Your Portfolio Watch Weekly Update – July 29, 2019

Weekly Market Update by Retirement Lifestyle Advocates

Stocks advanced last week to about cover their losses from the prior week.

Notably, the Standard and Poor’s 500 index rose back above the 3,000 threshold.  Silver rallied while gold fell slightly.

The Morgan Stanley Diversified Select Index rose nearly ½%, a big rise for such a broad index.  US Treasuries were largely unchanged and the US Dollar Index, which measures the purchasing power of the US Dollar against the purchasing power of the currencies of the six major trading partners of the US, rallied nearly one percent.

All eyes are on the Federal Reserve this week as they meet to determine what to do with interest rates.  Our view is that a .25% rate cut is a given and a .5% rate cut would not be shocking.

There are many that share this view.

One such economist is Narayana Kocherlakota, a former President of the Federal Reserve Bank of Minneapolis.  He is now a Professor of Economics at the University of Rochester.  This from the University’s website.

Next week’s meeting of the Federal Reserve will likely mark the beginning of a prolonged period of lower interest rates, says Narayana Kocherlakota, the Lionel W. McKenzie Professor of Economics at the University of Rochester. Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis, says there are signs that the Fed will cut rates; the only question is by how much.

At the July 30 and 31 meeting, Kocherlakota expects the 12 members of the Federal Open Market Committee (FOMC) to cut the rate by a quarter percentage point, a move he favors as a way to safeguard against possible risks to the economy. The committee sets monetary policy for the Federal Reserve System, largely by adjusting the federal funds rate, which is the interest rate commercial banks charge each other for loans made overnight.

Kocherlakota says there may be an additional rate cut in the fall. But more significantly, he believes it will be three years or longer before the Fed even considers a rate increase.

While we agree with the Professor’s assessment that a rate cut is highly likely, we do not agree that the Fed will look to raise interest rates in three years.  We believe given the economic facts and circumstances that exist today, we are entering a time frame where the policymakers at the Fed will not be able to raise interest rates – ever.

One of the top economic advisors to the President said as much back in April.

This from Politico (Source:  https://www.politico.com/story/2019/04/11/larry-kudlow-interest-rates-1269762):

In an interview with The Hill, National Economic Council Director Larry Kudlow pointed to Fed Chairman Jerome Powell walking back the central bank’s predictions for multiple rate hikes this year and said he agreed with Trump’s frequent diatribes against raising interest rates, calling recent hikes “unnecessary.”

“As I say, we wish they hadn’t raised.  I notice from the various reports and so forth that they’ve changed their view.  I don’t think rates will rise again in the foreseeable future, maybe never again in my lifetime,” the 71-year old said of Powell and fed Vice Chairman Richard Clarida.

Here are the facts.

The current official national debt of the United States is just over $22.5 trillion.  That’s a crazy amount of debt in light of the fact that the economic output of the United States as measured by Gross Domestic Product is just under $21.3 trillion.  (Source:  usdebtclock.org)

The Congressional Budget Office (CBO) projects that the cost of interest on the debt will increase from $389 billion this year to $914 billion in 2028, just nine short years away.  And, those interest payments are based on current costs to service the debt which are about 2.5%.

Should interest rates double to a more historically “normal” 5%, so would the already staggering cost of servicing the interest on the debt.  At 5% interest, the cost to pay interest on the debt in 2028 could be more than double, perhaps approaching $2 trillion per year.

No matter how you look at things politically, that is unsustainable.

Recognizing this, many formerly fringe but now mainstream politicians are embracing monetary theories like Modern Monetary Theory, essentially a belief that governments can’t run out of money if they create their own currency.  They can always just manufacture what they need.

Anyone with half a brain knows that this is lunacy.

There are many places on the planet today to see how crazy this belief really is.

While Venezuela is making headlines, Zimbabwe is once again suffering under triple digit inflation.

In the first decade of this century, the country of Zimbabwe redenominated its currency three times before abandoning its currency and using US Dollars and Euros.  When Zimbabwe began to use US Dollars and Euro’s as currency, deflation set in.

When debt levels get too high to be sustained, the money supply contracts and the result is deflation.  Deflation causes asset prices to fall and unemployment to rise.  Think the Great Depression.

To attempt to combat deflation the Zimbabwean Government began to get more creative with her currency policies.  This from an article in “The New Humanitarian” (Source:  https://www.thenewhumanitarian.org/news-feature/2019/07/23/zimbabwe-economic-crisis-inflation-fuel):

In 2016, the government introduced bond notes and coins, supposedly worth the same as the US dollar. But they steadily lost value on the informal market – and became an immediate source of arbitrage profits for the well-connected.

The Mnangagwa government has encouraged adopting mobile money to reduce the need for physical cash. According to the reserve bank, mobile money was used for 85 percent of all retail transactions in the last quarter of 2018.

But high transaction fees and a 2 percent government tax makes mobile money expensive – further eroding people’s purchasing power. In the rural areas, where mobile money is the common payment system for livestock sales, people are turning to barter instead, according to FEWS NET, the USAID-funded early warning hunger monitor.

In February, as a step towards creating a local currency, the government introduced the Real Time Gross Settlement dollar, or RTGS – effectively a digital currency harmonising bond notes, mobile money, and debit cards tied to an official US dollar exchange rate.

Immediately, the RTGS dollar began to lose value on the parallel market.

Last month, the RTGS dollar was trading on the streets at about 13 to the US dollar, more than double the official interbank rate.

On 24 June, the government abruptly decreed that the country’s sole legal tender was the RTGS, renamed the Zimbabwe dollar, and abolished the use of multiple currencies. The aim was to end the informal market contributing to galloping inflation and restore government control over monetary policy.

Since then, as more currency is created, the inflation rate has soared.

According to Bloomberg, the official inflation rate has risen to more than 175% annually in June, up from more than 97% in May.

Just two years after Zimbabwe adopted her own currency again, inflation is out of control.

What’s next for Zimbabwe? 

Eventually, the new currency will fail, and a different, more stable currency will be put in place and deflation will once again set in.  The only long-term, viable solution is to suffer through deflation as the debt is purged from the system.  It’s an ugly, painful process that no amount of money creation can solve.

The Federal Reserve will have to keep interest rates abnormally low and will at some point resort to more money creation.  The only other option is to suffer the consequences of deflation now.

Politically speaking, that’s not going to happen.

So, it seems we will see the low interest rates and money creation continue.

The outcome is certain.

When the outcome will occur is not certain.

But you need to prepare for this outcome and position your assets to profit from it when it happens.  As many of you already know, that means a two-bucket approach to managing money.  Pick up a copy of the book “New Retirement Rules” on Amazon to learn more.

On this week’s RLA Radio program, host Dennis Tubbergen interviews Dr. Bob McHugh of technicalindicatorindex.com. 

We get Dr. McHugh’s market forecast in light of the current economic circumstances that exist worldwide.  The podcast version of the program is now posted at www.RetirementLifestyleAdvocates.com.

 “I have never let my schooling interfere with my education.”

-Mark Twain

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