Today the stock market is down again, but the bond market is signaling now that an almost certain interest rate is going to come by the Federal Reserve before the end of this year. This wasn’t the case at the start of the year when the odds were around 50% that there would be a rate cut for 2020. But now as you can see the Fed Fund futures market is pricing in an 84% chance of a rate cut by December.
The odds are now 52% that the first cut of the year will come by June! At the start of the year the odds of that were 17%. It’s easy to think that this is all because of the coronavirus story, but I do not think so.
For one thing corporate investment spending in the United States turned down several months ago before the virus outbreak. And now we know that US GDP only grew 2.3% for all of 2019, way below the promised 3% growth. The Federal Reserve stated this week that “business fixed investment and exports remain weak.” On Thursday shares of UPS were down 6% on news that its global shipping operations were not growing in the last quarter. So the economy is not as strong as the stock market has suggested it is.
That doesn’t mean that the stock market is going to crash here. I think it is set to chop around now for the next few weeks and talked about this in a podcast posted today on my website. However, today shows us that gold, silver, and the mining stocks still remain an important component of anyone’s portfolio as they are up today once again. It is the correlation gold is displaying with the US Treasury bond market that is really making precious metals prices move now.
This is a debt fueled expansion and that means one day it will lead to disaster. The fact that the Federal Reserve had to lower rates last year three times to make the stock market go up again and play REPO games shows that more rates cuts are going to have to come one day in the future to keep the debt fuel going. Jeffrey Gundlach and his Doubline Capital group just put up a video on Youtube today talking about this: