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WHAT THE HELL HAPPENED: Gold Plummets – LOOK OUT BELOW!
The Federal Reserve has cut rates for the first time in eleven years. So much is different about the world today compared to back then. I’ve read the entire FED report, which accompanied the announcement and listened to Powell’s answers to reporters’ questions and I can tell you that the FED’s main message is dual:
- We’re mid-way through the cycle, according to them. One of the new realities of our global economy is that it is so vast in scope that businesses and markets alike are efficient, overall, so the REAL economy doesn’t overheat at easily.
In other words, the current consumer economy in the U.S. is pretty strong. There’s no foreseeable bubble, as there were sub-prime lenders in the years leading up to 2008.
The stock market may be near all-time highs and trading at HIGH valuations, but there’s certainly no bubble there either. Investors are not euphoric at all; they’re reacting to zero and negative rates by assuming more risk (buying expensive stocks), since there are few alternatives. But they’re not delusional, thinking that buying today will result in them making a fortune, as did the late 1990s Dot.Com speculators, or the gamblers of the late 1920s. It’s just the best available option.
- The problems that resulted in the rate cut are (1) weakening conditions in other parts of the world, (2) muted inflation and (3) TRADE TENSIONS.
Just as President Trump is furiously slamming the table on the FED to lower rates, so does Powell (in a much more subtle way) hint to Trump that he knows what he’s doing (in his view). Powell believes that Trump should focus on solving the uncertainty over trade, instead of focusing on monetary policy – which the FED ought to do, according to the way the American system is structured and designed.
Powell was also very REPETITIVE about the fact that this isn’t the beginning of a long rate cut cycle, but an insurance cut and a way to prolong and sustain the economic expansion.
My problem with all of this is that the FED isn’t even the institution that I fear is out of hand; the government is. The FED may have expanded its balance, as have other central banks (by trillions of dollars), but it is the government’s bonds that it is helping to purchase. Central banks in most countries are, officially, part of the government, so they’ll continue monetizing debt.
The government is the one running these $1.2T annual deficits, not the Federal Reserve.
The FED also isn’t the one paying wages to employees; businesses are. If wages aren’t rising, the central bank is not the source of your complaints.
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My bigger problem in all of this is that it leads me to the conclusion that the only real bubble is government debt and that’s the BIGGEST one yet. Modern Monetary Theory brushes it off, however, as being something we need to be concerned about only if inflation appears.
In other words, the ridiculous theory goes that governments can remain highly indebted and keep borrowing at zero cost, running ever bigger deficits without doing damage to currencies, as long as inflation doesn’t force higher rates.
This is so dangerous that LIVING ON THE EDGE doesn’t even begin to tell the story.
It’s even more frightening when considering that both Yellen and Powell continue to say that inflation is a phenomenon that no one – and I mean NO ONE – understands.
Powell made it a point to stress that we should expect a quick rate cut cycle. It is intended to keep the economy expanding, but has caused precious metals to sink hard.
The market also dropped by 1% yesterday, due to the same catalyst – fewer cuts mean that stocks are generally less valuable.
On the precious metals front, though, the current price of gold is high enough to justify a continued rising trend line. The dollar is entering a bear cycle, so gold hasn’t finished its move.
August is going to be volatile and I’ll update on interesting developments and time-sensitive actions I’m taking myself. The governments have taken deficits a step too far and it will come back to bite us, so the idea is to be diversified and absorb shocks, but capitalize on emerging opportunities.
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