My Trading Instincts Are on High Alert as Fed Rate Cut Speculation Grows

The recent surge in speculation about potential Federal Reserve rate cuts has left me with a sense of unease. As a trader, I would be keeping a close eye on price movements below short-term moving averages, preparing for a potential major downturn. To understand my concerns, let's revisit the events of last Friday. Fed Chairman Jerome Powell hinted at a possible rate cut in September during his speech at Jackson Hole, stating that the current policy landscape and shifting risk balance may necessitate an adjustment in the policy stance. Although Powell stopped short of making any commitments, his comments sparked a significant increase in bets on rate cuts, leading to a sharp rise in markets, including bitcoin and ether. However, these anticipated cuts come at a time when fiscal spending is at an all-time high, stock and crypto valuations are record-breaking, and the global M2 money supply is soaring. This raises questions about the true impact of cheaper borrowing costs on the economy. According to the founders of the LondonCryptoClub newsletter service, 'while rate cuts will undoubtedly have some effect on the markets, there are more significant drivers of this bull run, such as global monetary easing and rising stimulus, with the US still running large deficits and other major economies ramping up their fiscal policies.' In essence, the US Treasury is engaging in a form of 'treasury quantitative easing' by front-loading debt issuance into short maturities, which helps maintain low short-term interest rates. The question remains, though: how much stimulus is too much? The US economy, like a professional bodybuilder, has been reliant on fiscal spending and monetary policies - the anabolic steroids of macroeconomics - to artificially boost growth. However, these measures come with long-lasting and hazardous side effects. Economists have drawn parallels between the economy's reliance on these stimuli and the consequences of prolonged steroid use in bodybuilding. Just as the body eventually develops resistance to steroids, leading to a saturation point where the benefits diminish and the side effects escalate, the US economy may be approaching a similar threshold. The unabated use of monetary and fiscal stimuli has produced diminishing returns, with the law of diminishing marginal utility setting in. The potential risks to the US economy from these persistent stimulus measures are significant, and the chatter around Fed rate cuts, in a landscape where fiscal stimulus is already flowing freely and asset prices are at lifetime highs, feels like pushing an overworked system to its limits. As a result, the trader in me is nervous, and I worry that financial steroids could steadily lose their potency, leading to severe consequences.