The current state of geopolitics and the global economy warrant caution. Stocks are moving slightly higher in early action on Monday as the markets seem to be pinning their hopes on the Fed and another series of rate cuts. The Fed will be meeting this week, and although no action is expected on Wednesday, the central bank could lay the groundwork for the first rate cut in over 10 years next month.
There are currently several issues at work, however, that could potentially set off the next major financial crisis, and there may be little, if anything, that the Fed can do to fight it.
The ongoing U.S./China trade war is at or near the top of the list. Hopes for a productive meeting between President Trump and Chinese Leader Xi Jinping at the G20 meeting this month appear to be fading fast. Neither side has been willing to blink in recent weeks since recent talks fell apart, and the trade war could see a significant escalation if talks do not resume.
The next likely steps would be an increase in existing tariffs, but things could get even more serious if it seems that an agreement is not even close. If China were to close its markets to U.S. multinationals like Apple, for example, it could have a dramatic effect on global financial markets.
The U.S. has taken a hardline stance against Iran, and the tough rhetoric between the two nations has the potential to escalate.
In addition to the trade war, the potential for a rapid rise in oil prices must also be considered. Two oil tankers were attacked last week near the Strait of Hormuz, sending oil prices higher. The U.S. has blamed Iran for the attacks, and control of the strategically important strait is critical for the supply of oil to flow freely.
Any escalation in the situation, especially in the form of military action, could send oil prices higher by $7 to $10 per-barrel or more.
Both the ongoing trade war and the potential for an oil shock could send shockwaves through global financial markets. If tariffs are increased further and/or if oil prices start to rise rapidly, consumers may be reluctant to spend. This could set into motion a domino effect that could cause the economy to grind to a halt. The Fed may not have ammunition to combat such a significant slowdown, and the next great financial crisis could ensue.
With so many wildcards and the potential for a sharp and significant global economic collapse, now is the time to add diversity. Given the potential for a global recession, lower rates, a weaker dollar and other geopolitical issues, there may be no better asset class to look to than physical gold.
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