For years people have talked about the disastrous fait of the United States dollar. Those people have always been written off as quacks and go unheard. Well, After hearing Jerome Powell’s speech today, those quacks are about to be right.
Today Jerome Powell stated that the FED funds rate is at neutral. This assumption on FED funds rate differs from statements in the past. The new stance is clearly the result of how markets reacted in December when the FED continued to raise rates. Jerome Powell describes the market activity in his statement today as “crosswinds”. It is obvious that the economy can’t handle a “true neutral rate”. The only reason Powell was able to defend the current FED funds rate as a “neutral rate” is due to low inflation and low unemployment. Obviously these two things are great-but there are two obvious reasons why 2.25-2.50 percent can’t be the neutral FED funds rate.
First, the a neutral FED funds rate is not suppose to be accommodative or hinder economic progress. If inflation is slightly above 2% than the FED is still offering a real FED funds rate of 0%. Thus created an accommodative environment for moral hazards within the economy to keep growing bubbles.
Second, As Powell mentioned during his speech today, this means lowering the interest rate in times of crisis won’t be a strong enough tool anymore to jumpstart a spiraling economy. This lead Powell to candidly say that the balance sheet is in play to handle economic downturns. In 2008 we dropped the FED funds rate from 5% down to 0% and this wasn’t enough. We had to turn to a new experimental tool, quantitative easing (increasing the FED balance sheet via purchasing of bonds and bad debts) in order to quell an economic crisis.
After Jerome Powell’s statement today reports asked questions pointed that this was the “Powell Put”. This is a negative connotation used after FED chairman Alan Greenspan blew bubbles in the late 80’s, 90’s, and early 2000’s by constantly slashing interest rates that piled on debt until the chickens came home to roost in 2008. The truth is that this is the “Powell Put”. Only he has a second tool Alan Greenspan didn’t get to take advantage of-blowing up the FED reserve balance sheet.
So why are the Quacks that have been predicting the demise of the US dollar finally going to be proven right? Well, Jerome Powell just said himself that he is prepared to blow the up the balance sheet. In the last ten years the FED has constantly said they will clean the FED balance sheet at a rate of $50B per month. Well, as we saw in December, this caused great turmoil in the markets. We can’t tighten the money supply. So, Jerome Powell is using the “Powell Put”. He is stopping rate hikes and will inevitably stop Quantitative tightening, although he wouldn’t answer questions about the QT program after his speech.
We will inevitably have another recession. Its a 100% certainty. Some predict 2019-2020- I happen to agree with them. Whether we are right or wrong is neither here nor there. There certainly will be another recession. When that happens the FED has shown their hand that they will combat the problem with expanding the balance sheet-as Jerome Powell stated today. The way the FED expands the balance sheet is simple. The FED creates digital USD to buy bonds. This expansion of USD that are available increases the supply of USD and destroys the value. This is extremely troublesome as the US imports everything with our massive trade deficits. These deficits will be on steroids when our USD doesn’t buy as much as it had in the past.
So finally-the quacks will be the smartest people in the room. Assets like Gold, Silver, and oil that trade against the USD will be great places to be until they turn into a bubble that everyone will wish they were apart of from the beginning. They will mention the quack cousin that got “lucky”. They will say it was something that nobody could have predicted. When in fact, the FED chairman told everyone what was going to happen from the beginning.
Our current positions are in commodities that go against the US dollar. Owning physical metals is a great defensive position to be in. Owning ETF’s like USO (oil), SIL (Silver), and gold stocks with low debt are a fantastic offensive investment to be in.