KINGSTON, NY, 13 February 2019—When we forecast last September that an "Economic 9/11" would strike equity markets and economies, we based it on the U.S. Federal Reserve signaling an aggressive interest rate policy.
Since we had long noted that the recovery from the Panic of '08 was fueled and sustained by zero/low/negative interest rates and quantitative easing policies imposed by central banks… our forecast for an "Economic 9/11" was primarily based on the facts that world economies and markets cannot endure higher interest rates.
And, indeed, we were right.
As 2018 drew to a close, the Dow suffered its worst December since the Great Depression and equity markets across the globe sunk into bear and correction territory.
A 180° POWELL
Whether it was the barrage of President Trump's criticisms of the Fed's past and expected rate hikes, Federal Reserve Chair, Jerome Powell made a U-turn on 4 January that the Fed would be "patient" in raising rates and was "listening carefully with sensitivity to the message that markets are sending."
And on 30 January, Powell further backtracked from his aggressive 2018 rate hike message, stating, "I would want to see a need for further rate increases."
In response to the Fed's dovish rate hike policies, equity markets across the globe have strongly rebounded from the December disaster, with the S&P up 15 percent from its nadir.
Indeed, the Fed's move was a highlight for the sagging markets:
- "Asian Markets rise on hopes for interest rate cuts." Associated Press, 6 February
- "Monetary normalization is on hold across the globe as risks persist." The Business National, 10 February
- "IMF chief economist supports Fed rate pause." Financial Times, 12 February
Following the "Fed rate pause," India cut its interest rate for the first time in 18 months from 6.5 percent to 6.25 percent. In Australia, with an interest rate of only 1.5 percent, with real estate prices falling sharply in major cities and fears of a global economic slowdown, prospects for a rate cut are now likely.
The Bank of England, with the U.K. on track to mark its lowest growth rate in a decade, will leave rates at 0.75 percent. And in Canada, despite strong job numbers, its central bank is holding rates at 1.75 percent.
Across the globe – from China to the Eurozone, Ghana to Brazil, and Japan to New Zealand – central banks have taken measures to stimulate, cut rates and/or inject more rounds of quantitative easing to prop up markets and economies.
As with India, where pressure from the ruling government pushed its central bank to lower interest rates to boost the economy prior to elections, so too we forecast pressure from the ruling party in the U.S. will push the Fed to lower rates in the run-up to the 2020 Presidential elections.
While the massive injections of monetary methadone will temporarily prop up markets and economies, it will also further inflate the massive $250 trillion global debt bubble. These artificial stimulants, anathema to fundamental economic principles, have fomented conditions that have created a potential economic disaster unparalleled in modern history: "The Greatest Depression" and a market crash worse than 1929.