Fed’s Line in the Sand Could Undo Powell and Biden

The Federal Open Market Committee’s (FOMC) first meeting of 2022 on Wednesday is a critical event which, if the wrong message is sent, might be remembered as the watershed moment that catalyzed, or averted, a financial crisis.

With economic and stock market indicators flashing urgently red in unison, the Fed’s response is critical.

The VIX (INDEXCBOE: VIX) index of anticipated volatility spiked to 34 yesterday on par with February of 2020 preceding that 30 percent downside correction.

5-year weekly VIX chart (Jan 25, 2022)
5-year weekly VIX chart (Jan 25, 2022)

S&P 500 (INDEXSP: .INX), NASDAQ (INDEXNASDAQ: NDX) and DJI (INDEXDJX: .DJI) futures all indicate above 1 percent declines ahead of the open this morning.

The Fed has pegged the value of cash at near zero thanks to its interest rate policy, so the massive liquidation of assets if the market perceives that rate increases and stimulus withdrawal will isolate the Fed from relevance if it tries to raise rates.

Especially as the looming end of mortgage forbearance already puts 10 million homeowners on the brink of foreclosure and eviction, at a time when rents have skyrocketed.

Conversely, if the Fed succumbs to the petulance of the market’s taper tantrum and announces any sort of deviation from the commitment to the ‘end of easy money’, their credibility takes a serious hit, and the proverbial can is kicked a little further down the road – for the umpteenth time in over a decade.

To say the Fed is between a rock and a hard place is not overly dramatic. Proceed with stimulus withdrawal and rate hikes, and both Powell and Biden are labelled architects of what will surely be an acceleration into plunging market valuations. The commensurate shellacking in upcoming elections will ensue, and democrats will suffer.

Stay the course, torpedoes be damned, and the only question is how far can valuations plunge into negative territory?

Unlike 2008, the Fed policy is now likely to catalyze a crisis in mortgages and housing, and one can only speculate as to what tools remain in the rusty old box?

Not only that, but if the stock market Fed guarantee is withdrawn, then extreme overvaluation of US tech stocks will soon become apparent to even school children, and the Great Liquidation of 2022 will intensify.

Market Cap to GDP: The Buffett Indicator
Market Cap to GDP: The Buffett Indicator

And where will all that cash go if stocks and their derivatives are to become a higher risk than even mining exploration?

Hard assets become the logical answer if history is to repeat itself. But this time around, the fantasy bull market of the last decade has been accompanied by a healthy injection of imaginary assets, like NFT’s and Cryptos, which sets the stage for a second wave of financial mayhem among that ilk.

This is why early indications are that gold and its associated metals, both precious and industrial, are showing little signs of valuation degradation, even during the most intense selling of the day on Monday, when the Dow was down over 1,000 points.

I, like all my fellow dinosaur boomer fossil monetary gold advocates (better known as ‘goldbugs’), are, of course, foolish and living in the past.

History, in the current metaverse configuration, does not repeat itself.

Except for the inconvenient reality in which it inevitably does.

I know I’m not alone in silently rooting for the collapse of this monstrous, ethereal, utterly fake financial house of cards.

I have always preferred the difficult and unpleasant realities to the imaginary utopias. And it would be nice to see a return to a higher degree of Democracy than the sham we have now in the developed world.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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