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On Wednesday, the Federal Reserve (the U.S. central bank) released its latest public statement about the condition of the U.S. and global economies.
The Fed’s official outlook was the strongest it’s been in recent memory. It stated, “Near-term risks to the economic outlook have diminished.” For many readers, that implies the Fed plans to raise interest rates at its next meeting in September.
But in response to the most positive Fed outlook in over a year, the stock market ended… almost unchanged.
Bond yields came down. Gold increased. The U.S. dollar weakened. All the things that shouldn’t happen after news of a rising interest rate environment… did.
There’s an important takeaway here…
The Fed is losing credibility. People are starting to believe it’s losing control of the economy. And the implications are enormous…
It’s all about manipulation
Ever since the 2008-2009 financial crisis, central banks around the world have tried almost every “tool” at their disposal to stimulate the economy:
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Zero-percent interest rate policy (ZIRP)…
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Quantitative easing (QE—banker speak for money printing)…
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Negative interest rate policy (NIRP)…
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“Forward guidance” (banker speak for telegraphing future rate hike decisions before they occur)…
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Inflation targeting…
Nothing has achieved their desired “wealth effect.”
Remember, the economy our central banker “money mandarins” have created is debt based. It can only grow through lending. And lending can only occur when individual and corporate balance sheets show a favorable debt-to-income ratio.
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The last eight years’ extraordinary monetary stimulus has had one goal: to manipulate the numbers on individual and corporate balance sheets. They want to force a more favorable lending setup.
Think of it this way…
You bought a house for $100,000. You put 10% down and mortgaged the remaining $90,000.
Then the market collapsed. Your home’s asset price is now $75,000. But you still owe $90,000. No bank is going to give you another loan to help you “grow” your way out of this hole.
Now consider a second scenario.
You bought a house for $100,000. You put 10% down and mortgaged the remaining $90,000.
Then the market exploded higher. Your home’s asset price is now $125,000. But you only owe $90,000. You’ve got $35,000 in equity on the property. And banks will be happy to lend you money against it.
Keep in mind… the actual asset—your home—is exactly the same in each case. No material changes occurred. It’s the numbers on your balance sheet that have changed, not your real-world situation.
Central bankers think it’s their job to manipulate the numbers on everyone’s balance sheets. They want to push them all into favorable lending setups… and thereby create more “growth” for the economy.
Their final weapon
As we noted, none of the extraordinary measures of the last eight years have achieved the bankers’ desired result. And that leaves central banks with one final “bazooka” in their armory: “helicopter money.”
Imagine taking pallets of hundred-dollar bills up into the sky and shaking them out over every city in America. That’s the basic idea behind helicopter money. It’s a direct injection of freshly printed cash into an economy.
In practice, helicopter money would enter the economy through central bank-financed stimuli (like massive infrastructure-improvement projects). The bank could even finance a direct payout to citizens via tax “rebates.”
But let’s be clear: This is a 100% experimental monetary policy. And its ultimate end will be disastrous…
1,500% inflation
Now that’s not just some “tinfoil hat”-wearing newsletter editor’s opinion…
Zero Hedge reports Richard Koo—chief economist at the Nomura Research Institute—is waving the caution flag on helicopter money, too. (Nomura is a global consulting firm based in Japan. It employs more than 9,000 people worldwide.)
Koo states:
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Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves. That implies that if businesses and households were to resume borrowing in earnest, the U.S. money supply could balloon to 15 times its current size, sending inflation as high as 1,500% [emphasis added]. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the U.K. Once private-sector demand for loans recovers in these countries, confidence in the dollar, euro, and yen will plummet unless the Fed reduces excess reserves to one-fifteenth of their current level, the ECB to one-fifth, and the Bank of Japan to one-twenty-eighth. |
And if you think central banks can just shrink all those excess money reserves without consequences, think again. Here’s Koo again:
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That sort of extreme reduction in reserves will require the central bank to sell the bonds it holds, which would be a nightmare for both the economy and the bond market. |
By “nightmare,” Koo means bond yields ripping higher from the central banks’ massive sell-off programs… a corresponding inflationary explosion from high and rising interest rates… and bankruptcies for individuals, corporations, and governments that can no longer finance their debts at rock-bottom rates.
But if the banks don’t pare down their assets… the global economy will enter a disastrous hyperinflationary environment. Talk about a no-win situation…
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The reality at hand
Longtime Palm Beach subscribers know we’re not raving alarmists. But we don’t bury our heads in the sand either. We assess the world around us… then use our insights to make the safest plays possible in these treacherous economic times.
We believe—now more than ever—that return of assets is more important than return on assets. That’s why we continue to “bang the drum” on the fundamental importance of risk management and intelligent asset allocation.
Like it or not, central banks have placed us all on a runaway train. For the first time in human history, over $13 trillion in government debt trades at negative yields worldwide. And this number is growing… by several trillion dollars per month.
No one knows for sure what pitfalls lie ahead. Our only choice is to be ready for anything. And PBRG has taken extraordinary steps to help you do just that…
A more nimble service
Over the first half of 2016, we began a process to streamline our investment research services.
We realized we’d spread ourselves too thin… and we weren’t serving you well enough in today’s chaotic investment environment.
Yes, several of our services provided the surest, safest ways to build wealth inside and outside of the stock and bond markets.
And yes, they’re still our preferred vehicles for long-term wealth generation.
But we realize they often require more time and resources than many of our subscribers have.
We needed to become more nimble… more responsive to market gyrations… and more focused on “what’s important now.”
So over the remaining months of 2016, we’ll roll out some extraordinary new services. We’ll expose our readers to content, strategies, and investment networks they’ve never had access to before, including:
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Unprecedented ways to generate safe, high income in our negative interest rate world…
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Opportunities to find legitimate “100-bagger” candidates…
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Techniques to “unlock” your retirement accounts and survive the inevitable tax-hike tsunami…
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Alternative currency strategies to outlast the War on Cash and negative interest rates…
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And “asymmetric” risk/reward plays (risk $1 to earn $5 or more) from our well-placed network of elite industry and government insiders around the world.
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Time to level the playing field
The brutal reality of our modern age is a society split into two tiers. It’s powered by a monetary system that benefits the richest (through asset price inflation) and poorest (through transfer payments)… at the expense of the middle class.
In 2015, the middle class shrank to less than 50% of the U.S. population… and this trend shows no signs of reversing.
Our approach to counteract this is simple: level the playing field.
In our research we often find extraordinary opportunities available only to the hyper-connected elite. We plan to share them with you like we never have before—to the fullest extent we can under the law.
Help us help you
But first, Palm Beach editors Tom Dyson and Teeka Tiwari need to know your No. 1 concerns about today’s investment landscape. No topic is off limits.
They’ll discuss the issues you raise in a special event next week. It’s exclusive to PBRG subscribers and 100% free. No sales pitches.
Tom and Teeka want to know what you need help with most. Then they’ll share some insights from their research and networking inside business, technology, banking, and the government.
And they’ll begin to reveal some of our new approaches to helping you emerge safe and profitable from the dangerous times we find ourselves in today.
So please submit your comments and issues to Tom and Teeka right here. Then stay tuned for more information next week…