Can Fed's big-gun response work?
We woke up to a Monday like no other.
Daily life around the world is grinding to a halt as the virus crisis spreads. The Federal Reserve stepped in on Sunday with a dramatic, all-out attack on the growing economic and health crisis spurred by COVID-19.
In the second emergency rate cut this month, the Fed slashed interest rates to 0% - 0.25%, the lowest level since the 2008 global financial crisis.
In recent days, the U.S. stock market crashed into a bear market in a stunning 22 calendar days, making this the quickest collapse since WWII.
Despite the Fed's emergency action, stocks continue to plunge, hitting "limit down" in pre-market action Monday. Even circuit breakers and 0% interest rates can't stop the carnage and the market appears ready to fall further today.
The Fed also announced it is restarting "quantitative easing" also known as bond buying, in an attempt to keep markets moving.
What Lies Ahead?
The country is facing an economic challenge of gargantuan proportion.
While economists expect a recession given the health-inspired required closures around the country. From restaurants and bars to schools, the country is closing down.
The U.S. economy hasn't even officially entered a recession, yet the Fed is already out of bullets. It used up its stimulus powers and hit the zero level before we even registered a fall in GDP in two consecutive quarters (the official definition of a recession).
On the fiscal side, policymakers already enacted a huge tax cut in recent years, which increased the U.S. debt. The Fed is out of bullets. The government has already cut taxes. The only options left are negative interest rates, more money printing and expensive bailout packages that will need to be paid back by tomorrow's workers.
The failure of the government to improve the country's financial situation in good economic times, leaves our country faced with bleak options during bad economic times.
What lies ahead will mortgage the next generation's economic future and further tie the hands of policy makers to spend on programs that matter most, as an increasing amount of funds will be required to go to interest on debt.
In this Environment, Gold Shines Brightly
Gold is a hard asset that can't be devalued by the Fed's printing presses. As investors across the country watch their net worth fall by the minute, owning gold makes more sense than ever in order to preserve and protect our wealth.
Yes, gold is selling off now. In large part because investors are selling what they can right now to meet stock market margin calls.
The recent stock market gains were leveraged to the hilt with margin buying. The stock market crash has brokerage firms around the country calling in their chips. Investors who own gold – are selling to meet their margin requirements.
Gold is acting as the insurance policy that it is - a financial instrument that provides liquidity during times of crisis.
In these uncertain times, it can be helpful to talk with a trusted advisor. Blanchard is here for you. Please call us today if you have questions. We have answers.