The US Government Bond 3 Month Yield Is falling ahead of any official rate cut by Jerome Powell and the Federal Reserve Board. This effectively tells us the market is pricing in a rate cut being announced at the next Federal Open Market Committee meeting on July 30 2019.
This is more significant than most traders realise. It has become common place on Wall Street to celebrate rate cuts over the last decade since the financial crisis, after all easy money policy means more cash flowing into the stock market, and this is generally the case except if it comes directly after a tightening cycle in the face of a recession. But, I hear you say, how can the tightening cycle be over and a new recession beginning if we have only managed to reach a diminutive 2.25% Fed Funds Rate? Well the answer is simple, the interest rate is not what matters, what matters is the economies ability to service that debt load, and right now 2.25% is all the American economy can withstand.
This chart depicts the interest rate and shows where our ability to service that debt lies helping us to understand where the tightening cycle ends and the easing cycle begins. Once you understand this it becomes clear that the economic recovery, lackluster expansion, and good times have all come to an apex and the tide is now turning as the American economy struggles with its debt load at these interest rate levels.
As the American economy continues to weaken falsely masked by low unemployment levels (labor force participation rate is at all time lows) and corporate debt starts showing signs of cracking we will experience an easing cycle in which the Fed will take rates below the zero lower bound into negative territory in order to stimulate the economy with, you guessed it, even more debt.
The next recession is potentially right around the corner.
This is more significant than most traders realise. It has become common place on Wall Street to celebrate rate cuts over the last decade since the financial crisis, after all easy money policy means more cash flowing into the stock market, and this is generally the case except if it comes directly after a tightening cycle in the face of a recession. But, I hear you say, how can the tightening cycle be over and a new recession beginning if we have only managed to reach a diminutive 2.25% Fed Funds Rate? Well the answer is simple, the interest rate is not what matters, what matters is the economies ability to service that debt load, and right now 2.25% is all the American economy can withstand.
This chart depicts the interest rate and shows where our ability to service that debt lies helping us to understand where the tightening cycle ends and the easing cycle begins. Once you understand this it becomes clear that the economic recovery, lackluster expansion, and good times have all come to an apex and the tide is now turning as the American economy struggles with its debt load at these interest rate levels.
As the American economy continues to weaken falsely masked by low unemployment levels (labor force participation rate is at all time lows) and corporate debt starts showing signs of cracking we will experience an easing cycle in which the Fed will take rates below the zero lower bound into negative territory in order to stimulate the economy with, you guessed it, even more debt.
The next recession is potentially right around the corner.
