Weekly Market Update by Retirement Lifestyle Advocates
All markets finished higher last week. Stocks continued their rebound after touching the 50-day moving average. Metals were once again higher as well.
If you regularly read “Portfolio Watch”, you know that as recently as last week we wrote about the strong correlation between the Federal Reserve’s expanding balance sheet and the continued rise of stocks.
readers who may not be familiar with what expanding the Fed’s balance sheet
might actually mean, it simply means the Fed is printing money.
speaking, the pursuit of this policy never ends well. And, once the practice starts it’s a very
slippery slope and extremely difficult to stop.
But, the practice can’t go on forever.
As the late economist, Herbert Stein said, “if something cannot go on forever,
it will stop.”
This past week, Societe Generales strategist, Albert Edwards commented on this practice and also forecast what’s next in his view. For those unfamiliar, Societe Generales is a French-based, multi-national investment bank.
Mr. Edwards stated that he believes the Fed’s fondness for “pouring more and more liquidity” into the markets will ultimately lead to a deflationary bust. When the bust occurs. Mr. Edwards predicts the Fed will turn to negative interest rates to try to recover.
uninitiated reader, “pouring more and more liquidity” simply means to print
In a letter
to the bank’s clients, Edwards called the Fed’s actions a “new level of fiscal
debauchery for the US” that won’t stop.
Obviously, if you’ve been reading this weekly update for any length of
time, you know that we agree.
the article (Source: https://moneyandmarkets.com/albert-edwards-nirp-mmt/) (emphasis
And when the crash comes, Edwards predicts the only thing the Fed will be able to do is to engage in negative interest rate policy (NIRP).
“(I’m) now more convinced than ever before that the coming
deflationary bust will take the US 30-year yield below zero,” he said.
“I am also convinced that helicopter money will be the chosen way out of
this deflationary quagmire, especially as it becomes increasingly clear that
there is now no way left to reverse every government’s exploding fiscal
liabilities. The Ice Age is nearing the end.”
Looking around the world, negative interest rates are now the norm
in Japan and parts of Europe. Around $11 billion of global sovereign debt is
yielding in the negative currently, and U.S. President Donald Trump has blasted the Fed in the past for not being more open
to trying NIRP.
Edwards also thinks Modern
Monetary Theory (MMT), aka “helicopter money” is inevitable as well,
which backers of the policy believe is OK to use as long as inflation doesn’t
balloon out of control.
On the surface, it’s difficult to reconcile money printing with a
deflationary bust that sees many asset prices, particularly financial asset
prices plummet. When one thinks about
money printing, inflation is the anticipated outcome in the minds of most
Technically defined, deflation is a contraction of the money
supply. So if the Fed is continuing to
print, how can we have a deflationary bust?
The answer is that most money today is debt. Many analysts would tell you that more than
95% of money today is debt. In other
words, it’s only money as long as the borrower pays the debt. As soon as the borrower defaults, it’s no
Here’s an example that could have taken place about a decade ago to
make the point clear.
A banker loans a home buyer $200,000 to buy a $250,000 house. The home buyer signs a promissory note agreeing to pay the banker $200,000 over time, per the terms of the promissory note.
Now, let’s say that due to the hefty decline in home prices, the
home buyer decides to move out of the house and default on the note.
The bank has taken the home as collateral for the note but finds
the house is now worth only $175,000 on the open market.
The bank had $200,0000 in cash and loaned it to the home buyer. Now, after selling the home for $175,000, the
bank finds its assets have diminished by $25,000. That money has simply disappeared, or as we
like to say, it went to money heaven.
A little more than a decade ago, we had a deflationary bust that saw the stock market crash. It was the second crash within a ten-year time frame. The first crash saw the Federal Reserve reduce interest rates to around 1%. It had the desired effect.
Since money is loaned into existence, significantly lower interest rates resulted in more borrowing and more money creation. Gradually the Fed increased interest rates until they reached 5% in 2007. Then the next crash hit.
The Fed’s response was predictable. They reduced interest rates, this time to
zero. The desired outcome of more money
creation didn’t happen. So what did the
They began printing money and using the newly created money to buy assets from banks. On and off for the past 10 years, the Fed has been chasing this policy. Most recently, since mid-September, the Fed has been expanding it’s balance sheet to keep the repo market (the overnight lending market between banks) operating.
Mr. Edward’s point is that the next crash will require an even
more radical response than printing money to give to banks. He says that money will be printed and given
to consumers. This is also known as
‘helicopter money’ a phrase coined by the late economist Milton Friedman. It simply means that large amounts of money
are distributed to the public to stimulate the economy and get growth.
Edwards makes the case for negative interest rates and helicopter
“You can call it Modern Monetary Theory (MMT), you can call it
‘Fiscal and Monetary Co-operation’ or you can call it whatever you like, but
there is only one realistic way out of this mess – and that is for governments
to inflate away their debts.
Does anyone seriously believe that any democratically-elected government would be willing to raise taxes or cut government spending and future pension/health benefits in a bid to delay the fiscal timebomb? Of course, they wouldn’t! Any government that attempts to do so will be hounded from office by an indignant public armed with pitchforks and much else besides.”
Edwards is of the opinion that governments won’t be able to resist
the power a tool like MMT could provide,
“Helicopter money will work for Joe Sixpack much more effectively
than it will for Mike Moneybags and so it will be much more widely
popular. Once politicians have their
hands on this policy tool, make no mistake, they will never hand it back to the
A study of history confirms Edward’s forecast.
It also reveals that it won’t end well.
100% of the time historically speaking, disrespecting currency destroys it.
Look for negative interest rates here sooner than you might
On this week’s Retirement Lifestyle Advocates’ Radio Program host,
Dennis Tubbergen interviews the publisher of “Trends Journal”, Mr. Gerald
Celente. Gerald is of the opinion we
could see negative interest rates this year.
Once negative rates get here, or perhaps simultaneously, look for
When you see these policies appear, think about getting tangible and maybe even tax-free with some of your investments.
History teaches us that’s how you not only survive but can also
During the hyperinflation in the Weimar Republic after World War
I, when the German government printed money to make reparations payments to the
point of destroying the currency, those holding physical assets survived, those
with only paper assets perished.
There is a lesson there.
The most recent RLA Radio program featuring Gerald Celente is now
posted at www.RetirementLifestyleAdvocates.com.
are many other valuable resources available on that site as well. We’d encourage you to visit the site and
check it out.
“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”
― Thomas Jefferson