The US is sliding towards zero interest rates.
Two sides have been playing very different games. The White House needs to showcase economic growth as its ticket to reelection. The FED are concerned with longer term and broader issues, the possible path to recession, and the complex unexpected consequences of a trade war on several fronts.
We are in silly territory – this is no way to run the economy of the world’s superpower. It pits the fake news and twitters of an economically naive President against the FED’s inability to communicate or perhaps even to comprehend the political life and death struggle on the edge of which they stand.
So what is likely to happen?
First we are in the 9th year of positive gdp growth – an 80 year old record. As you would expect, if only for that very reason, people are talking up the trend coming to an end. Clearly the chance is that we are nearer to the end than the beginning. The chattering classes are talking a recession.
It hasn’t helped that, caught in the cross hairs of the President’s ferocious and public shaming of Powell the FED has back tracked from gradually unwinding the QE program and, in its embarrassment, is muttering softly and through clenched teeth vague mantra about one, two or maybe a steady succession of small cuts to below 2% – in line with the Europeans who are looking at some very different statisitics.
But what does the FED really think, and does it matter?
First of all it matters very much. This is an extraordinarily qualified and experienced institution, with long established relationships around the economic world and an unequivocal remit to work for the good of the US. Ignore them, ridicule them at your peril.
What do they think? The FED models are showing a major slow down. Instead of the Trump vaunted 3% growth the New York forecast is now down to 1.5% falling to 1% by year end.
The overall FED model is signalling a 49% chance of a recession within 12 months – the highest risk probability since 2008.
With interest rates slipping every few months, the FED has less and less room to stave off the first signs of a recession and most investors know that or sense it. But they aso know that reducing the interest rate juices their short term returns, may hold up profitability and certainly avoids the ultimate moment when the trillions of outstanding bad debt faces higher interest rates and so inevitable collapse. No one said this was an easy circle to square.
Here are one or two other thoughts before we decide what to do.
– The internet searches for the word “Recession” have just spiked four fold.
– The rest of the world is suffering from an economic slow down – annualised growth is now at a statistically questionable 1% – most of Europe is facing collapse, a hard Brexit is on the cards.
– The US foreign policy at best is creating enough worry, concern and lack of trust to be contributing to the down turn and it is hard to see any help coming from that quarter until after the election in 2020.
In a nutshell it is possible to see the strength of the US consumer and the self sufficiency of the US ensuring that this remains the best house on the street. But it is hard to see a street that is growing and prospering enough to allow our industries and businesses to flourish and grow at the margin.
So max out on the still buoyant American consumer – employment remains high. Choose companies with low p/e, strong growth, and solid dividends. Build your gold holdings buying on weakness.
Have a good day, James.