As of August 1st, 2019, the Federal Reserve officially announced the start of the next economic expansion.
Since raising the Federal Funds Rate in December 2015, the American economy continued to slow, even though stock markets reached new valuation peaks, with the S&P500 recently overcoming the 3,000-point mark in July 2019.
The Federal reserve typically cuts rates to stimulate economic growth, and the ongoing trade war with China presents harsh market conditions for investors and the American public as a whole. By implementing an easing strategy, the Fed hopes to offset the damage caused by the trade war, while stimulating lending in the private sector.
By dropping the Fed Funds Rate, the prime rate drops, allowing favorable conditions for buying homes and taking on new forms of debt, allowing consumers to start spending again. As a result, the economy begins to grow, and GDP figures should start to climb.
So what does this mean for you? How will the current economic expansion benefit your financial future?
The Problem with Predicting the Future of the Economy
When the Federal Reserve cuts rates, it does so with the hope that it turns around structural issues within the economy. The plan is to stimulate consumer spending, as well as investment into the economy by corporations and international investors.
However, there are multiple factors at play in the market that may or may not make these aspirations materialize. Even the Fed chair, Jerome Powell mentioned in his press brief following the last FOMC meeting, that the future is uncertain.
If the Fed does not have an idea about where things are going, then that’s a concerning sign for any investor. The dovish tone of the Fed does nothing to inspire markets, and the short-lived effect of the August rate cut has traders and investors crying out for three more rate cuts in 2019, to help stimulate the markets and continue its climb to the stratosphere of new all-time highs.
However, the Chinese threw a spanner in the works of the fed and Donald Trump’s plans, initiating a devaluation of the yuan past the 7:1-mark against the dollar. The August 5th devaluation caught markets by surprise, with indexes crashing around the globe in the wake of the PBOCs decision to fix the yuan above the 7-mark.
The devaluation was China’s response to Trump’s ongoing trade war, where the U.S government placed tariffs on billions of dollars of Chinese imports. The devaluation led to a steep decline in world markets, with the S&P500 plunging below the 2,900-handle, and it continues to slide regardless of the Chinese agreeing to fix the yuan below the 7-mark.
As a result of the devaluation, President Trump labeled China a “currency manipulator” for the first time since the Clinton administration did so in 1994. China did not take this label lightly and vow that they will take any actions necessary in the future to mitigate damage to the Chinese economy. So, What Does This Mean for the Average American?
The problem with predicting how the next economic expansion will play out is that nobody knows the answer to that question. However, we’ll make our best effort at looking at both sides of the coin to give you an answer.
Assuming a Positive Outlook
We like to take a positive outlook on the world, so we’ll start with this before we get into the opposite end of things.
If China starts to ease back on their devaluation, fixing the yuan to under the critical technical level of 7.0, then we can expect the Fed to continue to cut rates into the last quarter of 2019, with three rate cuts already priced into the markets by traders.
The only way China would consider this is if the Trump administration starts to back up on their tariff hikes. Assuming that Trump feels he is winning the trade war, he may stop placing additional tariffs on Chinese goods.
In this case, the economy and markets would get a significant boost from the Fed’s cuts. As a result, we can expect lending conditions to loosen up and markets to climb higher steadily.
This scenario is good news for Americans that have their 401(k) and IRAs invested into the American markets. Stocks will get a lift, and we can expect to see record valuations and price action in the coming years. As a result, Americans retirement accounts will continue to amass gains, which is good news.
With lower rates, we can expect banks to loosen their lending requirements, sending a fresh injection of credit into the consumer markets. More people will start to feel the prosperity as the economy goes into overdrive, and we can expect to see home loan and credit applications increase sharply over the interim.
With credit and consumer spending rising significantly over the next year toward the 2020 presidential elections, we can expect the economic data to continue to produce strong prints throughout 2019, and into 2020.
This situation means that inflation stays low, keeping the cost of living within reach of most Americans. At the same time, robust economic data reduces poverty and unemployment levels across the country. As an average American, you can expect gas prices to stay low, credit cards to cost you less in APR payments, and easy access to auto loans and home loans, while reducing any student loan payments.
In short, a positive outlook means that all Americans benefit from a booming economy, where they find they have more cash in their back pockets at the end of the month. Taking a positive outlook into the next election, we can expect the winner of the presidential elections to commit to further tax cuts, as the economy continues to grow.
Assuming a Negative Outlook
While no-one wants to consider a negative outlook on their financial future, it’s vital that you have an understanding of what could go wrong. Plan for the best, and prepare for the worst. By preparing, we’re not suggesting you build a bunker and stock up on canned foods. However, being prepared to protect your family’s wealth is a prudent strategy to safeguard you for the future if things do take a turn for the worse.
