Israel and Hezbollah conflict and RBA rates decision

Posted by Gavin Chau

The US Empire inches closer to its closing stages, and the world is a mess as we enter what Neil Howe and William Strauss call the ‘Fourth Turning’ or what Ray Dalio calls a ‘change in the world order’. Here’s what’s happened in the last few days.

Ukrainian president Volodymyr Zelensky is in a weapons manufacturing facility in America, signing bombs to be used on Russia.
Protests and looting in Philadelphia and Chicago.
After setting off a bunch of explosives planted in pagers and other electronic communications devices, Israel bombed Lebanon, killing 500 people. It seems like Israel is pushing hard for war while the US can help, as it is unlikely they can defeat Hezbollah on their own.
Russia has signed a ‘strategic partnership agreement’ with Iran, the most powerful military in the Middle East.
The Houthis fired an Iranian hypersonic missile, bypassing Israel’s Iron Dome defense system by flying into space and releasing a bunch of countermeasures.

All the actors are playing their roles, and the whole region looks ready to erupt again. Like clockwork, the US Federal Reserve pivoted, cut interest rates by a whopping 0.5%, and turned on the money printer. Funding these conflicts is costly, and the US economy is weakening. At the same time, gold prices are up a massive 28% in 2024, which puts it at its best annual return since 1979.

The Fed is calling for a ‘soft landing,’ the Chief Economist of one of the largest fund managers in Australia said the same thing at their conference last week. At this point, it seems like they’re either morons or conmen in expensive suits. Not much escapes the eyes of the asset markets.

The Fed has only begun a rate-cutting cycle two other times with a 0.5% cut, and both resulted in recessions…. We’ll see if this also ends in a recession. It doesn’t look good from where I’m sitting. Both the Sahm Rule and the 10-2 yield inversion/ re-steepening have been triggered, which have had a 100% success rate of calling recession in the US since the 1950s, and there is likely another 0.5% due for this year. The markets are pricing 2% of rate cuts in the next 12 months, the most since the GFC. This implies a 100% probability of recession.

As always, bad news for the economy is good for asset prices, and the global liquidity cycle has begun its upswing. This will take asset prices with it. It is, without doubt, the single best indicator for asset prices…. You turn that money printer on, and it finds its way into assets first…. Every time.

Of course, we have the RBA meeting today (the interest rates remained unchanged). The unemployment rate remained stable, and while inflation is falling fast, it is not inside their target band. Strangely enough, the monthly CPI numbers will be released tomorrow after the RBA makes its decision. Westpac anticipates it will come in at 2.7% largely because of the energy rebates (which the RBA will look through).

The RBA is fast becoming a lonely voice as rates are cut in the US, Europe, China, Canada, England, and New Zealand. If history is any indication, by the time it cuts, it will be too late, and when they cut, money will flow straight into asset prices.

The markets are looking 18 months into the future and have anticipated these moves ahead of the RBA. The smart money is already in position. We can see that investor home loan volumes are spiking, the share market is making new all-time highs, and cryptocurrencies are pumping. I don’t care what you invest in, but it’s time to take a position. The result is always the same: assets will rise faster than incomes, and even if your income doesn’t change, you’ll end up poorer than when you read this.

Posted by Gavin Chau, on 24th Sep 2024