Apr 13 – Over the past few years, the US Federal Reserve and the world’s central banks have pushed interest rates down with massive money printing and thus the stock markets to record levels. Now, however, the Fed is tightening its monetary policy. British hedge fund manager Crispin Odey warns of the consequences of this policy, especially as US President Donald Trump is fueling the economy.
The S & P500 is well on the way to recovery: there are many reasons for this. The Syrian crisis has eased a bit after US President Donald Trump has described an intervention in Syria as “an option”. At the same time, he is considering re-entering the negotiations on the Trans-Pacific Free Trade Pact TPP. In addition, the US president said that a trade war with China could be prevented if China opened its market more for US products. In the environment, investors are buying heavily US stocks.
Fed slows down the economy considerably
How long the recovery lasts depends on two factors: On the one hand by Trump. Largely due to its tax reform, according to the Congressional Budget Office (CBO), the new borrowing Fiscal Year 2017/18, which ends in September, is expected to rise more than 20 percent to $ 804 billion. For the coming fiscal year, a further increase to $ 981 billion is planned. With that, Trump is fueling the economy, trying to position the Republican electoral chances well into the 6/5 midterm elections.
And in an environment where the economic recovery of 106 months is the second-longest of all times, while the unemployment rate is only 4.1 percent, which could lead according to experts to higher wages and thus even higher inflation. The inflation rate rose 2.4 percent in March to a twelve-month high. Despite the massive tax reform, the savings rate of Americans has risen to just 3.4 percent – this is an extremely low value in the long-term comparison.
The Fed is significantly slowing down the US economy with interest rate hikes. On the other hand, from the US Federal Reserve. It has announced three rate hikes for the current year, while total assets are expected to be reduced by $ 420 billion through the reduction of government and mortgage bonds. As a result, the Fed is withdrawing the financial system from this amount of money, thereby burdening the real economy. At the same time, interest rate hikes by the Fed are driving interest rates up, as well as mortgages, which is also depressing the economy.
Inflation shock threatens
The interaction between Trump’s measures and those of the Fed is dealt with by British hedge fund manager Crispin Odey. The hedge fund manager and co-founder of Odey Asset Management came into the focus of several investors in 2008, predicting the crash and earning 54.8 percent that year. From April 2009, Odey has then set on rising prices and correctly predicted the rally of the year.
“In a world where the central banks have taken on the task of maintaining a balance, the markets of the figure (the central banks) are submissive,” wrote Odey last. What he means is that the Fed has pushed the S & P500 to new records with massive money printing and low interest rates. If the Fed pulls the net under the stock market with the tightening of monetary policy, threatening an end to the balance and thus a collapse in the stock market.
US inflation has risen to 2.4 percent.
“It does not help the central banks that Trump is more concerned with winning the midterm elections, rather than maintaining that relatively fragile balance. The closing of the Mexican border, the massive fiscal push … and in addition a few punitive tariffs equal a massive inflationary shock, “said the professional. If poorly-paid workers were missing from Mexico, while at the same time fueling the economy with tax cuts, and punitive tariffs on foreign goods led to price increases in the US, that combination would boost inflation.
Does the Fed make a U-turn?
“I have to look back to the 1970s to see something similar. At that time, loose monetary policy first hit asset prices (the Nifty Fifty stocks, which were 50 heavyweights among US stocks in the 1960s and 1970s, and later in the stock markets) Consumer prices, “wrote Odey.
Many experts would believe that the US Federal Reserve will continue to normalize monetary policy this year, as the Fed regularly emphasizes. “If you look at the risks of assuming that a system that drives (economic) growth without a need for saving moves to one that requires $ 1.9 trillion in two years then these risks are just too big, “said the hedge fund manager. At $ 1.9 trillion, it means the sum of new debt for the current and the next fiscal year. Money printing has made everything work. In order to come to a higher saving volume it requires a higher savings rate and less consumption. ”
“I bet a turnaround (in US monetary policy). There are far too many memories of what happened in 2014 when something similar was attempted, “said the financial expert. In 2014, the Fed had to reduce its bond purchases visibly, after which they had finally expired in October. The increasingly low level of liquidity injections had noticeably dampened the US and global economies. “Until 2016, the emerging markets were at an end. When the pain gets too big, we (the Fed) go back to monetizing, “said the expert. Monetizing means the financing of public debt through the printing press.
“But this time, because of full employment and continuing expansionary Keynesian measures, there will only be one result – higher inflation and ultimately higher interest rates,” Odey wrote. John Maynard Keynes was a British economist. His idea was that the government in times of crisis with debt should boost the economy. However, the problem is that almost all states are making heavy debts even in times of economic growth, which is why global sovereign debt is rushing from one record to the next – not only nominally but also in relation to economic performance.
“Then the mountain of debt will play a role again. The authorities (central banks) will raise interest rates slowly and the world will feel the first touch of stagflation in 50 years, “warns Odey. “Stagflation” is a combination of “stagnant economy” and “inflation”, i.e rising prices