A negative outlook primarily rests on the ongoing trade war with China as the crux of the matter. If the Trump administration continues to listen to advice from the trade hawk Navarro, it could potentially result in Trump escalating the trade war by imposing further tariffs on Chinese imports.
China is known for playing a long strategy game. If tariffs increased, Beijing would likely continue steadily devaluing its currency to offset the damage to their economy imposed by the tariffs. Recently, China announced that all Chinese companies are to suspend any agriculture imports into the country entirely.
This strategy places enormous pressure on the U.S agriculture industry, and we can expect to see rates of U.S farm bankruptcies continue to soar. The U.S already had one of the worst crop planting seasons in history, and suspending imports could see the nation lose its farming base, escalating food prices at American grocery stores.
At the same time, Chain could continue devaluing the yuan against the greenback, to a range of 7.70 to the dollar. This scenario could cause the Trump administration to choose to devalue the dollar in open market operations, by flooding international markets with the reserve currency.
While this strategy would work, it would also reduce investor confidence in the dollar. As a result, investors would pull their money from treasuries, and look for alternative sources of yield on the global markets.
In such a scenario, we would see bond prices crater, resulting in instability over the worlds reserve currency, edging the world closer to a global currency crisis. In the case of a crisis – it would be far greater than the impact of the 2008 Lehman Brothers fiasco which nearly froze global credit markets.
However, this time, there would be little the Fed could do to inject dollars into the credit markets to retain stability. Investor confidence collapses, and we would see a massive run of inflation across the United States, removing the purchasing power of cash.
In the event of the crisis, we would expect to see global stock markets, as well as the Dow Jones and S&P experience a bloodbath, with stock prices collapsing across international markets. Many Americans would see their investments wiped out, and it’s a probability that banks would seize any deposits in their coffers to cover their losses.
As a result, Americans with money ion the bank could see their entire life savings wiped out as the banks conduct a “haircut,” like the Cypress authorities used in the wake of the Great Financial Crisis of 2008.
Gas prices would steadily rise at the pumps, food would be in short supply, rents would skyrocket, and there would be no consumer credit to loan from the banking system. This outlook is the worst-case scenario and one that we would hope the current administration could avoid.
Weighing the Probabilities of Possible Outcomes
While anything is possible at this stage, we like to think that governments would avoid global financial collapse. However, the arrogance of globalist politicians is something that we should all not take lightly.
We think in the interim that things are likely to get worse before they improve, and the final quarter of 2019 will play a defining role in how these scenarios play out. China is expected to continue with its ban on U.S agriculture imports to place pressure on the Trump administration going into the 2020 election.
Farmers are one of Trumps biggest supporter bases, and by crippling this sector of the economy, we would expect that Beijing is hoping that they could play a role in installing another democrat in the White House. This strategy would end the trade war, as a democratic candidate is likely to move away from protectionist economic policies, and move back toward a globalist agenda.
However, in a worst-case scenario, history tells us that a trade and currency way are the first steps to a shooting war. With current tensions around Chinese waters between the U.S military and the Chinese, it’s a possibility that we could see war break out if the current situation continues to play itself out.
Time will tell.
How to Protect Yourself in Times of Economic Uncertainty
Preparing for the worst involves safeguarding your assets. If you have cash savings in the bank, you may want to remove a portion of them, and buy some physical gold coins with your money. Gold is the oldest form of sound money, and it continues to last throughout the ages.
In the event of a currency and debt crisis, fiat currencies would fail around the world, reducing its value to zero. Hedging your savings with physical gold will leave you something to trade in times where paper money no longer has any value.
Using cryptocurrency would provide a similar hedge. However, should the global internet grid go down – which is likely in the case of a worldwide currency collapse, then there would be no means to claim your digital currency, and no way to trade what you have. It would simply vanish into thin air.
While this is a gloom-and-doom scenario, if history teaches us anything – it’s never to underestimate the pride and arrogance of world leaders.
Wrapping Up – Key Takeaways
Trying to predict how the current economic expansion will affect your financial future is a challenging task. We could think of it as flipping a coin, and there’s a 50-50 probability either scenario could play out at this stage.
While a positive outlook could play to your advantage, increasing your wealth, and negative outlook could crush your finances.
Protect your wealth and savings through hedging with physical gold coins.
In times of economic chaos, gold will provide you with a means to trade and to feed your family. Avoid overexposure to the financial system where you can.