Fed will be forced to lower interest rates and declare war on cash

March 29, 2016 10:17 AM

The simple and easy to understand chart shown below quite clearly illustrates why the Fed has no option but to lower interest rates.  Central bankers worldwide have already embraced negative rates, so it is just a matter of time before our central bankers are forced to walk down the same path. 

The Fed is trying to put on a brave act, but you can already see them backtracking from the strong stance they took last year. Now they are stating that all is not well, and the economic outlook is weaker than expected. Rubbish we already stated in several articles that they would take this path and that the only reason they even raised interest rates was so that they could come out with an excuse to lower them again. 

When an economy is booming, the velocity of money increases and as you can see from the chart below, the velocity of money has been dropping and quite precariously we might add. Hence, the only thing supporting this market is hot money. Take away the hot money and this illusory economic recovery crumbles.

The chart topped out in 2000 with a double top formation. We did get a small pop up when Greenspan flooded the markets with money to create the housing bubble, but it put in a lower high. After that, it has been nothing but a downhill ride, and this is why gold prices have tanked. The money supply has increased, but the money is not moving, the masses do not have access to this money yet. 

This is why we stated that if they really want to create a monstrous bubble, they need to put this money into the hands of the masses. Only the masses are foolish enough to take markets to levels you can only envision after smoking some illegal substance.  This is why we are dead certain that the Fed will come out with another stimulus plan; this economic recovery is being held up by hot money and nothing else.

If the recovery were real, interest rates would not be held low for so long, and the Fed would need to support the stock market. After it stopped the corporate world stepped in via the illegal usage of Stock buybacks. Now instead of trying to improve the bottom line, they focus on simply buying back more shares and in doing so artificially boosting the EPS. It’s a perfect scam, no work and big pay; and as interest rates are low, the incentive to borrow large sums of money to do these dirty deeds is larger than ever.  Hence expect stock buybacks to surge to levels that will appear insane one day. 

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About the Author

Sol Palha, with Tactical Investor, is a self-taught student of the markets and provides compelling insights into the markets by combing the key elements of mass psychology with the supreme elements of technical analysis. He has been studying the markets for over 18 years.