The Absurdity of Rate Cuts A Furious Perspective From This Joker Ape!!!

In the grand theater of global finance, a deceptive narrative has been quietly unfolding, casting a dangerous illusion over the unsuspecting audience. It’s the beguiling tale of rate cuts by the Federal Reserve (FED) - a tale spun with promises of economic salvation and prosperity. But beneath this captivating facade lies a stark reality that’s far from the promised utopia. Today, we’re going to rip away this veil of deception, and I warn you, this journey will not be for the faint-hearted. Prepare to confront the harsh truth about the so-called magic of rate cuts and their supposed benefits to the economy. This is a furious dissection of a dangerous fallacy, a critical examination of a misguided belief that’s been circulating in the financial world. So, brace yourself as we dive headfirst into this stormy sea of economic misconceptions

Just a fortnight ago, the trading community was buzzing with speculation.

They were assigning a whopping 60% probability to an emergency rate cut by the FED, potentially up to 75 basis points. Now, let’s pause here for a moment and underline the word ‘emergency’. An emergency rate cut isn’t your run-of-the-mill monetary policy adjustment. It’s a drastic measure, a financial defibrillator used in dire circumstances. So, what was this so-called ‘emergency’ that warranted such a drastic action from the FED? Was it Japan’s economic situation? If so, why on earth should the FED, the Central Bank of the United States of America, be cutting rates and printing money on behalf of the Bank of Japan (BOJ)?

Thankfully, for once, the FED didn’t succumb to the pressure of the hysterical crybabies in the market. An emergency rate cut two weeks ago would have been akin to dousing the Japanese economic wildfire with gasoline. Why? Because decreasing the rates differential in the short end of the yield curve, the one with the most significant impact on FX rates, between the US and Japan would have amplified the strength of the Japanese Yen (JPY) against the US Dollar (USD). This would have escalated the unwinding of JPY carry trade positions, thereby exacerbating the situation.

This scenario is a textbook example of how traders often overestimate the benefits of a policy decision that appears to favor them while conveniently underestimating or even ignoring its potential risks.

So, what did the FED do instead? It cleverly coordinated with the BOJ to devalue the JPY, thereby relieving the pressure on JPY carry traders. How did they achieve this? Take a look at what happened to the Euro (EUR) in the past two weeks. Despite the continuous deterioration of the Eurozone’s economic data, led by a recession-hit Germany, the EUR counterintuitively strengthened against both the USD and JPY.

This seemingly paradoxical situation was achieved through a two-pronged strategy. On one side, the US Treasury and the FED used the ‘buy back’ program to lower the yields in the long term of the curve. They financed these purchases by issuing Treasury Bills and shorter maturity treasuries, ultimately decreasing the differential between EUR and USD rates. Simultaneously, the BOJ kept purchasing longer-dated Japanese Government Bonds (JGBs), thereby lowering those yields too. As a result, while the rates differential between USD and JPY curves remained roughly stable, it shrunk between EUR and USD and widened between EUR and JPY. This triggered a bid for EUR since Eurozone government bonds were appreciating in relative terms against both those of the US and Japan.

However, this is merely a temporary fix, and its effects have already started to wane. If the Dollar Index (DXY) depreciates further, the FED will trigger a flare-up in inflation due to a natural increase in the costs of all goods and commodities the US imports. Conversely, if the EUR continues to appreciate, it will significantly impact the export-oriented Eurozone economies, leading to a further slowdown of their GDP due to a decrease in exports.

As a matter of fact, the last time the FED ‘intervened’ to help the BOJ (when the market was fantasizing about six rate cuts to be delivered in 2024), it was forced to halt and U-turn its narrative exactly where we are right now.

To all those who advocate rate cuts because they believe it will benefit the economy, I challenge you to pinpoint exactly where the economy will reap these supposed benefits. A rate cut will not only risk triggering a resumption of forced JPY carry trades unwind, potentially pushing stocks to the brink of crashing before forced deleveraging, but it will also undoubtedly reignite inflation in a country already grappling with an increasingly unaffordable cost of living.

And if that wasn’t enough, if the FED cuts rates, there’s the ultimate risk of triggering an inversion of the US yield curve back to upward sloping. If that happens, it will be challenging for the global financial house of cards to remain standing, as has happened every single time in the past.

This brings us to a crucial point. The current state of affairs underscores the urgent need for change. America was built on the principles of a republic, not a democracy. It’s a distinction that carries significant implications for our economic policies and the distribution of wealth and power.

A republic is a form of government where the country is considered a “public matter” and the head of state is an official appointed or elected to represent the citizen body. It’s a system designed to prevent any one person or group from gaining too much control. On the other hand, a democracy, while it champions the rule of the majority, can sometimes overlook the rights and interests of the minority. If unchecked, it can potentially pave the way to a monarchy, where power is concentrated in the hands of a single ruler.

It’s disconcerting to see certain candidates pushing for policies that seem to edge closer to a monarchy, forcing their agenda down the throats of the American people. This is not what our nation stands for. Our economic policies should not be tools for the rich and powerful to safeguard their wealth at the expense of the majority. They should serve as instruments of fairness and equality, ensuring that everyone gets a fair shot at success.

The American people deserve leaders who will uphold the principles of our republic, leaders who will ensure that our economic policies benefit all citizens, not just the ultra-rich 1%. It’s time for us to remember the foundations upon which our great nation was built and to strive for a future that upholds these principles. After all, the strength of America lies in its diversity, its people, and its commitment to justice and equality for all. Let’s not lose sight of that. Let’s demand change, for the sake of our nation and its future generations.