Wednesday, December 11th, 2019 MST

Fed rate hikes and reversals

In 2018 the Fed imposed four rate hikes, and stocks were virtually flat for the year.  Actually, in the fall of 2018, stocks took a huge tumble.

Then came the “Powell Pivot.”

With the December rate hike, which was anticipated, stocks plunged, and the Fed chair reversed fields.  Powell immediately hinted at lower rates in 2019 and delivered with two rate reductions so far.  Another is expected at the FOMC’s October or December meeting, maybe both.

While stocks look to have done well so far this year, it is only because the December plunge was so severe.  Stocks are not now above their 2018 highs.

Will the stock market’s rise continue as long as the Fed reduces rates?  No.  When the bad investments made with all that freshly printed money start showing up, such as WeWorks and the poorly received IPOs, investors will see that this bull market in stocks is over.  Then investors will run for gold and silver.

Investors have turned thumbs-down on high-profile companies including WeWork, Uber, Lyft, and Tesla. Industries including marijuana, vaping and bitcoin all have seen big price drops after a spate of bad headlines. Even Netflix is under pressure, with competition rising.  Apple TV is the latest entry into the movie market, which has not gone unnoticed by Netflix shareholders (and former shareholders.)

Multiple initial public offerings have gotten trashed, most recently exercise bike maker Peloton, which tumbled 11% in its opening day on the market Thursday and fell another 4.3% on Friday.  The speculative fever is dying.

A final note on stock speculation.  Average transaction sizes for startups have surged, from $6.7 million in 2013 to $23 million in 2018, and the number of megadeals of more than $1 billion exploded to 24 in 2018 against none five years ago. WeWork, the office space company whose initial public offering has run into major complications, was the biggest such venture capital deal in the first half of 2019 with a value of $2 billion. Uber was the biggest IPO exit, valued at $14.7 billion.

Nowadays, the stocks no longer trade on profits and anticipated profits.  Stocks trade on what the Fed is going to do.  Sadly, though, central banks can overshoot, and the result is rapidly rising, uncontrollable inflation.

This time, though, considering the thinking (sic) at the top levels of government, there may not be an effort to reign in inflation until it is too late. Modern Monetary Theory, a concept that says the level of government debt does not matter, is actually being discussed as an alternative way to finance government expenditures.

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