Over six years ago Wall Street was rocked by an unprecedented crisis … and the U.S. economy still hasn’t been able to fully recover since then.
September 2008 ushered in the dramatic Fannie Mae and Freddie Mac takeover, the Lehman Brothers bankruptcy, the AIG bailout, and ended with the introduction of massive government legislation to buy “toxic” mortgage debt. The ensuing global financial crisis took its toll on economies around the world and the U.S. and global economy are still scuffling to climb back to pre-crisis growth levels.
Since the collapse, central banks around the world have implemented previously unheard of monetary strategies in their efforts to shore up global economies. Unconventional methods of quantitative easing, money printing and interest rate schemes aimed at restoring financial health have caused the Federal Reserve’s balance sheet to balloon from $850 billion prior to the financial crisis to over $4 trillion as of this writing.
But, have these measures worked? Well, the stock markets are trading near all-time highs, but what about the economy? Many economic indicators are still showing significant signs of weakness.
Despite the U.S. federal funds rate being at a record low between zero to 0.25% since December 2008, the U.S. economy has not dramatically responded to this unprecedented policy. Economic growth has stumbled slowly forward in a below average recovery with gross domestic product (GDP) growth in the 2.2-2.4% range in recent years. That pace of growth is well below the average or previous “trend” growth of about a 3.5% pace.
Federal Reserve officials have loudly broadcast their intentions to begin “normalizing” monetary policy this year. A historically more normal federal funds rate (the Fed’s short-term interest rate and policy setting tool) is around 3.0-3.5% versus the current 0-0.25%.
While most market watchers have been bracing for an interest rate hike this year, could weaker than expected economic conditions derail the Federal Reserve’s plans?
One major investment bank is even warning that the Fed might have to loosen monetary policy conditions further — an event that could be extremely bullish for precious metals.
What does the economic data show? Are the Fed’s hands tied?
A recent patch of softer-than-expected economic numbers shows lackluster growth in the first quarter. Consumers are saving more than expected while spending less, wage growth remains low (when was the last time you got a raise?) and businesses aren’t investing in growth and business development. Economists estimate that first quarter GDP growth could show only a 1% growth pace.
Here are just a few recent examples of renewed weakness in the U.S. economy.
- Employment growth cratered in March, with only 126,000 new jobs created versus expectations of 250,000 new jobs. (That was the first time since February 2014 that job growth did not exceed 200,000).
- Retail sales were weak in the first quarter with both January and February registering a decline. Overall, the data shows a still-hesitant consumer.
- New home sales plunged by a larger-than-expected 11.4% in March.
Another economic indicator that is flashing warning signals about the internal health of the U.S. economy is deteriorating credit conditions. The National Association of Credit Management’s March Credit Management index fell to 51.2, which indicates that “serious financial stress is manifesting” according the NACM.
“We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather,” said NACM Economist Chris Kuehl in a press release. “These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage.”
“The signal this sends is that many companies are not nearly as healthy as it has been assumed and that there is considerably less resilience in the business sector than assumed,” said Kuehl.
Major investment bank UBS pointed to this data as a major signal that the Federal Reserve may actually need to loosen monetary policy further — in an attempt to support the still ailing U.S. economy, which could create conditions for another bull run in gold.
Right now gold is low relative to where it has been while stocks are approaching record levels. Basic investment principles of selling high and buying low would indicate a good time to rotate some assets from one investment to the other. Gold is a time honored investment vehicle that allows investors to preserve and build wealth and at current price levels it certainly appears to be a bargain.
Gold is trading around $1,175 per ounce right now, well off its record highs at $1,900. The U.S. stock market continues to climb into nose-bleed record high territory supported by little other than the manipulations by the Federal Reserve. The current bull run in stocks is poised for a crash as the underlying fundamental economic picture doesn’t support a continuing rise in share prices.
Buy low, sell high. As you consider saving for retirement, now is the time to lock in protection. Investors can look to sell stocks when they are high and vulnerable to a fall, and purchase gold while it is still at levels significantly below the highs.
Learn more about gold in our 2015 Gold Investor Report.
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