In this central bank managed global economy it is important to take note when major central banks start to signal that they’re shifting policy. Because that shift will signal massive changes all the way down to you.
First, the European Central Bank (ECB) did not add more money into the system earlier this month. Now Japan’s central bank has backed off more easing as well, and the U.S. is preparing the market for a rate hike later this year.
All this while the economy still stumbles along while Americans take low-paying jobs to keep their heads above water. This isn’t an economic success. Pretending like we’re in a productive economy and then acting on the pretense that we are is about as dangerous as it can get.
Zero interest rate policy (ZIRP) and negative interest rate policy (NIRP) no longer get the job done. And the central banks are at a loss as to how to spur economic activity.
Of course central banks weren’t designed to be the stewards of the economy, so now they’re up against the wall. They risk cutting off the easy money and sending major economies into another recession — or worse — and they also risk continuing a policy that is only benefiting the banks and corporate barons.
If the central banks push their economies into recession, it’s the bankers that most benefit. You see, the only real winners in a rate hike will be people that are holding lots of U.S. Treasuries and blue chip corporate bonds. Basically, that’s banks, investment firms, insurance companies and S&P 500 firms.
Nowhere in that short list is the U.S. consumer or retail investor.
Higher rates will make it harder to borrow and companies will be less likely to reinvest in people, plants and equipment as costs rise. What’s more, if bonds yields begin to rise, there will likely be a flood of money coming out of the stock market and into the safety of bonds until the dust settles.
And higher rates devalue money, which means you have less purchasing power. This is the slippery slope to hyperinflation, which Bob Livingston predicted, no matter who wins the election. And we’re now further down that slope.
That means a major stock market selloff on top of a weak economy and a rate rise. As the Chinese curse goes, “May you live in interesting times.” Times will be interesting indeed.
The closer we get to the edge of the cliff, the more important it is to diversify out just stocks.
Real estate, gold, silver and other hard assets will be the winners in this next crazy market.
If you have no desire to dump all your stock holdings, then stick with utilities, Big Energy, Big Pharma, consumer staples and Big Tech. These companies will benefit from a flight to safety and have the wherewithal to navigate any storm successfully.
Avoid mid-caps and small cap stocks. They’re much more interest rate sensitive and a rate hike will destroy them.
— GS Early