This month’s move by the Federal Reserve Bank to lower interest rates for the first time in a decade may prove to be a “boondoggle”.
This was done on the backdrop of all the economic indicators in the U.S. posting continuously showing record employment, rising wages, all time historic high stock index prices, and record corporate profits. With a Fed funds rate of 2.25% and a Ten-year bond yielding a disproportionate 2%, why would anyone move to lower rates when, in reality, a neutral 10 year should show generously 4-5%? The answer: politics and manipulation.
Before I get into the nitty gritty and drilldown, let me just state that what happened last week is like opening “Pandoras Box”. I believe not only will it be hard to get out of the death spiral that potentially could happen, but the world (and I mean every major economy) will all go with it. In my opinion we might be facing a 10-20-year potential downdraft that was only experienced by (and to some extent are still in it) Japan for the last 20 years. This could lead to the inability to drag ourselves out of a 1-2% growth and a zero inflation to a deflation scenario. We might look back and say, “the good old days were paying 3% on time deposits”.
To understand; if 4 countries are selling TV’s, the weaker a currency is.…the cheaper to buy that same TV from outside that country. If another country lowers its rates…it makes that currency also weaker so the TV in that country becomes more competitive and the others will drop theirs to stay competitive. It becomes a downward spiral when playing this game.
This is a dangerous scenario…a race to the bottom.
For all you “millennials” out there, please realize that 2%-2.5% is not restrictive monetary policy. IT’S EASY MONEY! For most of the time I have been on this earth, normal interest rates had the 30-year bond at 8%. All the Fed did in 2018 and 2019 was desperately attempt to move the needle back to a normal neutral rate. Like a spoiled child screaming for its candy, the market and the politicians pushed back. By design, the FED is supposed to be immune to these pressures and be independent.
In addition, in “the old days” countries used to work together to help coordinate central banks. In “Trump’s World” of nationalism and “Bully Tactics” no one has any interest to work with the U.S. That push of the fellow Nato Member from Montegero may come back to haunt us.
So what is the answer?
Are we going to zero like the rest of the world? Right now its hard to say. One thing is for certain; there will inevitably be another recession. Its 100% normal for economies to have these cycles. It’s healthy! Right now; the U.S. economy is strong in both real and relative terms. The economy is still growing, unemployment is literally at record lows, and the consumer is spending. Another thing is completely obvious to me and that’s all of the problems and gyrations in todays markets are self-inflicted. The Trade War, the anxiety in the U.S. over immigration, the divisive rhetoric among what are supposed to be representatives of the highest moral caliber.
I have the only answer…and its fool-proof and guaranteed. Don’t count on time deposits to fund your retirement AND Twitter…please close Mr. Trumps twitter account!