Last week I spoke about an interview on 60 Minutes given by Fed Chairman Jerome Powell, and I wanted to discuss that a little more today. But I’ve changed my mind. The decision announcement last week and his following press conference are so dramatically important that it needs to be discussed with high priority. If you expect to at least maintain your standard of living or enrich it, you’ll want to pay attention to what is happening now more than ever.
It’s important to either listen to the 7-minute press conference prepared remarks, or to read the separate releases found here, here, and here. If you’d rather watch or listen to the full press conference, including the prepared remarks, you can find that here. Mr. Powell speaks in very clear language that is easy to understand, even if you are not accustomed to economic terminology. He doesn’t use too much technical language during the press conference, but what he does use is kind of self explanatory, such as “household confidence”, “consumer confidence”, and “financial stability”.
One thing that he said, perhaps in a lucid moment, is that deficits and debt can’t grow faster than the economy indefinitely as they are now, and it is something that needs to be addressed over time. He concluded that statement saying that he doesn’t see a credit crisis on the horizon and there is no need to try to predict one forthcoming. The first part of his statement is 100% true. However, that he thinks it is not problematic, is in itself, well, problematic. Regular readers know what I think about $22 Trillion of bonded debt and trillion dollar annual deficits. But that’s not what I want to get at now.
Press Conference Takeaways
Powell's prepared remarks as well as his answers during the Q&A should raise more than just a few eyebrows. The important takeaways are as follows. First is that the Fed will not be dovish enough, and it won’t come fast enough. And by dovish we mean that the Fed will lower interest rates, buy treasuries and other assets, bailouts, or engage in other policy maneuvers to help money flow more quickly and fluidly through the economy. The Fed will be behind the curve and any moves it makes will be reactionary rather than proactive, and they will come too little too late like a firefighter coming to douse the flames after the house already burned down.
The second takeaway is that the Fed was expected to go to one more rate hike by the end of the year, down from two, and instead it went to zero hikes this year. And I am telling you now that what is most likely to happen is that not only will the Fed refrain from any more rate hikes this year, but that it will rather go back to rate cuts before the year is out. This decision of no more hikes this year is pretty remarkable, especially because we’re only in March! Last year we thought it would be three hikes this year, the beginning of this year we though it would be two hikes, and now just 2.5 months in, we’re not getting any more hikes for the remainder of the year. How fast that policy has gone from Mach 1 to sitting on the tarmac!
I was expecting to get hikes this year, at least one and maybe two. That changed in October when the Fed started reversing its public language in interviews and official statements. From that time I wasn’t expecting any more hikes this year, and now Powell has confirmed it.
The third takeaway, and more important is that the Fed is going to end its asset sale program by September, just six months from now, and they will begin tapering off those sales immediately. Remember that this whole program started 10 years ago with only $800 billion of assets on the Fed balance sheet. It is ending with over $3.5 trillion. If the whole policy worked as they want us to believe, the Fed should close out the program with $800 billion or less, not over $3.5 trillion.
And remember too that selling its assets has the same effect as raising the target rate, which is interest rates go up. What this means is that rates are not going back to normal…6-7% on the ten year treasury and over 5% on the Fed Target Rate. This will never happen unless we get serious monetary policy reform, and that won’t happen until the rest of the world forces the United States to do so, which is going to happen when the dollar collapses…meaning we’ll have an entirely new monetary system. It's entirely possible; it has happened four times in the last 106 years right here in the United States.
The outcome of this major shift in policy will be a very long and painful recession, and the salt in the wound will be stagflation. The rug has been pulled out from the deflationary environment on assets and the economic stimulus is gone, between the effect of tax cuts and monetary policy and continued tariffs on Chinese goods. We’ll see a stagnant or shrinking economy combined with inflationary pressure on commodities like oil, lumber, pork bellies, and more, and in addition the trade war with China will not likely be resolved any time soon, which will keep higher prices on imported goods in the mix for some time. This is a recipe for complete and utter disaster, and you better be prepared to endure because the Fed is now ready to destroy the economy as well as our entire monetary world order.
To summarize, 1) the Fed will not act strongly or quickly enough, 2) not only will we have no more rate hikes this year as he said, but we are more likely to have rate cuts before the year is out, and 3) asset sales are being tapered through September when they will end, leaving the Fed’s balance sheet at over $3.5T, but that will soon begin to increase once again with another, very large round of quantitative easing that will leave the Fed balance sheet more than double what it is now and our national debt over $30T.
Election Day
As an aside, what is going on will probably have enormous implications for the election in 2020. If the Fed can hold the economy out long enough, The Teflon Don will likely be reelected. If you are a Democrat you should vote for Joe Biden, the most electable candidate and the one who will have the best chance to defeat Trump. The proposals of the other candidates are just too far to the left and socialist, and no conservative minded person will ever vote for that.
If the economy tanks and is still doing poorly by the time we get to the general election, the Democrats will probably put forth a very socialist candidate like Sanders or Warren, and there is a strong likelihood that middle of the road conservatives will swing left, thinking that capitalism just didn't work out. The big BUT here is Howard Schultz. He's running independent, and if the voters like him more than Biden or Trump, he'll steal votes from the left and Trump will handily defeat all other candidates in a landslide victory.
