Fewer options left for a recession fight
It’s common to hear that we’re “overdue” for a recession. 11 years after the Great Financial Crisis, we’ve only seen double-digit growth in most years, and an eager willingness to conform to this sense of false reality. Now, suddenly, news breaks out that global growth is deteriorating, President Trump is all but Tweeting for a stronger reaction by the Federal Reserve, and Germany is predicting a recession in the 4th quarter. But, with this U.S. President betting his re-election on a strong stock market, what more will they do to keep markets afloat? Central Banks around the world face an even tougher conundrum: heavy unemployment, negative interest rates, and deprecation in their currencies relative to the U.S. dollar.
Stimulus programs from global Central Banks are the reason for the decade-long bull market. Both stocks and bonds soared to levels never expected. Now, with global interest rates in negative territory ($11 trillion of bonds are negatively yielding), there are fewer obvious options left to stimulate further. An idea that has been floated by this White House is to reduce payroll taxes (Social Security and Medicare), threatening the already thinly funded social programs. Germany has announced the issuance of 30-year treasury debt yielding 0.0%, which is seemingly better than their 10-year note, current yielding -.71%^1 and the U.S. may issue, for the first time, 100-year bonds, in order to correct the currently negative yield curve and raise additional funds.
Along with the threat of weakening democracies around the world, monetary and political interventions are equally perilous. Republicans hope to pass legislation forcing the Fed to weaken the U.S. dollar to support their domestic agenda.^2 Replacing free markets with currency controls and tariffs push us in a direction where other countries will counter-measure every move by the U.S.
If this were a normal environment, markets would be due for a correction. However, with governments around the world desperate to keep their economies afloat, they will initiate measures still unknown in order to drive asset prices higher.
At Eureka Wealth Management, I keep my clients informed of the global economic situation and tell them to take action when it may be needed, such as reducing emerging market stocks as this area may feel the brunt of a global slow-down. I also advise on retirement and insurance. Call for a free initial consultation at (760) 537-0791 or book a meeting online at eurekawealthmanagement.com.
Sources:
^2 FT 8/20/19 Reducing the strength of US dollar attracts cross-party support