ECONOMIC UPDATE: Dow Down 400+ Points, Worst is Yet to Come
Why gamble in the stock market when you can get 5 percent plus by putting your cash in money market funds and/or U.S. Treasures?
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It’s all in the numbers.
The Dow Jones Industrial Average closed down 430 points today and the S&P 500 fell to its lowest level since the start of June.
It’s no surprise, the reason is simple.
Why gamble in the stock market when you can get 5 percent plus by putting your cash in money market funds and/or U.S. Treasures where the risk of losing the money is very low and the return on investment is decently high?
And as for investing in the stock market, again it is a gamble. The P/E ratio for the Dow is at 24.21. Last year it was just 17.38. Thus, by the numbers, many stocks are overvalued for those who look for companies with lower P/E ratios as a better investment metric, with more upside.
Indeed, as noted today in Wall Street on Parade:
“Part of the ongoing problem for the stock market – regardless of what the Fed does with further interest rate hikes – is that Treasury supply is growing and requiring higher yields to attract demand.
“In its quarterly refunding statement for the third quarter, the Treasury said it planned to issue $671 billion of debt, which was $178 billion more than the amount of Treasury securities that were maturing.
“The projection for the fourth quarter of this year is even more sobering. The Treasury shows it has $582.45 billion of Treasury debt maturing, but plans to issue $921 billion – or $338.55 billion of new debt.”
Making a bad situation worse, the longer and higher interest rates rise, the deeper the debt load of those having floating loans and/or having to renew old loans coming due or getting new ones… which adds to recessionary pressures and bankruptcies.
As to where interest rates are going, it is a guessing game.
Yesterday, Fed Governor Michelle Bowman said, “I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2 percent in a timely way.”
Backing her up, Fed Vice Chair for Supervision Michael Barr said, “In my view, the most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals,” and “I expect it will take some time.”
Yesterday, Cleveland Fed head Loretta Mester also said the Fed must keep rates high and may raise them because, “I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred.”
As to where interest rates are going, according to the CME Group’s FedWatch Tool, there is a 25.7 percent chance the Fed will hike them after its meeting on 1 November, and a 45 percent bet they will hike them in December.
Of course, the high-interest rates have hit U.S. banks. Customers are withdrawing their money to get higher returns. And bank losses on fixed rate bonds and loans they are holding when interest rates were at record lows… are increasing.
TREND FORECAST: As Trends Journal subscribers well know, in July we had forecast the equity markets in the U.S. would decline in September and October… here we are.
We also had forecast that the higher interest rates rise, the deeper gold prices would fall. Today, they hit a seven-month low.
Gold prices will move higher when the Federal Reserve begins to lower interest rates. The lower interest rates fall, the lower the U.S. dollar will fall. The primary reason why the dollar is strong is because interest rates and U.S. Treasuries are high, thus, as we note, it is a safe bet to keep your money in Treasures so why gamble with gold? And, according to the Wall Street Journal, investors believe the dollar is overvalued by 10 percent.
Indeed, it is.
Again, the only reason the dollar is strong is because U.S. interest rates rose at their fastest levels since the 1980s. And when interest rates fall, so will the U.S. dollar. And, again, when the dollar goes down, gold prices will spike.
Also, should the equity markets crash this month or soon, despite high-interest rates, gold prices will skyrocket as the reality hits both The Street and Main Street that the economy has been artificially propped up and that the federal government has $33.2 trillion in debt.
TREND FORECAST: The U.S. dollar had its best quarter since last fall according to the WSJ Dollar index. While good news for Americans since the imported products they buy are cheaper, as is overseas travel, it is bad news for emerging markets that are deep in dollar debt. Thus, the higher the dollar rises the lower their currencies fall which means it costs them more to service their debt.
Red October is here.