Chairman Jerome Powell hinted last Tuesday, while speaking at an event at the Fed in Chicago, that the Fed would likely cut rates to keep the economic expansion going. With stocks still within 10 percent of their all-time highs, the not so calming words may just be enough to avoid another mass selloff, for now anyways.
It seems that most Americans have forgotten the golden rule of investing “Buy low; sell high”, while continuing to risk it all as the stock market continues to rise even higher. Greed kills bull markets much faster than old age ever could. It’s not even a new story. It’s a story we’ve already experienced in 1929, 2000, and 2008 that speculative greed doesn’t work out.
Therefore, the market is immensely increasing the odds of a cut in interest rates by the end of the year, and if I was a gambling man, I’d bet that they do two cuts.
Given that interest rates are at 2 percent, whereas usually at this stage, in past market rallies they’ve been closer to 4-6 percent. This doesn’t exactly give me any confidence that they have a plan to stop the bleeding, much less talk about a 22 Trillion Dollar deficit that’s growing as I punch each key.
The Fed is putting on quite the performance by hiding its identity by keeping interest-rates near-zero which is what they’ve been doing since 2008. As well as, continuing to increase our balance sheet at a pace faster than ever before. But that’s exactly how the Fed works. Rather than try to act on a brake in the economy when it’s running hot, or getting things reignited when it seems cool, as designed.
When the Fed says dance, Mr. Wall Street does the Harlem shake. Stocks had their second-best day of the year when Powell spoke, and continued to rally all last week.
We can’t eliminate the economic cycle, which is largely fueled by human fear and greed. I believe we could redirect the emotional sentiment before this all burst, but why would we want that? Who cares if we have a recession right? It’s not as if we have the largest debt any country has ever known, or the fact that this could be the spark the next recession has been waiting for.
In a market that has 700-point swings on a weekly basis and a mere 5 percent pullback, which in return sends panic soaring, the Fed is laying the foundation for the kind of market where greed can potentially lead to the last, big, speculative leap of this current cycle.
With a not so smart thought process as that, it’s no wonder that gold has started to really climb the last couple of weeks. We’re now sitting at a two-month high and has been moving even higher even as the markets have bounced in the past two days as well.
The Fed just gave us the single most important reason to diverse your portfolio with gold, and that’s some of that market fear and inflation insurance, which nothing has ever done better than gold has.
Central banks are buying gold at a faster pace than any other time their creation. So far in 2019, they have bought over 145.5 tons of gold, which is more in a quarter of a year than central banks have purchased in the preceding six years. To put it bluntly, this figure represents a 68 percent increase from the year before. Last year, central banks increased their reserves by 651.5 tonnes compared to 375 tonnes in 2017. Allegedly, this is the largest net purchase of gold since 1967.
What is enormously thought-provoking, however, is that the class of countries that are turning to hoarding more and more gold, are deemed to be adversaries of Washington.
As always, Russia is the largest buyer of gold. In 2018, Russia’s Central Bank purchased 274.3 tons of gold. It also dumped 84 percent of its US treasury debts, just as China is beginning to threaten, while the trade wars continue.
Turkey, another country that has shown a swift move away from the US-EU alliance and a greater willingness to cooperate with US economic and military rivals. Russia, China, and even Iran, has sold off around 38 percent of its US debt and purchased more and more gold.
I don’t see this being the end of the long-running bull market we’ve all been enjoying in stocks, but it may just be the beginning of the end. If there is anything we should have all learned from the past recessions it is that when it comes to investing and finances, during a time surrounded with uncertainty, it makes much more sense to protect what you have rather than to risk it all just to earn an additional percentage point.
Written by – Mike White
06/15/19 5:15 a.m.