The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Weaker Dollar Is Bullish for Gold, Metals, Oil
08/04/2017 3:00 am EST
The weaker U.S. dollar will be bullish for gold. The same goes for the other metals, the gold and silver shares and the oil price. Stay diversified and continue to go with the major trends, according to Pamela Aden and Mary Anne Aden.
Behind the scenes, there’s a big debate going on, and the outcome will be important for all of us.
Here’s the deal...higher interest rates
The Fed recently hiked interest rates for the fourth time in 18 months. They feel the economy is strong enough to withstand these rate hikes. In their favor, they point out the employment picture is the best in decades.
Housing continues to improve with sales picking up, and housing prices are hitting their highest levels since prior to the financial crisis. Manufacturing is also surging and the risk of deflation has diminished.
Plus, the index of leading economic indicators continues its upward march, hitting a new high and signaling the economy will likely keep plugging along for the rest of this year.
Consumer confidence is up too, and so is the service sector, consumer spending and the stock market.
Famous last words?
These positive signs led Janet Yellen to make her boldest statement yet... she said that another financial crisis, like the one that exploded in 2008, was not likely in our lifetime. You’ll remember Lehman Brothers went bust in 2008, and the banking crisis pushed the economy literally to the brink.
The Fed then intervened, embarking on its QE economic stimulus program. Other central banks did the same, also dropping interest rates to zero or below, in a successful attempt to keep the financial system and the world economy afloat. But there was a high price to pay...
Hard job ahead
As our old friend Jim Grant points out, since the start of the 2008 financial crisis, the world’s central banks have materialized the equivalent of $12.25 trillion. To put this into perspective, the value of all the gold that’s ever been mined amounts to $7.4 trillion.
So the money that’s been created in the past nine years is 65% greater than all the gold that’s been accumulated throughout world history. This alone is pretty mind boggling.
Yellen, however, had more calming words, stating the banks are much stronger than they were in 2008. She said the Fed has learned lessons from the financial crisis and it’s brought stability to the banking system. That is, not only does she feel the economy is good to go as far as more interest rate hikes are concerned, but she also wants to start reversing the Fed’s lopsided balance sheet. Like higher interest rates, this too would have a tightening effect... and that’s where the debate comes in.
On the other hand...the economy not so strong
In the opposite corner are the naysayers, warning that higher interest rates could prove to be a disaster. They say the economy is not nearly strong enough to handle more interest rate hikes and they have a laundry list of items backing up their case.
Inflation, for example, remains low. It’s not a threat in any way, and the drop in commodity prices reinforces it’s not going to be a problem going forward. The bad... Then there’s a slew of indicators that’ve been going down, like housing starts, retail sales, bank loans and durable goods. These indicators have essentially offset the positive indicators, so basically the economy is mixed. But there’s more...
Consumer debt is back up to record highs and so is corporate debt. Plus, 70% -80% of those polled said they don’t have enough money in savings to cover a $1000 emergency.
Then there’s the velocity of money, which has been declining since the late 1990s. It measures the rate that money is “turning over” and the fact that it keeps hitting new lows is a negative sign and it’s worrisome.
It tells us that, despite all the monetary stimulus over the past eight years, people aren’t borrowing or spending like before. That is, it’s a sign of a lackluster economy that isn’t responding like the Fed would like. With GDP growing at a sluggish 1.4% annualized rate in the first quarter, it’s no wonder many are concerned the Fed is on the wrong track by raising interest rates into a weakening economy.
Even the IMF has said the U.S. economic outlook is uncertain. In addition, Trump’s approval rating is at a low, and this is creating some concern.
The danger of too soon
At this point, some of you may wonder, who cares if the Fed raises interest rates moderately again? Well, our dear friend and colleague, Matt Kerkhoff at dowtheoryletters.com summed it up best.
Here’s Matt: “The answer to that very important question is that if the Fed hikes rates under the wrong conditions, it could throw the economy into a recession and provide a nice haircut to asset prices. Adopt too many rate hikes at the wrong time, particularly when inflation is already weak, and we risk crossing the threshold from economic expansion to economic contraction, aka recession. As most of you know, the Fed has a rich history of throwing the economy into recession by raising rates too far into a weakening economy. Monetary policy acts with a lag, and we need some time to allow the latest rate hikes to percolate through the system.”
The debate matters
In other words, considering the mixed signals, it would be best to take a wait-and-see attitude for the time being. And yes, this debate matters. In fact, it’s probably the most important factor hanging over the economy for now and the outcome will have wide ranging effects. So, it’ll be very important to watch what the Fed does and see how the economy unfolds in the months ahead. The Fed has said they’re going to raise their Fed funds interest rate one more time this year.
Hopefully, they’ll take it slow and easy, especially if the economy stays mixed, but we’ll soon see.
The bright side...rising stock market
Meanwhile, one important bright note continues to be the stock market. It keeps on rising, which is extremely positive for the economy. As you know, the stock market is much more than just a stock market.
It’s also a very reliable leading economic indicator. And since the stock market leads the economy by about six to nine months on average, and some of the market indexes are still hitting record highs, this is a big plus.
It’s telling us the economy will likely continue to do well, at least until the end of this year, and perhaps well into 2018.
Interestingly, this is also reinforcing what the index of leading economic indicators is signaling. And these two indicators are powerful. If so, this also means the stock market will continue to focus on the positives.
And it’ll keep ignoring the Trump controversies like it’s been doing all along.
Dollar feels the heat
So far, these have barely caused a hiccup in the stock market. But they have been a factor driving the U.S. dollar lower. This, in turn, is resulting in some bullish action in some of the currency markets.
We now recommend buying some of these markets. The weaker U.S. dollar will also be bullish for gold, and at some point, we’ll likely see it head north.
The same goes for the other metals, the gold and silver shares and the oil price. So the bottom line is, stay diversified and continue to go with the major trends.
Regardless of all the news, commentaries and opinions, the price action in the markets themselves will keep us on the right track. And for now, that track is telling us to diversify, also keeping a large portion of our portfolio in cash.
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