The markets are delivering a stern warning to the Fed: Don’t even think about it.

July 19, 2021

Dear Fellow Investor,

This morning, I was reminded of the closing scene in “Caddy Shack,” when Rodney Dangerfield’s character tells Moose and Rocco to “help the judge find his checkbook.”

The stock market delivered a similar message to the Fed shortly after the opening bell today, warning that it should cut out all the taper/rate hike talk if it knew what was good for it.

I’ve talked for years about the markets’ addiction to “ever easier money,” and how any serious attempt by the Fed to raise rates would prompt the U.S. stock market to throw a hissy fit to deter any action by the central bank.

And the Fed, knowing how the stock and bond markets — and even the economy and financial system itself — are fragile houses of cards held up solely by the promise of ever-increasing liquidity, would take its orders and reverse course.

Today, the prospect of the spreading Covid-19 Delta variant combined with last week’s surprising inflation data and the Fed’s recent trial balloons on rate hikes to send the U.S. stock market into the predictable hissy fit.

As I write, the Nasdaq is down about 1.5%, the S&P 500 is off about 2.0% and the Dow is about 2.5% lower.

For its part, gold was down as much as $18 overnight and early in the New York session, as Treasury yields continued to fall but the Dollar Index was up again. But as U.S. stocks began their nose-dives, gold began to rapidly recover.

The metal even got a couple of bucks into the green. As I write, it’s down only about $5.

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Making Sense Of The Bond-Market Conundrum

One of the unusual aspects of the markets in recent weeks has been the way that Treasury yields have been falling precipitously even while the Fed has been making noise about rate hikes, inflation data has come in unexpectedly hot and the dollar has been strengthening against its fiat contemporaries.

What has the bond market been thinking?

As I remarked to my Gold Newsletter Alert readers last week, I think the bond market has been sniffing out a much-greater impact from the Covid-19 Delta variant than most have been expecting.

And this expectation is proving to be accurate.

Moreover, the recent dollar strength can be explained by lower economic growth in Europe and higher vaccination rates in the U.S.

So what does this hold for the future?

Given today’s severe equities sell-off, I expect the Fed to begin walking back its recent hawkish talk. Make no mistake, the stock market is telling the Fed to back off, and Powell & Co. will obey its orders.

So expect some massaging of the message from the Fed, if not today then before the market open tomorrow. Because if they don’t, stock investors are going to keep ratcheting up the pressure.

The Fed will yield (pardon the pun), because it has to. The financial-market house of cards it has built is now inseparable from the U.S. economy. It cannot be allowed to fall.

Of course, anything so shaky will fall eventually. And that’s why, although we cannot predict the precise course of events, we can be confident that we’ll want to own gold and silver going forward.

For now, I remain cautious on the metals, until we get a clearer signal that the metals can mount a sustained rebound. Today’s recovery from the session lows is encouraging, but I want to see more.

So stay tuned — and watch the messaging from the Fed after today’s big equity sell-off, as well as the reaction from gold.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference

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