One of the oldest investment sayings has just taken a beating.
“Don’t fight the Fed” is perhaps the most cited piece of investment advice there is.
It’s shorthand for the US Federal Reserve – America’s central bank – being tougher, meaner, bigger than you are, so don’t try to take it – or the US dollar – on. You’ll always lose.
Armed with the world’s dominant currency, with just about anything of consequence priced in dollars (think oil, soybeans, foreign debts), the US used to be well-positioned to ride out any storm.
Once upon a time the US could inject any amount of liquidity or cut interest rates when the going got tough, and – in normal circumstances – could help its economy and others pick themselves up again. In any really difficult situation the US could just print more dollars, or boost liquidity by selling more bonds. So: don’t fight the Fed.
After all, US government bonds have long been trusted by investors as perhaps the best place to be when things go wrong. But no-one could foresee things going this wrong.
A world without interest
This time round people are starting to ask – is the Fed really able to beat back this tide of unemployment (17% in May, the worst in more than 70 years) and budgetary crises affecting many US states?
By the end of June this year around $13 trillion of sovereign and investment-grade corporate debt around the world had negative yields. Holders of these debts – around 20% of such bonds – will in other words lose money if they hold them to maturity. First the European Union started quantitative easing in March 2015, spending around $3 trillion over four years, buying up government and corporate debt. In the wake of the Covid-19 pandemic and the economic travails governments all round the world have cut their interest rates to the bone, and flooded their markets with vast amounts of paper currency to try to prevent their economies from collapse. Money supply has exploded since February this year in the US, as this chart shows:
Source: US Federal Reserve
Money, money, money
This explosion of M1 – physical currencies and the most liquid forms of money – is bound to have consequences. If we were not living through a low interest rate, low-yield era, one could be confident that inflation would swiftly follow. The US debt bubble – currently around $27 trillion, some $80,000 per citizen (while the US government gets about $7,000 revenue per citizen) – could then carry on regardless.
In the UK the debt level rose from the £12 billion of special measures announced in March to £190 billion by early July; once the drop in tax revenues is included the UK government is headed for a £150 billion budget deficit this year. The US budget deficit this year could well be $4 trillion.
The investment bank Goldman Sachs, no less, has floated the idea that the US dollar’s pre-eminent status as the world’s reserve currency is now at risk. Goldman correctly warns that policymakers the world over are currently most concerned about deflation, about economies tanking.
As a result they are building up debts, to flood economies with much-needed liquidity. In Goldman’s view the risk is that so much liquidity has been deployed in this global fire-fighting exercise that “debasement of fiat currencies” and inflation will follow. “Gold is the best hedge against debasement”, it adds.
So – protect what you have, download the Glint app, and start using gold. You don’t have to fight the Fed, just lift yourself above it and nimbly adjust your monetary habits while you settle down in the bleachers.