Educated guess on Wednesday's rate hike by The Fed (9/21/2022)

If The Fed was a BMX jumper, this photo sums up how they're doing right now at their mandates...  #steveemigphotos

This Tuesday and Wednesday The Fed governors meet (officially Federal Open Market Committee- FOMC), to decide exactly how much they want to fuck up our lives further.  I mean, to decide how much to raise interest rates by raising the Fed Funds Rate, to "fight inflation."  The big money is betting on a .5% to .75% hike (50 or 75 basis points).  Their next meeting after that is November 1st & 2nd.  

Here's the problem, The Fed has pretty much lost all credibility with the stock market traders.  Traders know The Fed will have to lower rates again, to bail out Wall Street and corporate America, probably within 6 to 12 months.  The Fed is trying to convince Wall Street traders that they really mean business, and that interest rates will stay high at least through then end of 2023.  Then stocks and real estate will drop, and overall consumer sales will drop, what they call "demand destruction."  If we go into a serious recession, people buy less stuff, prices drop, and that makes inflation go back down.  The Fed wants some inflation, but only about 2% per year.  Right now were officially at 8.3%.  Big difference.  The problem is, the stock markets keep rallying after each rate hike, believing The Fed will drop rates back down in 6 months or so.  In the past 3-4 months, the market falls the week or so before the rate hikes, then rallies back up on the announcment day, and keeps going up.  We might see another market drop on Monday, then Tuesday the markets will most likely be flat.  Then Wednesday, Fed governor Jay Powell makes his official announcement of their decision.  Here's what I see as the most likely reactions by the stock market on Wednesday.  

Disclaimer

.25% rate hike- Not going to happen, we're way beyond the traditional level of interest rate hikes at this point.

.5% rate hike- Stocks soar several hundred points on Dow and Nasdaq- probably a 1% to 3% rise, and continuing rally in coming days and weeks, until October inflation number comes in above 8%, when things drop back some, like they did last week. 

.75% rate hike (most expected outcome right now)- stocks rise, maybe 200-400 points on the Dow, and 100 or more points on the Nasdaq.  Another false hope rally comtinues until October inflation number comes in at 7.8% or higher.

1% rate hike- (Possible, but unlikely action)- The Fed actually, sort of, kind of, looks like they're serious about fighting inflation.  Markets drop a bit Wednesday through Friday, and then another false hope rally begins slowly.  

1.25% rate hike- (Nobody expects this)- The Wall Street traders go "Oh shit, maybe The Fed IS actually serious," and the markets drop a couple hundred points, or more, and The Fed actually gets the results it wants, slowing down the economy enough to actually have some effect on asset prices, and therefore on people's mindsets, and inflation cools off a little faster than it's gradual slowing pace it's doing right now.

1.5% rate hike- Absolutely no chance whatsoever of this happening, but this is how much The Fed would have to raise rates to actually cool things off as much as they say they want to, to actually bring down asset prices quickly, slow down consumer spending, and then slow down inflation, since they are so fucking far behind the curve now.  

That's my view on the possible scenarios possible this next week.  Remember, I'm just a crazy homeless guy (who has been predicting this current recesson since 2019), and this post is for entertainment and education purposes only, and should not be taken as advice.  Click the "Disclaimer" link above for the full disclaimer for this blog and all my financial oriented posts.

Blogger's note- Wednesday 9/21/2022- 4:11 pm Pacific- after The Fed announcement- So... I was right and I was wrong.  Yes, as expected, The Fed raised rates by .75% or 75 basis points.  The immediate reaction was that stocks went down.  I figured that was likely, but I thought that the markets would rise by the end of the day, as they have on (I believe) the last three Fed rate hike days.  

