What can we expect if the Fed cuts interest rates tomorrow?

Two things are needed for stock markets to rise: optimism and money. Interest rate cuts have a very powerful effect on investor sentiment. As far as sentiment is concerned, things are looking good.

The problem lies with money. Because that is also needed for stock markets to rise sharply. The general idea is that low interest rates will encourage savers to invest. Investors overestimate that.

It is not the case that when interest rates fall by half a per cent, large sums of savings suddenly flow into the stock markets. There are savers and there are investors. They hardly ever switch.

To really boost the stock markets, you need the money press. Then you have both the positive sentiment and the money to boost the stock markets. However, it is still too early for the money press.

Tomorrow, we will have to make do with an interest rate cut and the expectation that there will be more to come. The stock markets may then rise purely on the positive sentiment surrounding the interest rate cut. However, this will only last until the budget is used up.

And that budget is now a major problem. American stock markets are at all-time highs and European stock markets are not far behind. This means that almost the entire budget has already been used up.

Small investors have also taken on considerable debt in order to be able to invest extra money. For those debt records, see this graph:

I readily accept that investors want to invest even more on the basis of interest rate cuts. The question is, however, how much money they can still invest. I don't think much more. It may even be that they have already bet everything on that Fed interest rate cut.

In that case, the stock market adage “possession is the end of enjoyment” will come into play tomorrow. I estimate the probability of this happening at 35%.

With a 65% probability, I expect the stock markets to rise for a few more days or up to a few weeks.

The next question is what the big professional investors will do. When interest rates start to fall, bonds become more attractive. Those professionals are always active on the stock markets and in bonds.

They often shift around a bit with the percentages they have in either stocks or bonds. If lower interest rates cause the value of bonds to rise, some money will move from the stock markets to those bonds.

They have already anticipated this to some extent, as the yield on 10-year US government bonds has already fallen from 4.5% to 4%. This means that an interest rate cut of around 0.5% has already been priced in.

No matter how I look at it, the Fed's interest rate cut and the cuts that are still to come will not cause a big stock market party. A small and short-lived stock market party is possible, but it will be followed by a very big hangover. I maintain my expectation of sharply falling stock markets in October.

Gold & Silver

Here too, the Fed's interest rate cuts will have a major impact. To date, American investors do not yet believe in this gold and silver bull market.

In recent weeks, that belief has grown slightly. However, American investors are still predominantly convinced that gold and silver prices could fall again at any moment.

This is reflected in profit-taking. In recent months, American coin dealers have seen many small investors selling their gold and silver coins and bars.

When mining and exploration stocks rose slightly in recent months, many investors immediately took their short-term profits.

Almost no Western investors dared to hold on to gold, silver and mining and exploration stocks for the long term. Fearmongers continued to dominate.

Things have improved somewhat in recent weeks. This came after two major downward revisions to US job figures and Jerome Powell indicating at the Jackson Hole meeting that it is time for a policy change.

This fuelled hopes of an American interest rate cut, which immediately pushed gold through the £3,500 resistance level and silver through the £39/40 resistance level. Mining and exploration shares also began to perform better.

American investors believe that interest rate cuts are very positive for gold, silver and mining and exploration shares. This does have some fundamental value.

But for now, I am giving much more weight to the large gold purchases by central banks and the five-year shortage of silver.

The fact that American interest rate cuts will cause the dollar to fall and that the Fed will cut interest rates while inflation is still too high is a significant factor from a fundamental point of view.

If the Fed does indeed lower interest rates tomorrow and investors see a trend of interest rate cuts emerging, this will cause a turnaround among American investors. From that moment on, people will start to believe in the current bull market for gold and silver.

This will give gold, silver and mining and exploration stocks a huge boost (think of this not in terms of days, but months or even years).

Another factor that will come into play is that the alternatives are running out. The AI hype on the stock markets is over, stock markets (see above) are going to fall and crypto has also fallen flat.

That leaves two options: gold/silver and mining and exploration stocks on the one hand, and bonds on the other. Given the relatively low returns on bonds, small investors will gravitate towards gold/silver and mining and exploration stocks. The pros will do so to a limited extent and also opt for bonds.

Today, the fearmongers prevailed once again with regard to gold, silver and shares in mines and prospectors.

I would always prefer that to a euphoric rise in the run-up to an important event such as the Fed meeting. Because then it can only disappoint. And now the chance of a windfall tomorrow evening has become very high.

Cryptocurrency

I think that te volatility on the markets has just begun. BTC attakcing the resistance here, the crucial breakout is above $118K. Strong moves firing up.

The crucial area for ETH to hold is around $4,400. If it starts going beneath that zone, then I’m expecting an acceleration and big liquidity flush. That’s the ideal ara to buy the dip from, but it might feel silghtly scary. So far this is a good bounce from the crucial area on ETH