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Why Has The Fed Shifted to A New Policy Framework?

The Fed monetary policy is changing, focused now on the "broad based and inclusive goal of full employment". The long held belief that low unemployment was a signal for potential inflation turned out to be a "false" belief. Prior to COVID-19 when the USA apprached its lowest level of unemployment in 50 years economists were surprised to see that there was little to no spike in inflation. The measure(s) of inflation however are complex and an entire paper can be written on the obfuscation of the truth hidden in over 15 different measures of the money supply and how increases in rent, food, health and education expenses are factored into the measure of inflation. We will also not dwell on the fact that trillions of dollars in newly minted currency has entered the economy via the stimulus bills and Fed underpinning of the economy.

For the purposes of this post, we will take the Fed at its word that inflation has been held to less than 2%. That goal however is now going to be sacrificed for the sake of stimulating the economy, job creation and the goal of full unemployment. Forecasts, at this point in time, do not see unemployment falling to less than 5% until the end of 2023. The damage to business and the conomy caused by the coronavirus is going to take time to rectify. The big winners resulting from COVID-19 are the tech businesses that have seen trillions of dollars added to their market cap in less than 6-9 months. It is worth pointing out that ten years ago tech may have represented approximately 16% of the S&P 500 whereas today it comprises almost 37%. That is an enormous shift. At some point "tech" stocks will inevitably correct and with it the S&P 500 to a greater degree given the heavier tech weighting it now bears.

In practice this new Fed policy shift means that they will not consider raising interest rates unless inflation rises above 2% and even then, may continue to keep interests rates low for the purposes of encouraging business investment and a stronger labor market. While this will inevitably mean higher food prices, new asset bubbles forming and who knows what else, the goal of full employment is worth the cost, at least that it is the new theory or belief. This new belief also assumes that if individuals and businesses believe that inflation is inevitable and will result in a dilution of their future dollar spending power, they will be incentivized to borrow, spend and invest their money sooner, leading to a virtuous cycle of stimulating the economy, job creation and rising markets.

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The Markets & Gold Rise Together, Warrren Buffets Goes for Gold - What does it all mean?

The Year 2020 will go down as one of the most disruptive years in modern day life and perhaps the most paradoxical year in the markets history. One fine example of where this paradox is self-evident is what is happening to Gold. In a Risk-On environment, you would expect Gold to rise. A traditional safe haven in times of uncertainty, when the times are highly uncertain and investors get fearful, Gold is where investors rush to. A time tested stalwart of value, you can balance your potfolio risk with a portion of Gold.

However, what is unique during this time is that Gold has continued to rally even while the markets have retraced their march lows to now August re-test of the all-time market highs. The last time that happened was 1979 when both gold and the S&P500 made new highs.. Gold is now over $2,000 an ounce. Historic data show that gold has tended to continue to rally when it starts to trade in record territory and this rally is launching on the heels of a seven-year base which provides fundamental strength for a sustained rally.

Risk is difficult to quantify in a pandemic which has no clearly defined end point yet and an economy that is requiring enormous sums of capital to prop it up. The unprecedented amount of money printing in such a short time period is another reason why investors are moving to gold. How much more debt will it require to get through COVID-19 and is the will there to keep increasing the mountainous debt load if the crisis drags on longer than many expect? What if this wains? In addition, the historic low (close to negative) yields coupled with the money printing impact on the dollar, allow asset managers and investors to make a strong case to move to gold. As more certainty is reached with respect to a likely endpoint for the pandemic, the case for gold will likely weaken but we believe the inflationary impact of the combined stimulus infusions into the economy will still make Gold an attractive asset to hold for some time until the impact of this is more known.

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COVID-19 and The Implications of Rising National and Corporate Debt

The arrival of COVID-19 has caused the greatest disruption in the global economy since World War 2. It has exposed significant weaknesses in the modern day global economy and in the healthcare systems to respond to such a pandemic.

This article is going to focus on the impact that COVID-19 is having on the national debt, both globally and nationally and on corporations as well as the potential implications of the latter, especially as we do not know how long COVID-19 will be with us or when an effective vaccine will be proven out, distributed and administered.

At this stage in the pandemic we can point to actualities. The International Monetary Fund estimates that public debt as a percentage of GDP will rise above 130% in 2020 and 2021. It will exceed levels only seen during and after World War 2. Global debt is close to 331% of GDP or a staggering $258 Trillion and in more mature markets it is estimated to be as high as 393% of GDP. These numbers are hard to digest. Britain's national debt for example is forecasted to be at 418% of GDP in 2070. Only 4 years ago economists were forecasting it would be 87%.

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How Much Do You Need To Retire On?

There is no "one size fits all" when it comes to answering the question: "how much money will you need to comfortably retire on"? It is entirely dependent on your retirement goals, desired lifestyle and how flexible you are. 

The most common wisdom that you will find on the internet will tell you that the number is 70% of your pre-retirement income. That number will of course vary depending on your expenses which in turn will depend on where you are living. The good news is that - if you are flexible - there are different retirement options for almost every budget if you are willing to move where the costs can accomodate your income. For example an article in MoneyWise covers 20 different countries where you can retire on a lot less than you may think is possible.

Countries such as Portugal, Uruguay, France, Costa Rica, Portugal, Thailand are covered in the article where yes, appartment rentals can be found ranging from $350 to $750/month. If you have a retirement income of $2500-$3000/month for example, you may find that one of these countries could serve up a workable and enjoyable retirement. 

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The Status of Traditional Safe Havens & How Much Risk Is Right For You?

In a close to zero-interest and low bond yield environment alongside a massive expansion of the money supply (over 4 Trillion dollars to date) what choices do investors have with respect to selection of conservative safe haven assets that can protect from inevitable inflation and posible dilution in the value of the US dollar.

The disincentive for keeping money in the bank or in bonds has never been higher. Inflation will now outpace the (close to zero) yields in savings accounts or bonds. Effectively, your money while safe from losses, is now losing value.

The counter bet to inflation and market uncertaintly is of course Gold which has been on a tear this year, up 60%, surpassing all time highs. Gold has become a "risk-on" asset.

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Hawley Advisors
1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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