Fed: Asleep at the Wheel?
Two years ago, President Trump nominated Jerome Powell to succeed Janet Yellen as Fed Chairman.
Trump said: “He’s strong, he’s committed and he’s smart, and if he is confirmed by the Senate, Jay will put his considerable talents and experience to work leading our nation’s independent central bank...”
That was about as chummy as the two would get.
Since Powell ascended to Fed leadership, Trump has ripped him countless times on Twitter, saying: “horrendous lack of vision,” “our problem is with the Fed,” “I’m just very disappointed in the Fed,” “doesn’t have a clue!” and, “we don’t have a Fed that knows what they’re doing.”
There's plenty more, but you get the idea.
For the president, it's pretty simple. He believes lower rates will push economic growth higher and he can leverage that into a second term.
The stakes are a bit different for Powell...
For the last 20 years, the financial media has obsessed over the Fed — starting with Greenspan and the committee to save the world back in the late ‘90s. Now, we don't look to fiscal policy as the catalyst for the current economic environment. Now, it's all about the Fed.
The Fed gets the credit of both economic expansions and recessions. And since the business cycle is basically inevitable, a Fed chair will either step down a hero or stay on long enough to see themselves become the villain (yeah, that's a loose Harvey Dent quote from the seventh greatest movie ever made, The Dark Knight).
At first, I thought Trump was being a little harsh. No, I know he was. But in a way, he's also right that the Fed is acting a little clueless. But it's exactly because the Fed is doing what Trump wants: cutting interest rates.
“It's a Simple Question”
The purpose of lower interest rates is to encourage people to borrow and spend. The assumption is that if people are spending more money, then companies have to increase production to meet the increased demand. Maybe they start hiring, meaning more people have money to spend, and all that kicks off the virtuous cycle that drives economic growth.
Borrowing and spending are not the problem these days. Consumer spending has been quite solid for some time now. And GDP growth is consistent with what we've seen for the last decade.
The reason the president is griping so much about Powell is that Trump promised us "so much winning," and that's what he wants to do: win. GDP growth in line with what we saw during the Obama administration is not winning. Winning is 4%...
Problem is, 4% GDP growth is a mirage. Or worse, it's redlining the economic engine. Of course, it's 2019. The U.S. economy can probably hold the redline, probably won't blow up until after the 2020 elections...
Maybe Powell thinks a couple cuts can get Trump off his back.
But the picture is that the U.S. is not the EU, and it is not Japan. We actually have a dynamic economy that grows more often than it stagnates. And so I say it is simply incorrect to say the U.S. should have interest rates consistent with those of the EU and Japan. And the U.S. dollar should be the strongest currency in the world.
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And I would add that U.S. stocks should be more attractive, too. Every year or so, I see a few macro-strategist types saying EU stocks look too cheap, that there's great value in Japanese stocks. And every year or so I tell my Wealth Advisory subscribers that despite this appearance of value, we're going to stick to our longstanding policy of 90% U.S. stocks. Bottom line: U.S. stocks are safer and more reliable.
The Negative Comparison
Last week, the chair of the EU central bank went full wingnut. Maybe it's his classic accent, but it actually sounds good when Mario Draghi says interest rates are going to go further into negative territory and open market bond purchases will accelerate.
Negative interest rates are an abomination. What does it say about a currency and an economy that will pay you to borrow money? And if you're getting paid to borrow money, why would you put any of that money at risk via an investment? Why not just let it sit there and make money risk free?
This is a question no one is asking. The basic assumption is that the cheaper it is to borrow money, the more risk people will take with it. People will borrow, buy, and invest until we have a massive asset bubble somewhere...
But is that really true? Seems to me that if borrowing costs are zero, or even negative, you can take less risk and still make money.
As for Japan: Please, God, no. The Japanese central bank is now the biggest shareholder of Japanese stocks. Seriously. How does that end well? It's like all these central banks have board game night with their kids, and they're making up rules and leaving handwritten IOUs in the Monopoly bank...
But no: These are real economies, and there will be real consequences at some point. And you can't just put the game away and carry on like nothing happened.
Japan's so off the deep end I have no idea what's next. But I can tell you: The EU is doomed. Brexit is just the start. So, to Jerome Powell, please don't follow the EU and Japan. Let's get our own house in order. And to you and other investors: Keep your money in U.S. stocks.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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