Ever since the Federal Reserve signaled it would stop hiking rates, the U.S. stock market has basically gone straight up. The Fed has finally given up on the pretense of “normalization.”
Now the European Central Bank has announced it has halted plans to hike rates and instead will make more loans available to banks.
These actions may prop up stock prices over the near term. But none of this is healthy or sustainable. This is yet another large dose of “kick the can” economics, which will almost certainly not end well.
I continue to avoid most U.S. and European stocks. Both central banks have shown themselves to be horrible stewards of the economy, and unfortunately, central bankers are the primary force driving markets today.
Disturbingly, we’re also starting to see possibly permanent quantitative easing (QE) being discussed by U.S. central bankers. Federal Reserve Bank of San Francisco President Mary Daly recently said as much when speaking with reporters. From Bloomberg:
Federal Reserve Bank of San Francisco President Mary Daly suggested that the central bank could decide to use its balance sheet as a routine part of how it guides the economy, not just as a last-ditch measure to deploy in emergencies.”
An important question is, should those always be in the toolkit?” Daly said of post-crisis bond-buying programs, popularly called quantitative easing, or QE. “Should you always have those at your ready, or should you think about, those are only tools you use when you really hit the zero lower bound and you have no other things you can do?”
What does this mean? In my view, this is the Fed openly admitting that it will eventually be forced to “monetize” U.S. debt in an ongoing fashion. In other words, the Fed will buy up Treasurys with newly printed money to fund our ballooning deficits.
This is an extremely worrying sign and confirmation of what many of us have feared for years. There is no plan to normalize rates or pay off the debt. It’s going to attempt to inflate away our financial problems.
This seems like a recipe for stagflation (very low or negative growth coupled with inflation) in the U.S. and Europe. For this reason, I continue to prefer emerging market stocks to developed ones.
Speaking of emerging markets, China also announced a large stimulus package this week. However, I am less worried about the Chinese economy, as it is still growing at a nice clip and stocks are trading at more reasonable levels.
Needless to say, I remain very bullish on disruptive startups and quality crypto.
If you want to learn more about my thoughts on the macroeconomic picture, here are some previous articles I’ve written on the topic.
- “Did the Fed Just Blink?”
- “Russell 2000 P/E Ratio Excludes Negative Earnings”
- “Nassim Taleb: Today Is Riskier Than 2007”
- “Where the Fed Points, Markets Follow”
- “How to Hedge Against Stock Market Turmoil”
Co-Founder, First Stage Investor