This is a Disastrous Macro Setup
Inflation is at a 40 year high. Real GDP just went negative; and this is before the 50 bps rate hike we're expecting next week.
Before we really get into the meat and potatoes of this post, let’s first sarcastically admire the mess the Federal Reserve currently finds itself in. This morning we learned real GDP shrank by 1.4% in the quarter. That was well below analyst expectations of 1% growth. That’s a massive miss. The question that I now pose to you faithful readers is this: what generally happens when the economy slows down? How does Fed policy typically react?
The central bank generally lowers interest rates to help stimulate economic activity when growth slows down. Cheap credit means cheap financing and cheap investment. Essentially, lower cost of capital has historically enabled growth. The fact that the economy actually went negative in Q1 means that we are half way to what would historically be considered a recession depending on how you choose to define the word.
Keep reading with a 7-day free trial
Subscribe to Heretic Speculator to keep reading this post and get 7 days of free access to the full post archives.