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What I was worried about happened yesterday, as the Federal Reserve lowered interest rates by one quarter of a point, predicted that it would lower rates two more times next year, and the bond market called BS on that prediction and sold off, causing the interest rates on mortgages, car loans, credit cards, and corporate debt to go up instead of down.

Instead of helping people the rate cut is going to hurt them.

It is a mess and so the DOW fell 1,123 points and there was fierce selling in everything.

TLT is a bond ETF that tracks the 20-year Treasury bond and it fell.

When bonds fall their yields go up.

While the Federal Reserve lowered rates, the yields on Treasury bonds went up.

The Fed Reserve lowers what is called the Fed Funds rate and it took it down to 4.25-4.50%.

However, yields of longer duration went up, so the 2-Year Treasury bond yield ended the day at 4.36%.

This is important, because the Federal Reserve, in practice, tends to follow the yield on that and move the Fed Funds rate towards it.

The move in the 2-year Treasury Bond yield up, above the lower end of the Fed Funds rate, is the bond market saying NO to the Federal Reserve predictions of more rate cuts to come next year.

So, the DOW dumped.

And the Nasdaq dumped even more, while gold fell about half as much on a percentage basis and so far this morning has made up half of it’s losses yesterday. Gold is less volatile and more stable than stocks, while virtual crypto coins are the most volatile thing you can own and become toxic in market drawdowns.

The S&P 500 now has a nasty looking chart.

Now the last time the markets had a pullback like this was when they made a peak in July and dropped into the first few days of August.

That drop ended with a big gap down in the markets, that brought with it a wild spike in the VIX volatility index, which is called the “fear index,” because it measures the premiums that traders pay for S&P 500 options. When they go into panic the premium they pay for volatility rises.

Now, yesterday the VIX jumped 87% in one day.

A big one day surge in the VIX, like we saw yesterday, is enough of one to show that there was real panic in the markets. It is enough of a spike to suggest that this most recent drop is probably near an end in terms of time.

I do not think now is the time to panic.

After the mess, the Federal Reserve made the past few months they are going to be motivated to do as little as possible next year.

I’ll have more to say about the markets, this VIX action, the reason why the bond market did this, and more in this Sunday’s WSW Pro update, unless something happens I need to notify WSW Pro members about before then.

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-Mike

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