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Fed rate cut is a big mistake – chaos on the stock markets inevitable


© – Following the publication of US inflation data, former Fed Chair and current US Treasury Secretary Janet Yellen took the helm. She publicly stated that there is absolutely no reason why inflation will not fall to the Central Bank target.

Prior to the publication of the Fed’s interest rate forecasts (dot plot), Rabobank analyst Michael Every was still assuming that the FOMC would not be swayed by this steep rise. It would be too obvious that the central bank would become a puppet of politics in the context of the upcoming US presidential elections in 2024. In addition, the Fed’s preferred measure of inflation, the core services index, is far too high at 5.28%.

However, the reality was different, as the FOMC members raised their previous expectations for two rate cuts in 2024 to three, which led to dances of joy on the stock markets.

The shipping companies were already positive anyway. They are forecasting an upturn in international trade in 2024, while property prices in New Zealand have already risen by 12.2% on an annualised basis. Every comments:

“I can’t imagine the crazy situation we’ll get into if the Fed really does cut interest rates significantly. On the other hand, that’s exactly why certain people are getting carried away with speculation.”

But even without the Fed’s obviously politically driven rate cut expectations, the inflation outlook is miserable. The fact that the Yemeni Houthis are attacking ships in the Red Sea has only been noticed by many, if at all, as a side note. But this has already been enough to cause insurance premiums for the route to rise by almost 200%, from 0.07% of the cargo value to 0.2%, according to Every.

Such challenges should no more be ignored than the fact that the Chinese Communist Party has pledged its support to the economy for 2024 – business as usual is completely inappropriate. What the West needs, in Every’s view, is a long-term strategy, and he is not alone in this view.

There is a bipartisan congressional committee that deals with the competitive challenges facing China. On 12 December, it published a 53-page strategy paper entitled “Reset, Prevent, Build”. The financial markets have not dealt with this yet, and why should they, they are not even in a position to deal with the details of the inflation report, according to the harsh judgement of the Rabobank analyst.

However, the contents of these 53 pages should be familiar to anyone who invests in the financial markets and does not just speculate in the short term. According to this paper, free trade, from which the global economy and stock markets have benefited for decades, will no longer exist in the future. The USA, as a global power, is in danger of slipping further and further into irrelevance and this can only be prevented through decisive action.

Democrats and Republicans agree on this point. Only the introduction of tariffs can restore economic influence.

Under Donald Trump’s presidency, an initial trade war was sparked by demanding that China allow more American agricultural imports in order to reduce the trade deficit. But what is called for in “Reset, Prevent, Build” goes far beyond that – free trade must come to an end.

Dependence on China is no longer desirable and politicians are prepared to accept the consequences. They are already looking for alternative export markets, as they are aware that China will react to the new tariffs with retaliatory measures.

The Customs Act of 1930 is to be amended so that the threshold for duty-free imports into the USA is lowered. This will prevent private individuals from ordering cheap Chinese goods duty-free. A similar approach is being worked on in the EU, as more and more money is flowing into China via shopping apps such as Temu & Co, leaving local producers and retailers at a disadvantage.

However, the new strategy will not only affect the financial markets indirectly, but directly. US companies will have to disclose their risks in connection with China. US investors will have to divest their Chinese holdings within a transitional period of one year, while the transfer of US technology will be made even more difficult by preventing Chinese investments in the US.

This is the rough roadmap for the economic future, from free trade and bubbling profits to hermetically sealed, ideological trading blocs.

At the end of the day, it’s not about the stock markets, even if that helps the incumbent president in an election year. But Democrats and Republicans alike are concerned with securing the supremacy of the USA, and it doesn’t matter which camp has the president. Every dollar that flows to China weakens its own power and strengthens its opponent. A situation that must be brought to an end.

Every comes to the conclusion that this will change the world, and in a direction that will no longer allow interest rate cuts and the associated bubbling equity gains.

Translated from German using DeepL.

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