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Fed Rate Cut Is Bad News For Economy And Markets

Malvin Spooner profile picture
Malvin Spooner


  • Fed rate cut implies recession is underway.
  • Worsening economic data reason for rate cut.
  • Effects of coronavirus won't change because of easy money.

Despite what the consensus believes - that the Fed is trying to allay fears related to coronavirus - the reality may be far worse. The Fed sees much more data that the rest of us, and to me they've just confirmed a recession is underway. The 50 basis point surprise cut suggests the data is looking so sour that they couldn't even wait a couple of weeks for their scheduled meeting. The coronavirus is certainly accelerating the downturn.

rate cut pic

I've coined the phrase "inflession" to describe what it's in store for us over the next few months or longer. 'Stagflation' is when there's inflation and no growth. The yield curve warned us months ago (when first inverted) that a recession was in the offing. What is unusual this go around is that there is evidence that inflation is rising while there's negative growth (recession). As a result, the usual defensive measures such as moving into financials won't be effective investment strategies.

For example, the cut will be devastating for banks (already wrestling with skinny margins) who's balance sheets are unprepared. The Fed would have known this and acted anyway. Normally in a recession, inflation falls and so do interest rates, but excessive liquidity (now but also in prior years) has created the odd scenario where real rates were already negative. If not the financials for defense then where? This uncertainty has caused the price of gold to balloon - considered at least an inflation hedge in many circles.

The data related to U.S. manufacturing (see chart) just keeps getting worse. Just how bad things are won't be clear for a couple of months when the full impact of reduced global trade, supply chain disruptions, travel restrictions and growing fuel inventories are evident. Negative surprises will keep coming, which will send market indexes lower with an

This article was written by

Malvin Spooner profile picture
Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored An Investment Maverick's Guidebook which blends his experience touring across the heartland of the United States on his Harley with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources predicted the prior boom in natural resources - published early in 2004. He now teaches Finance, Economics, Business Strategy & Professional Ethics course at a Canadian college.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

The Fed has no choice and is forced to follow the market. What we really did wrong is when things were good, it was really a time to get prepared, but instead we were complacent and thought we could fuck things up. Now things are bad, what are we going to do?
Malvin Spooner profile picture
Market kept pressuring Fed. Now an about face won’t come foe awhile. Us could vote Dem and get spending up while slowly normalizing rates.
We need a fiscal stimulus! The infrastructure in the US is falling apart while the government can borrow money at negative interest rates.

It's time to borrow money and update the infrastructure in the entire US. That will support the economy, offset the shock, decrease the unemployment rate (which isn't high, yet) and most importantly increase interest rates over time again.
Malvin Spooner profile picture
Normalizing rates does make sense, but FED and Admin. Egos won’t let it happens for quite awhile now. Maybe if Dems win will spending pickup.
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