3 Ways To Invest In Stocks (Even When The Ride Is Coming To An End)

The U.S. economy is appallingly dependent on the “wealth effect”. And the U.S. Federal Reserve knows it.

Just how “easy” is the Fed’s monetary policy? The real Fed Funds Rate (FFR) is at -0.8% right now. The last time the inflation-adjusted FFR was down at -0.8% had been 8-9 months into the Great Recession (10/2008). Before that, the country had been 8-9 months into the 2001 recession (12/2001).

Pushing the cost of capital to insanely cheap places used to be a tool for alleviating recessionary pressure. Today? The central bank of the United States believes in the permanence of cheap credit to maintain elevated levels of stock, bond, and real estate prices.

The proof of financialization is in the bread pudding. Never in the history of the U.S. economy has the ratio of household assets to nominal gross domestic product (GDP) reached 4.25.

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financialization

It’s not just the reality that asset price inflation is vital to economic well-being in 2019. Previous wealth effect reversals occurred because of an over-reliance on respective asset bubbles in stocks in 2000 and real estate in 2008. (See the orange lines in the chart above.)

Unfortunately, most of the Federal Reserve committee members only see the “benefits” of the present-day wealth effect. Few of them show any concern about the eventuality of an ugly reversal.

Never mind the probability that the Fed will not have enough ammunition for a crisis or recession. All-star economists are notoriously poor at alerting folks when a recession is happening. In particular, the average number of months between the inception of economic contraction and a pronouncement by the National Bureau of Economic Research (NBER)? 9 months.

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nber-recessions

Granted, people keep on spending in ways that is keeping the current expansion alive. Indeed, the recent 1.9% GDP print was entirely attributable to the resilience of the consumer.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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