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Hard Assets Alliance was created as a cooperative of investment professionals who believe there's a better way to invest in precious metals. This is a guest perspective on the markets from one of these partners; we hope you enjoy it.

Dear Reader,

The Federal Reserve had its first FOMC meeting of 2020. As I suspected, the FOMC kept interest rates where they are. The federal funds rate will remain in the 1.5–1.75% band. It was a unanimous decision, despite pressure to cut rates from the White House.

Fed chair Jerome Powell also announced it will continue its “repo” operations program through April “at least.”
So that repo-style dark money will likely remain on the menu for a while longer.

Through these operations the Fed injects “dark money” of short-term loans into the financial system in return for short-term collateral.

In his post-announcement Q-and-A session, Powell dodged a question about whether the repo operations were helping Wall Street (which I believe they are). It seems obvious.

The size of the Fed’s balance sheet has gone from $3.7 trillion in early September, before the Fed began its repo operations program, to $4.11 trillion today. That’s an enormous expansion in such a short amount of time.

I call it QE even though the Fed doesn’t.

Until the coronavirus came along, the stock market advanced steadily higher to match the balance sheet.

A Black Swan?

Powell did address the coronavirus issue on Wednesday. He said it’s likely to cause “some disruption to activity in China and globally,” noting “the situation is in its early stages.”
The virus is just another example of how unpredictable markets can be.

Unexpected events can derail even the strongest economies. The popular term for these types of events is “black swans.”

It’s too early to reach any conclusions, but the coronavirus is a possible example of a black swan.

As you probably know by now, an outbreak of this new virus began in the city of Wuhan, China and has spread throughout parts of Asia, Australia, Europe, Canada and the U.S.

The number of infected people seems to be growing, as does the number of deaths. There are over 40,000 cases of the deadly virus and over 1,000 deaths. Both numbers, unfortunately, are expected to rise. Some major U.S. airlines have now cancelled all flights to China.

How bad it will get no one knows right now. Markets don’t like uncertainty, but that’s exactly what they’re confronting now.

I think financial markets will remain choppy as a result.

Of course, that means the virus could serve as a convenient excuse for more central bank dark money to prop up markets and the global economy.

The fact is the global economy cannot afford a major slowdown. Here’s why…

The Global Economy Has Lost Its Cushion

Annual overall global growth used to have a comfortable cushion in the event of a downturn. Not anymore.
When I say a cushion, it means that world trade grows faster than GDP.

For example, from 1990–2008, global trade growth was 82% faster than global GDP growth. But that cushion has now decreased to just 13% faster in the last 10 years.

This smaller cushion leaves the economy more vulnerable to stalling out, with recession as a result. This is in sharp contrast to the increasing optimism of financial markets on global economic numbers.

Powell characterizes the current slow-growth economy and low interest rate environment as the “new normal.”

But in his Wednesday statement, he was cautiously optimistic about global growth due to the U.S.-China trade deal and a lower possibility of a hard Brexit:

Some of the uncertainties around trade have diminished recently and there are some signs that global growth may be stabilizing after declining since mid-2018.

Here’s what I would say: not so fast.

Nearing the Danger Zone

World GDP growth grew by only 2.9% last year, which is the weakest rate since the financial crisis.
Even though it doesn’t sound bad, and it’s still growth, 2.9% is still fairly close to the widely accepted recession threshold of about 2.5%.

Analysts that study business cycles consider the 2.5–3.5% growth zone dangerous.

And even though the IMF forecasts annual GDP growth to increase to 3.3% in 2020 and 3.4% in 2021, it has also revised down its global forecast six consecutive times.

Who would be surprised by a seventh downgrade, and then an eighth?

The latest coronavirus scare makes additional downgrades even more likely. That’s why you can expect more central bank dark money. Even without the coronavirus, the trend started last year…

63 Rate Cuts Last Year

Once the Fed decided to cut rates last year, the rest of the world’s central banks followed suit. Not only are the major central banks involved in creating mega amounts of cheap money to supposedly keep economic growth moving and borrowing inexpensive, but the rest of the world’s central banks are trying to do the same.
In 2019, 85% of global central banks’ changes to their monetary policy stance went toward easing rather than tightening.

Central banks in developed economies cut their rates 63 times last year alone. For 2020, here’s how I believe main central banks around the world will conduct their rate policies:

The U.S. — Though the Fed’s dot plot and Chairman Powell’s words indicate the Fed will be on hold for the rest of 2020, reading between the lines, the Fed remains committed to providing the markets money through repo operations. It’s open to any incoming data that would require another reassessment of its position

Europe — Former IMF head Christine Lagarde is the new president of the ECB. She has indicated the ECB would remain in dovish mode and I expect her not to hesitate to deploy easing policies as needed

The U.K. — Bank of England Gov. Mark Carney is standing down at a time when the U.K. is formally quitting the EU. His replacement will be Andrew Bailey, current head of the U.K.'s financial industry regulator, who takes over in March. It’s likely that Bailey will try to keep rates where they are or lower them to stimulate the U.K. markets in the event of a bumpy Brexit

Japan — The Bank of Japan is expected to keep its interest rate at around negative 0.1% and 10-year government bond yields around 0%

China — The People’s Bank of China tends toward decreasing bank reserve requirements to ease policy but shaved rates last year as well and I think that will continue this year, especially given the negative economic impact of the coronavirus.

The happy market narrative that started the year has suddenly shifted. We’ll have to see how it all plays out.
But it looks like you should get ready for more dark money.


Nomi Prins

Nomi Prins is an American author, journalist, and public speaker. She is the editor of Nomi Prins' Dark Money Millionaire and contributor of Jim Rickards' Strategic Intelligence. She has worked as a managing director at Goldman-Sachs and as a Senior Managing Director at Bear Stearns, as well as a senior strategist at Lehman Brothers and analyst at the Chase Manhattan Bank.

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Posted in: Economy