Jerome Powell just gave his testimony to Congress and there were a number of NUGGETS that are of the utmost importance to consider.
Powell said that it is the belief of the Federal Reserve that we’re going to keep living in a Low Growth, Low Interest Rates and Low Inflation world, created by various major trends that are beyond the Federal Reserve’s ability to impact meaningfully.
Powell was asked by one of the committee members about the inherent risks to the economy in a low-rate environment to stimulate, if a recession appears. He shocked the members by responding that if the FED had to follow historical lines of policy, the Fed Funds Rate would be dropped by 5%, all the way down to -3.50%, if judging by today’s rate.
That means that the FED has just alerted to investors, globally, that the heavy lifting going forward will be done by the government, using fiscal policies.
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History is clear on the matter of government stimulus packages: they end up being inflationary.
My most pressing concern is that the FED and Washington aren’t communicating and that lack of coordination and cooperation is hurting the American people and, to an extent, the global community.
The market is COMPENSATING for the fact that NO ONE has ever seen a worldwide recession, with interest rates being so low, by holding immense amounts of cash on the sidelines.
This means that the wealthy will be able to exploit cheaper prices, but the middle-class and lower-income demographics might be traumatized when the slowdown hits.
It is true that there are a record number of people working in the USA right now, but wages aren’t rising fast.
Think of it like a car that is running at what looks to be the limit of its performance curve, but you have no idea when it will start malfunctioning, or what the malfunction will look like.
You’d be taking precautions and that’s putting it mildly. You love the performance and the adrenaline, but it can all end without many early warning signs.
Some prepare by buying government bonds. Others buy precious metals. Another group owns cryptocurrencies. Most like cash. A minority places short orders and is ready to make money from the bear market.
Whatever you do, diversification is always a good tactic.
Best Regards,
Tom Beck
Research Partner, PortfolioWealthGlobal.com
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