Yesterday the Federal Reserve lowered interest rates by 0.25%, the first cut in 11 years. The Fed did so with “official” unemployment numbers near all-time lows and the stock market at all-time highs.
At a press conference yesterday, Fed Chair Jerome Powell offered a confusing message. He claimed that this does not signal the start of a series of rate cuts. Contradictorily, he also said the Fed would cut more if required.
Tellingly, the Fed halted the program known as quantitative tightening after just 10 months. This was originally expected to happen in September. The fact that it happened sooner is a worrying sign.
I have long believed that the Fed has given up on its dreams of “normalizing” interest rates and the economy. When it started this insane experiment of zero percent interest rates and quantitative easing (money printing), it assured us ending it would be easy. Many of us didn’t believe the Fed then, and now I think it’s clear it can’t do it.
If the Fed didn’t know then, it now knows that this economy can’t handle normal, healthy interest rates. It is completely addicted to low rates and easy money. The historical average of around 5% interest rates would completely crush these markets. There’s too much debt. Too much leverage in the system.
The reversal highlights how fast central banks have been forced to again embrace lower interest rates and swollen balance sheets as the world economy slows amid the U.S.-China trade war. Investors and economists may question how effective quantitative easing will be given its failure to ignite powerful recoveries from the last recession.
And President Trump certainly wasn’t happy with the small size of the cut or the tone Powell struck. He tweeted the following on Wednesday:
What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world…
As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!
Trump is eager to blame the Fed for any drop in stock prices. The Fed is eager to protect its independence (or its own agenda).
I continue to believe the most likely outcome is that U.S. interest rates will go down, and likely eventually go negative.
Investment Game Plan
My investment game plan for today’s scenario remains unchanged. As a hedge against inevitable financial chaos, I continue to hold cryptocurrency. And I believe bitcoin is the best bet in the near future. If you don’t own any yet, or are looking to add, I think now is a fine time to buy, while the price is around $10,000. I see bitcoin headed much higher over the next year and beyond. Just please remember to buy only what you can afford to lose because there are rising governmental risks to crypto (which have been inevitable).
Gold and silver also look great to me here. I have added to both positions recently.
In stocks, I am heavily skewed toward cheap emerging markets and cannabis. On the cannabis front, we will be delivering new picks to you soon.
I continue to invest aggressively in disruptive U.S. startups and avoid most U.S. stocks.
It’s a crazy world out there. And I believe it requires a nontraditional investment plan. We’ll do our best to help guide members through these interesting financial times.
Co-Founder, First Stage Investor