Earlier today, the Federal Reserve cut interest rates by 50 basis points. The Fed rate meeting was scheduled for March 18th, but they couldn't wait until then to cut rates, one of the reasons why this is an "emergency cut". The other reason being that 50 basis points is a lot for a rate cut. This is the first emergency cut since the financial crisis of 2007-2008.
These actions should tell you that the economy is very weak. They should also not surprise anyone because there were many clues pointing towards this rate cut, and we have been explaining that rate cuts were coming since before the first one in July (peep our previous blog posts).
The market initially spiked on this "unexpected" news. It then gave back all its gains and went negative. The reason for the drop in the market is because it is a clear sign that the Fed is desperate and the economy is in danger. This could potentially get much worse if rates keep getting cut (which they will) so fast because it has gotten to the point where cuts are showing signs of no confidence in the economy. Combine this with the daily repo operations that are going on (we talk about it here), and you can see that things are bad.
Gold and silver rallied several percentage points today on this announcement and that is expected as fear in the market and inflation are rising in tandem.
What to do From Here
We explained in our blog post a few days ago that it is too dangerous to be in the market right now and that we had sold all our long stock positions (besides some gold stocks). We still think this is the case and urge caution when entering long positions. We are still bullish gold for the long term, especially gold priced in currencies such that aren't safe haven currencies such as CAD, AUD, and NZD. Gold should be bought on the dips in our opinion.
Canada has its overnight interest rate announcement tomorrow March 4th, at 10:00 AM EST and we think they will follow the US and cut rates as well. Rate cuts weaken the currency of the country cutting rates, which is why its important to protect against that by being in assets like gold and by being out of the Canadian Dollar if you are in it. What is almost a certainty is that rates will not be hiked any time soon.
Watch the Yield Curve
The yield curve is getting worse by the day. To better understand the dangers, read our blog post from a few months ago here.
The yield curve is still inverted and it is dropping at an alarming rate (meaning bonds are being bought up at an alarming rate). Below is a screenshot of the yield curve currently.
As you can see, bond yields are very low right now relative to where they were a few years ago or even a few weeks ago (meaning bonds are getting bought). The 10 year yield dropped below 1% today for the first time in history. Also, the yield curve is inverted, meaning that short term bonds pay more than longer term bonds. A harbinger for a recession that has never been wrong.
Watch the yield curve. If it keeps dropping and getting more inverted, it will be even more troublesome for the stock market.