Here's the economics/markets part: Regardless of who wins in 2020, it will be more deficit spending and more dollar devaluation. During supposed good times the Trump administration is over spending tax receipts by more than $1T per year. As the economy falters, tax receipts will also fall and deficit spending will have to rise. If a Democrat is elected the deficit spending will be more than what Mr. Trump is spending now. And if a Democrat is elected, the deficit spending and bailouts and QE will be much more than if Trump is in office. Democrats and Republicans both like to spend without abandon; the Republicans are just the less dirty shirt in the hamper.
As noted, Powell said that growing deficit spending faster than the economy can grow is not sustainable and must be dealt with. He's right. It's just a matter of time before all of America's creditors come knocking on the door for repayment. When that day arrives your Treasuries will be worthless.
What You Can Do Now
Here are some bold moves to make now, if it is appropriate and suitable for you, to protect your wealth and prepare for what is coming. And remember that each person’s situation is different so it’s important to consult your financial advisor and do your own due diligence before acting, as some of what I suggest might not be suitable for you.
Speaking of your financial advisor, the first and most important thing to do is call that person and ask, “What will happen with my money if the Fed goes back to quantitative easing, rate cuts, and asset purchases, amongst other policy moves?” The answer you should hear is “I am glad you called, and in fact you are one of the top ten people on my list of calls today. Many of our other clients share your concerns, because it’s very important to know what is happening and what to do. Is tomorrow afternoon good for you, or is Monday morning next week better for us to meet? And your house or my office?” On the other hand if your financial advisor blows you off in any way, you know that you need a new advisor because the one you are using will prove himself to be nothing more than a salesman. A blow off means he has no understanding of the very markets you are investing in. And further, most financial services professionals, regardless of the alphabet soup on their business card following their name, they don’t know what to do in a stagflationary environment. It's been 40 years since we've seen serious stagflation, and even advisors who were around then and still manage money for people, they didn't learn anything the first time around. The only books they read are study manuals for series licensing and sales techniques. They probably haven't picked up an economics book since college.
The next point, which is very important as well, is if you want to hedge against stock market losses, the best thing to do is NOT to simply short the stock market. It's very short sighted if that is your only plan. We will surely see a lot of downside volatility, however, once the Fed begins easing and rate cuts again, the stock market might once again begin to rise in nominal terms. If you've shorted the market and it rises, you're going to lose a lot of money. But because of high rates of inflation the market will not likely keep pace in real terms either. In plain English that means that as fast as the stock market may rise, if you factor in inflation, you may lose because your real ability to buy the stuff you need will not rise as fast.
A better hedge against the stock market would be a multi prong approach of buying gold bullion (not numismatics), buying gold mining companies (and silver too), and using options. Also, because I believe the next crisis will be a dollar confidence crisis, you can diversify into other currencies that will appreciate against the dollar. The currencies to avoid are the Euro, the Swiss Franc, the Japanese Yen, and the British Pound. Currencies that may do well are the Russian Ruble, the Chinese Renminbi (Yuan), the Indian Rupee, and Australian Dollar. The Canadian Dollar may do well against the US Dollar as well.
By the way, if you live in America, you obviously need USD to buy the stuff you need to live and make your mortgage or rent payment. I am not suggesting to eliminate your dollar holdings. Just the opposite in fact because as I’ve said and will say again now, a large cash position will do you very well when the opportunities arrive. As an example, would you have liked to have bought Apple or Starbucks in March 2009? How about houses for $150K but had a full market value of over $500K? Opportunities like this will abound once again, and you’ll need cash to be able to jump in. Not space to borrow in your margin account, but rather real, hard, cash. Do not use margin because a margin call will crush your dreams of adding an extra zero to the end of your net worth.
You may also choose to hold ultra short term treasuries because anything with 1-3 month maturity will have very little interest rate or price risk. Any bonds that mature in more than 3 months will be too risky. You might include TIPS as well for the inflation protection that is built in, but the reason I don’t like them is because the government sets the inflation rate that TIPS are set against, and the government admittedly fudges the numbers in its own favor using geometric weightings, hedonics, seasonal adjustments, and the like.
Finally, beside precious metals there are other sectors that will fare well, and there are sectors that will crash hard. Financial institutions, banks, and insurance companies will likely crash hard, and we can already see housing and automobile manufacturers not doing well either. Sectors that will do well include noncyclical consumer staples (think toiletries, primary food items, discount wholesale clubs, etc), utilities, energy (including uranium and midstream), and healthcare.
Always do your own due diligence before making any purchases or sales, and stay patient. You'll be rewarded.
That’s it for of my Fed policy decision commentary. Make sure to leave your comments and questions down below. Thanks for reading Volumes 65 & 66 of The Macro Market Wrap Up With The Mad Genius. Remember there is always a bull market somewhere in the world, and on the opposite side of every crises there lies opportunity.
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