Unstable Fed killing chance for recovery
We, as a nation, are stuck in a low-interest-rate environment. And the surprising vote that has sent Britain out of the European Union has plunged markets into chaos.
But here’s what it’ll mean for Americans once the dust settles…
We will be the nation of safety in the turmoil. That means more money will go into Treasuries, and that money will keep interest rates very low for some time to come.
Remember, England no longer has a government to implement its exit strategy from the EU. Conservative Party leader and Prime Minister David Cameron has resigned. And it will take months to replace him.
Plus, no one really knows who his replacement will be or even the makeup of parliament. The “Brexit” surprise has left everyone a bit unsteady. Even the ratings agencies have lowered England’s bond rating because their confidence in continuity has been broken.
If you’re an American traveling abroad, especially England, then this is all great. The British pound has been thumped and the dollar has gained strength. It’s temporarily a currency of safety. Plus, it’s one of only a few countries that hasn’t ended up with negative interest rates on its money.
And it’s these yields that are important to consider. After the financial crisis in 2008 we entered a central bank-controlled world. It was off the map, uncharted territory. And we’ve been living in uncharted territory ever since.
But we accelerated down this unknown road once central banks in many major nations began to issue bonds with negative interest rates. That means you would pay the central banks for holding your money.
The bizarre logic here is to stimulate private-sector spending by making saving less attractive. The goal was to stabilize the financial markets, then get them to start lending to businesses and individuals to grow the economy.
The problem is, the “banksters” have gamed yet another system. Now they have fashioned models to make this low interest rate, no spending world work for them. And the Fed and other central banks are doing nothing to move down the road.
This low interest rate world is not good for you or me. Low interest rates mean a strong dollar, and that means it’s harder to sell our goods abroad. It also means commodities priced in dollars, like corn, wheat, copper, steel and oil will become more expensive.
In a world of low to no growth, this is not a good thing at all.
Basically, what the Fed has done is sacrifice economic stability for financial stability. The problem is, it doesn’t see the facts (or maybe it does, it just doesn’t address them). It continues down this path of ruination thinking this low-rate world will get us back on track. In reality it is making it increasingly difficult for any major economy to get itself out of this mess.
If you want to watch this unfold, simply watch the U.S. dollar and 10-year U.S. Treasuries. If the dollar strengthens and the bonds rise in price — or even maintain current levels — then don’t expect much growth anywhere. And that includes stock earnings. U.S.-based companies report their earnings in dollars and they’ve been hurt by the strong dollar for over a year now. It won’t get better any time soon.
And nothing is going to really happen between now and November. With British elections to begin soon and the U.S. presidential election in a dead heat, once the markets digest Brexit issues, it will settle into a trading range.
The best opportunities here are U.S. Treasuries 20-year bond ETF (TLT), gold through the SPDR Gold Trust ETF (GLD) or bitcoin. The latter is making a huge move as cash looks for safety.