After the non-event of the Fed meeting yesterday we learned a few things.
#1 The economy is doing well according to the Fed even though all of the economic reports are far from convincing me of that. I guess the economy is SO strong that the Fed had to start reducing expectations about that QT (balance sheet reduction) likely because, as they found out in December there is no one else out there willing to buy the assets they are peddling. That is what, in my opinion, leads to 20% drops in stock markets and rising interest rates.
#2 In just one month’s time the economy has deteriorated enough to pause the QT and stop all of the talk of 4 interest rate increases in 2019. Wait? Didn’t they just say the economy was great? If it was the S&P 500 likely wouldn’t have dropped 20% in the 4th. quarter of 2018 and companies would be opening rather than going bankrupt.
#3 What I learned yesterday is that the Fed has said, without actually saying it, is that they realize that the asset values that have been artificially propped up for years and are so far from any historical norms cannot be sustained without continued monetary stimulus. It also appears that they have decided to kick the can yet again.
#4 It appears to me that there was a message sent that the value of the stock and bond markets are more important than the value of the US dollar. That is a shame for those who BUY stuff and a boom for those who OWN stuff. (This is what causes the inequality in our society- plain and simple).
#5 I believe that this means little to no more tightening and possibly a new wave of QE (quantitative easing) that could be started at any time. The markets liked it and rallied in fine fashion.
Now, we can’t know if they will do an about-face at any time but if conditions remain as they are I am looking for a FAR weaker US dollar.
The dollar fell on the Fed news as I would have expected.
Just today I learned that INSTEX has come on line in Europe. INSTEX was created by France, Germany and the UK to facilitate trade between Europe and Iran. This will avoid US sanctions by avoiding the US-dominated SWIFT system of payments. It will also avoid having to use US dollars in bilateral trade between these nations.
For years, the Russians, Chinese and many other countries have been setting up bilateral trade deals and mechanisms for payment to bypass the use of the US dollar and possible sanctions by the USA. Since the USA has weaponized the dollar the rest of the world has been moving away slowly for years but the pace is obviously picking up now.
It is one thing when a few countries look to trade amongst themselves but now it is becoming a global phenomenon. Now even our supposed allies and friends are running away!
China, Russia, Iran, Turkey, India, Venezuela and many other countries have legitimate reasons for wanting (maybe needing) to trade outside the US dollar.
China set up the Shanghai Oil Exchange where imported oil is paid for in Yuan- not US dollars.
China set up the Shanghai Gold Exchange
Iran is trading its oil for gold, Rupees, Yuan and possibly other assets as they sell oil around the US sanctions.
Russia has sold virtually ALL of their US Treasury notes and bought other assets- gold being the largest asset.
Now, even Europe is noticing that it would be a good idea to trade outside the dollar to maintain their independence in trade transactions.
As more and more trade is done outside the US dollar system the demand for US dollars declines. This is another catalyst for a weakening dollar.
Put this on top of the fact that the US is running the largest deficits of all time, our normal international “investors” are starting to slow down, stop or sell their US debt and you have a recipe for a large funding problem. (QE 4 and beyond?)
While it may seem that I have been beating this same drum for a long time and that it may or may not play out this way history is very clear. Nobody EVER got rich long term by conjuring up “money” out of nowhere. I “” money because money should have a store of value. Anything that can be conjured up at will and in any amount at virtually no cost obviously has little to no value longer term. It should decrease until it reaches its ultimate value of little to nothing – as all fiat currencies have in the past. It is simply human nature.
I urge anyone who is hoping that the “markets” continue rising for eternity and is keeping all of their faith in paper assets and other’s promises to look into diversifying at least some of your assets into real stuff. Things that cannot be conjured up out of nowhere and, if possible, things most people need day to day. A little gold and silver might not be a bad idea either. It appears that the long-awaited train may be nearing the station.
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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