A hour after the announcement, stock markets bounced up, and the Dow, Nasdaq, and S&P 500 were all positive.  I've been calling these "false hope" rallies, with the markets believing The Fed will have to lower rates in 4-6-8 months because of the recession or some major crisis (like the Lehman Bros. collapse in 2008).  Then, the markets dropped back down, which is what would normally happen on a huge interest rate hike day.  But financial markets have been anything but normal since 2008, and particularly since 2020.  The Dow closed the day down over 500 points, about -1.7% lower, with a similar percentage drop in the Nasdaq and S&P.  

Is the reality of dark times ahead finally setting in on Wall Street?  Perhaps.  As I said back on March 22, in my old blog.  This year, 2022, feels like another 2008, and we've had a bumpy downhill ride in stocks since, along with a huge rise in interest rates, both of which I predicted.  We're still a ways from the numbers I forecast in that post (Dow below 27,000, Nasdaq below 10,000, and S&P below 3,500), but those numbers look possible now, by the end of 2022.  

I expect some Black Swan event, or perhaps, at this point, just reality setting in of a severe recession, which will drive markets down A LOT in the end of September or October, and then they'll hit bottom between October and next spring.  That's where it appeared we were heading back in March, and that's where it still appars we are heading, until inflation (official CPI) gets close to 2%-3%.  And that's a long way off.  

I think the recession period experience, for everyday people, will last years.  There will be ups and downs, but we have years of tough economic conditions ahead, for most of the U.S. (and world) population.  That part reminds me of the early 1990's.  Officially, we had two recessions then, a "double dip."  But for most people, the economy was slow from early 1990 through most of 1996.  The 2020's will feel a lot like that.  But the policiy makers live in a bubble far removed from the day to day experience of most Americans.  At their financial level, the recession is a minor inconvenience, and zeros in their investment values.  It's much different for everyday working people trying to feed families during layoffs and rising food and gas prices.  

There's a whole lot of change across society that needs to take place, which I've written about in my Big Freakin' Transition idea, several places.  There's a lot of change in how businesses and organizations operate to take place (out of old Industrial Age models, and into Information Age native models), as well as a massive populist movement, because most jobs today can't sustain a decent standard of living.  There's just a ton of issues that need to get worked out, throughout society, in my opinion.  That will take years, no matter what The Fed does.

I also believe The Fed will overcompensate, again, flooding us with liquidity, new money, in 2023, maybe 2024, which will slow this whole shake out process down, and lengthen the overall economic mess.  Things may move towards some kind of stable new normal by 2026 or 2027, and probably a bit later.  This whole decade will be pretty crazy, and that's if we avoid more major wars.  As I've been saying for quite a while, we are just beginning the craziest couple of years of the 2020's.  Buckle up, now it's about to get REALLY interesting.

My thoughts on financial markets:

White Bear Investment Ideas

Wall Street in July 2022- the craziest street of all?

Drawing I did in 2019, that keeps getting more prescient.  #sharpiescribblestyle

Disclaimer

 This post is to explain why I think the financial markets will tank more in the middle of July.  To start with, let me remind everyone that I think we're about 33 months into what will feel like a great depression, by 2027, to most people.  It might even fit the official definition of a great depression.  I call this The Phoenix Great Depression.  I think there will be a death and rebirth in so many industries, that the word phoenix describes this economic downturn well.  

In my opinion, we are now going into the 2nd, and worst, "recessionary wave" of this long financial mess.  Yes, I realize all of this is arguable.  Again, this is my opinion, just like I said in this blog post and this blog post, both from October 2019.  I used the word "recession" in both of these, because at the time the conventional wisdom was that there might be a minor recession in late 2020.  Maybe.  Conventional wisdom was wrong.  But so was I, to a point.  I didn't expect The Fed to pull $5 to $6 trillion in new money out of their ass in 2020-2021.  That inflated and warped the financial/asset markets dramtically.  So the timeline for things I epexcted, and expect to happen, got moved later.  

