial basket case Greece, saw its 10-yr rate finish at 79 basis points.  

Making no news was Lyn Alden’s tweet that the Federal Reserve’s balance sheet crossed $8 trillion in assets. Additionally, Fed watcher Alden followed with the news, “Reverse repos jumped $235 billion today to $755 billion.” 

Chairman Powell didn’t articulate what the Fed will do, the financial press deciphered it this way per Bloomberg:  “The Federal Reserve’s so-called dot plot, which the U.S. central bank uses to signal its outlook for the path of interest rates, shows that officials expect no change in policy this year, while leaning toward two rate increases by the end of 2023, based on median estimates.” 

Does this make sense? Free markets at work? Logical price discovery?  After all, as Murray Rothbard explained, “Since the investment is always in anticipation of later sale, the investors are also engaged in entrepreneurship, in enterprise.”  

Since when does forecasting a couple rate bumps two years from now be considered hawkish to the point of making the dollar pop and gold flop?

Since it’s a Keynesian world, rather than Austrian one, Lord Keynes reminds us, “The market can stay irrational longer than you can stay solvent.”

Another point of view is, "I'm looking at the gold market right now and I think this could prove to be a good time to buy," George Milling-Stanley, chief gold strategist at State Street Global Advisors, said. "I see a lot of panic selling and I don't think that can last much longer. Basically, the markets saw higher inflation and higher interest rates, but they completely ignored the fact that the hikes are at least two years away. A lot can happen in two years."

Milling-Stanley has a long enough memory to make the point, "the last time that the Fed was actually in a rate tightening mode was between December of 2015 and December of 2018, so gold should have gone down. But it went from $1,050 in December of 2015 to $1,270 by December of 2018. So gold went up 21% in those three years, even though rates were raised nine times."

Keynes pointed out, “For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a  pastime in which he is victor who says Snap neither too soon nor too late, who passed the  Old Maid to his neighbour before the game is over, who secures a chair for himself when  the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops  some of the players will find themselves unseated.”

While Keynes viewed speculation as a game, Rothbard viewed it more seriously. “Entrepreneurship is also the dominant characteristic of buyers and sellers who act speculatively, who specialize in anticipating higher or lower prices in the future. Their entire action consists in attempts to anticipate future market prices, and their success depends on how accurate or erroneous their forecasts are.”

Nobody can say for sure the Fed will taper or increase rates. And just because the Fed’s inflation has forced us all to learn to pump our own gas and scan our groceries, not many have the entrepreneurial savvy to invest properly to fund retirement.

With the 800-pound Fed in the markets, finding a chair and forecasting accurately may be next to impossible.