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Fed Forced to Choose Between These Two Equally Scary Possibilities
Should we stand on the tracks and hope the train misses us – or run straight at it?
In the recent era of what feels like endless inflation, we keep hoping for something that would cool it off.
In fairness, the Federal Reserve led by Jerome Powell has been raising rates slowly after each meeting (even though they started later than they should’ve). The result of that approach has cooled inflation over the last six months, from 4.5 times over the Fed’s target 2% rate to just 3.2 times higher.
If we zoom out just a little, we’ll see 6.4% year-over-year inflation is still hotter than at any point in the last 30 years. Most of us have either forgotten how to deal with such a high-inflation environment, or we’ve never in our lives faced this situation.
It’s no wonder that nearly half of the public think the U.S. is either on the brink of, if not already in, a recession.
In fact, Raheel Siddiqui, senior research analyst at Neuberger Berman, recently predicted that the 2023 recession “will be more severe than expected.”
Further insights from Siddiqui offered even more bad news:
“A longer road” means keeping interest rates higher for longer – effectively slowing the economy for longer. That’s bad news for economic growth.
Side note: Remember, these continued rate increases effectively increase the cost of credit. Borrowing money for any reason gets more expensive. This throws cold water on the economy, slows down spending and tends to draw investment dollars out of the stock market, into the bond market. That’s why Wall Street types hang on the Fed’s every press conference and obsess over the minutes of every Fed Open Markets Committee (FOMC) meeting.
So will the Fed “stay the course,” and keep rates high enough to end inflation despite the inevitable recession? Or will the Fed capitulate before the inflation bonfire is fully extinguished?
Let’s take a quick look at the implications of each path.
What happens if the Fed stays the course?
Bankers and other Wall Street crybabies don’t like it when the Fed raises rates, because that means they don’t get to borrow at low costs and speculate with cheap money.
In the media, you’ll see this reflected in endless calls for a “Fed pivot,” effectively a return to near-zero interest rates. Even while inflation remains hot.
Why? Because the “inflation tax” doesn’t affect everyone evenly. The wealthiest 1% of Americans disproportionately benefit from rising asset prices during inflationary periods.
Meanwhile, pretty much everyone else suffers.
Strategist David Rosenberg is somewhat optimistic, and he put the economic situation inside the U.S. into perspective by describing how he thinks things will play out:
Fortunately for investors, the Fed’s pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500 could drop 30% from its current level before that happens.
Rosenberg thinks that, eventually, stocks will look attractive again – once they’ve dropped some 30% from today’s levels.
And he thinks that’s a story for 2024. Certainly not today.
To summarize, the Fed’s anti-inflation fight will continue to crush stocks.
That’s one path. What happens
Here’s what a Fed pivot would look like
Remember last week when we reported Mohamed El-Erian’s claim that the Fed’s 2% inflation target is a pipe dream? El-Erian hopes that “we learn to live with stable 3% to 4% inflation.”
Should the Wall Street establishment get their way and the Fed give up on their efforts to fight inflation? Well, the ever-controversial Peter Schiff articulates the consequences of either course, predicting red-hot inflation could become the new normal:
Either everything comes collapsing down because the Fed actually fights inflation, or the Fed stops fighting inflation to try to keep everything propped up and we have to live with high inflation indefinitely.
Of course, “indefinitely” can be a long time – between six and twenty years (based on historical precedent).
The historic inflation we’re experiencing today isn’t likely to last forever. But isn’t a decade long enough?
Right now, you might be asking yourself: “How can I prepare for a potential inflation crisis, and what steps should I take to protect my investments?”
That is a great question – fortunately, for those of us for the future, there are a few solutions worth considering…
Today’s solutions for an uncertain tomorrow
If you’re planning for retirement, then managing inflation risk in a portfolio must be a priority to account for the economic consequences of high inflation. Otherwise, the inflation “tax that no one voted for” might rob you of a large chunk of your hard-earned nest egg.
We’ve analyzed and compared inflation-resistant investment options for you. Diversifying with assets that at least preserve your purchasing power can help you plan for future expenses. Prices will be higher, though ideally your purchasing power will grow at the same rate.
“Wealth preservation” is a prudent goal, but what about growth? There aren’t many assets that help protect from downside risk and offer growth potential… That’s one of the benefits of physical precious metals. Gold and silver both have historical track records as stores of value. During periods of economic turmoil, precious metals tend to outperform just about all other assets.
That’s why investors consider gold a safe haven investment that offers shelter against inflation as well as economic and political crises.
I have a friend who’s a passionate free-climber. He once told me, “Life should be a balance of adventure and relaxation. You’re either climbing or planning your next climb.” If your financial concerns are interfering with your balance of adventure and relaxation, that’s probably a sign that your finances are unbalanced as well. Consider diversifying your savings to the “point of indifference” – where you’re confident that, no matter what happens in financial markets or in the economy, you’ll be able to sleep soundly.
Can physical precious metals can help with that? Take a moment to learn more here.
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