Forty-year high interest rates are edging higher and the Fed is being forced to jack up interest rates faster than the fifty basis points they planned each month. Will they go the Alan Volcker route and raise rates by several points? Will they stick with fifty points a month and be forced to acts more decisively at a later date? The point to consider for both investors and option traders is the relationship between interest rates and recessions. The Fed raises rates to slow the economy and tamp down inflation. The end result is almost always unemployment and a recession.

Recession Fears and the Market

Stocks have fallen into bear market territory during 2022 despite a recovering economy. There has been lots of spending that was bottled up during the height of the pandemic. Employment is improving and wages are going up. Meanwhile China has been following an ill-advised policy of city-wide lockdowns to deal with Covid while most of the world has moved past that. And Vladimir Putin is pursuing a return to the “grandeur” of the USSR with his horrific war in Ukraine. Preceding all of these things Congress, two Presidents, and the Federal Reserve pumped a massive amount of money into the US economy. As the chickens have come home to roost, we are left with recession fears and the market is wring out years of excess valuation.

Will Rate Increases Stem Inflation?

When there is too much money in circulation the Fed can raise rates and it will generally help to reduce inflation although if they go too high and too fast, they cause unemployment and a recession like happened in the 1980s. When the issue is in the supply chain the Fed might still cause a recession but will be less successful bringing down inflation. That is the case both with the Chinese lockdowns and Putin’s war in Ukraine. The markets are getting a glimpse of a recessionary future with no clear end in sight. Thus, stocks are on their way down. This is point at which it is useful, again, to remember that the market crash that started in 1929 did not end until 1932 when all of the excess value had been wrung out of the market.

What Is the Bitcoin Crash Telling Us?

The meteoric rise and impressive crash of Bitcoin is a lesson about speculation without a basis in fundamentals. At its worst it is the Dutch tulip bulb frenzy and crash all over again. During a time when money is cheap and some folks have lots of it, people become convinced that upward investment trends will last forever. Those of us paying attention say this in the runup to the dot com crash when any investment with dot com in its name went up because “the market was different this time around” and stocks were going up forever. We have talked about the pizza review guy who convinced his followers that “stocks always go up.” There is a reason that we always sign of our videos with the admonition to always make sure you hedge. There is no free lunch but there can be profits if you work with the right people like in the trading squadrons at Top Gun Options where we potentially print money whether the market is going up or down. Thus, as Americans, we hope the Fed threads the needle and brings the US economy in for a soft landing. As modern day replicas of Gordon Gekko we will pound the market into the dirt in search profits no matter how the Fed does with inflation and how the market reacts.