My calls for this year, 2022, in the stock markets were in this blog post (March 22, 2022).  I called for continuing high inflation, and rising interest rates, over most of 2022.  I also said the stock market indices would drop below these numbers in 2022:

Dow Jones Industrial Average- 27,000

Nasdaq- 10,000

S&P 500- 3,500

The averages at the time of that March 22, 2022 blog post were approximately: DIJA- 34,861, Nasdaq- 14,169, and the S&P 500- 4,543.  As I predicted, the markets have moved much lower since, and we're only halfway through 2022.  The markets closed yesterday (7/1/2022) at: DIJA-31,097, Nasdaq-11,127, S&P 500- 3,825  Those numbers were off the recent lows.  The Dow has been below 30,000, the Nasdaq below 11,000, and the S&P has hit 3,666.  I don't think we've seen the bottom yet. 

Here's why.  Everything is about The Fed's (the Federal Reserve) actions at this point.  The inflation number that came out in June (May 2022 numbers) had inflation (CPI) at 8.6% annually.  The Fed's goal is about 2% annually.  Uh, yeah, it's a bit high, as your last tank of gas proved to all of you.  To stamp down inflation, The Fed has to raise interest rates, which, in theory, will slow down the economy, as consumers and businesses back off, and spend less money.  BUT... The Fed's actions usually take 12-18 months to really take full effect.  They raised interest rates by 3/4% (aka .75% or 75 basis points) in June, the biggest rate hike in decades.  They did that because the June CPI was so high, at 8.6%, and that it was higher than the May number, 8.3%.

OK hang with me here.  That high, 8.6% inflation rate was the MAY 2022 numbers, the official CPI inflation numbers released are up through the previous month.  It takes a while to collect data and figure it all out.  

On July 13th, the next CPI number comes out, the June 2022 data numbers.  So the CPI was figured almost the same time The Fed raised interest rates.  Inflation seems to still be rising, in general.  So the number coming out on July 13th, which The Fed and every stock trader will be looking at excrutiatingly close, will almost certainly be between 8% and 9%.  It could very likely be over 8.6%.  Nobody wants that.  The Fed has already said it plans to raise interest rates again, 1/2% to 3/4% at the July meeting, held July 26-27.  If the inflation number is even close to 8.6%, they will most likely opt for another 3/4% (.75% or 75 bssis points) hike.  That's like hitting the e-brake on an already slowing economy.  

Here's the really bad part.  The stock markets FREAKED when The Fed raised rates 3/4% in June, since a 1/2% hike was expected.  Since then, the traders have decided that they over-reacted, and the markets have risen back up some.  If the inflation (CPI) rate is still high, or higher (near 8.6% or more annually) on July 13th, the markets will FREAK even more, causing another big drop in stocks (and possibly in crypto, too, and a further decline in real estate, due to another big jump in mortgage rates).  

So that's my thinking.  Again, this is not financial advice, (see my disclaimer for this blog, linked above), these are my thoughts as a futurist/Big Picture/economics geek.  These ideas are for your education and entertainment.  Do your own research and due diligence before making any financial/investment decisions.  

My hope is that my thinking may cause you to do more research, and make better decisions for yourself, your family, and your busniess, in these crazy economic times.  

Blogger's note- 7/13/2022- 

I was right about the inflation rate not dropping much.  The CPI inflation rate today, July 13th, came in at 9.1%, year over year.  That's a full 1/2% higher than last month's number.  As for the stock market, The Dow was down over 400 points at one time today.  That qualifies as "tanked."  But the three main indices have been bouncing up and down all day.  The Dow is down 167 points, as I began to write this, and the Nasdaq is down about 11 points, 20 minutes before market close.  The higher than expected inflation number makes a .75% interest rate increase much more likely at the Fed (FOMC) meeting later this month, July 26-27.  The Dow is down about 300 points, from the close the day before I wrote this blog post, and the Nasdaq is up about 130 points from the close the day before, 11 days ago.

Bloggers note- 7/14/2022- The next morning...  I told you so.