July 14, 2019 | The U.S. Is Not an Economic Island

By signaling a move toward easing, Powell has made ready to cushion the U.S. against an economic slowdown that has been gathering force around the world. Although it is never wise to fight the Fed, we should be very guarded this time, scanning the horizon for signs of monetary-policy fissures. They are not likely to be obvious right away, since loosening will initially have a bullish impact on stocks. The mere prospect of a rate cut has already spiked the Dow Industrials above 27,000 for the first time, and the rally appears to be gathering force, presumably ahead of a blowoff top by late summer or early autumn.

It will increasingly draw capital from outside the U.S., since the economies of Asia and Europe are deteriorating rapidly. China’s attempts to stimulate domestic spending have failed, and unsold cars are piling up on the lots. As for Germany, the erstwhile economic engine of Europe, its GDP most recently grew at an annualized rate of 0.7%.

Don’t Get Trapped

The U.S. is not an economic island, and GDP growth is certain to slow as America’s major trading partners sink into recession. It seems predictable nonetheless that U.S. stocks will continue to move higher, at least for a while, for the reasons noted above. This will occur with further softening in interest rates and GDP falling. Wall Street may be able to pretend for yet another few months that the U.S. will skirt recession. But when rates on Ten-Year Treasurys drop below 1% and head into negative territory sometime in 2020, the jig will be up. At that point there will be no denying that America’s economy has fallen into the same liquidity trap that has long vexed Japan and which has spread to Europe, if not yet China. The resulting epiphany will cut the Dow in half so swiftly that anyone still in stocks when they begin to fall will be trapped. U.S. Treasury paper is where you will want to be by no later than September, even if it means missing the potentially spectacular last gasp of the ten-year-old bull market.

Rick Ackerman July 14th, 2019

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