• As traders grow optimistic for rate cuts, economists are warning investors to “be careful what they wish for”
• Historically, steep rate cuts occur only after the economy has taken a serious downturn
• Gold is positioned to rise in the case of recession and interest rate cuts

Misplaced Optimism for Rate Cuts

The Federal Reserve is marking a year since pausing rate hikes at 5.25% to 5.5%. As the Fed awaits signs of sustained cooling inflation, investors are growing optimistic for cuts. But some analysts are warning: be careful what you wish for. Historically, rate cuts come at the cost of economic downturn.

According to the CME FedWatch tool, investors are expecting one or two cuts to come in 2024. Deutsche Bank’s Jim Reid noted that this would the eighth time that traders bet on aggressive rate cuts – cuts that never materialized. Traders may again be jumping the gun betting on large interest rate cuts between now and the end of the year. They are pricing in 175 basis points cuts over the next 18 months. ¹

Going from being on hold for more than a year to such drastic cuts means something has gone terribly wrong with the economy. With one exception, the Fed has only cut that deeply when the country was in the throes of recession. Only in the wake of the dot-com bubble deflating in early 2001 and the onset of the financial crisis in September 2007 did the Fed deliver half-point reductions. ²
.

³

George Goncalves is the head of US macro strategy at MUFG. He expects the economy to weaken by September, which could lead the Fed to take early action.

“This idea of slow and steady cuts makes no sense given how data is shaping up,” Goncalves said. “The longer you wait, the more you may need to do later.”⁴

Federal Chair Powell has signaled an intention to cut rates. Yet, the Fed does not want to look like they are panicking though. They point to continued growth and consumer spending to “remove the urgency” to act. Economists at LH Meyer, a policy analysis firm, said the current state of the economy does not justify rapid easing. Instead, officials are more likely to do small cuts at each Fed meeting.

Be Careful What You Wish For

“Black swan” investor Mark Spitznagel is urging caution. His firm, Universa Investments, is known for positioning itself to gain on unpredictable black swan events. The fund pulled a 4,144% return on its investments during the pandemic stock crash. He shares the belief that the Fed is only likely to cut rates when the economy is slammed with recession and the market is falling.

“Be careful what you wish for,” Spitznagel said. “People think it’s a good thing the Federal Reserve is dovish, and they’re going to cut interest rates … but they’re going to cut interest rates when it’s clear the economy is turning into a recession, and they will be cutting interest rates in a panicked fashion when this market is crashing.”⁵

The current higher-for-longer rates still threaten to spark a downturn. Spitznagel said today’s markets are a “mega-tinderbox-time bomb.” The potential for a crash is large because of the massive debt acquired when interest rates were ultra-low. He said the yearslong rally in the stock market amounted to the “greatest bubble in human history.” The impact of the bubble bursting would be extreme because the government’s $34 trillion debt would make it harder for them to intervene. ⁶

Conclusion

As traders, once again, get excited for significant interest cuts, analysts are advising caution. While a rate cut can be beneficial, it often signals deeper issues that could lead to significant market declines and earnings reductions. Historically, rate cuts occur after the country has entered recession.
Gold is positioned to benefit from both cases. Gold prices go up when interest rates are cut because lower rates reduce the opportunity cost of holding non-yielding assets like gold. And if cuts are taking place in response to recession, owning gold is advantageous because it retains its value and acts as a hedge against economic uncertainty. A Gold IRA can protect your portfolio from the impact of interest rates for the long term. Call us today to learn more at 800-462-0071.

Notes:
1. https://www.msn.com/en-us/money/markets/traders-may-be-jumping-the-gun-once-again-by-betting-on-aggressive-fed-rate-cuts/ar-BB1qP6Dv
2. https://fortune.com/2024/07/28/fed-rate-outlook-super-sized-cut-bet-bond-traders-fomc-meeting-jerome-powell/
3. https://www.france24.com/en/live-news/20240609-us-fed-likely-to-remain-on-pause-and-pare-back-rate-cut-expectations
4. https://www.france24.com/en/live-news/20240609-us-fed-likely-to-remain-on-pause-and-pare-back-rate-cut-expectations
5. https://markets.businessinsider.com/news/stocks/fed-rate-cuts-stock-market-crash-recession-outlook-economy-investing-2024-4
6. https://www.benzinga.com/markets/equities/24/07/39870083/black-swan-investor-says-greatest-bubble-in-human-history-is-on-the-verge-of-bursting-calls-stoc

 

• Despite multiple recession indicators flashing red, the actual downturn hasn’t materialized yet
• Economists think unique post-pandemic economic dynamics are disrupting traditional forecasting models
• Experts advise preparing for an inevitable downturn by considering safe haven assets like physical gold, silver, or a Gold IRA for long-term financial security

Disrupted Recession Signals

Our current economic situation presents a paradox. While numerous recession indicators are flashing red, the actual downturn has yet to materialize. This delay may be caused by the unique post-pandemic economic dynamics. Traditional forecasting models have been disrupted. However, as noted economist and Johns Hopkins professor Steve Hanke warns, “The average guy on the street corner knows that if they goose the money supply, you’re going to get inflation. And if they contract it — we’ve had four contractions in the history of the Fed since 1930 — and every one of those has led to a deflating economy and ultimately a recession.”¹

Key Recession Indicators

1. Rising Initial Jobless Claims

One of the most reliable recession predictors, initial jobless claims, has surged 20% since January 2024. Historically, such upticks have preceded every U.S. recession. That includes the financial crises of 1990, 2001, and 2008. Analysts at the Game of Trades trading platform caution, “If initial jobless claims are set to rise substantially from here, that really doesn’t bode well for the stock market.”²

Declining Temporary Employment

The Bureau of Labor Statistics has found that declines in temporary employment typically precede a recession by 6 to 12 months. This pattern is emerging once again. Which makes sense. Companies reduce the number of temporary employees to avoid laying off permanent workers.

Chicago Fed president, Austan Goolsbee challenged the temp employment indicator. He said pandemic-era labor shortages “scarred employers so much that they’re like, ‘We don’t rely on temps anymore.” ³

3. Inverted Yield Curve

The inverted yield curve is a historically accurate recession predictor. This economic condition occurs when short-term interest rates exceed long-term rates. It is a sign that investors don’t hold high hopes for future growth. It has been inverted for two years—the longest stretch since the 1929 crash. However, the curve has not yet reached the steepness typically associated with a labor market collapse. Its persistent inversion is cause for concern among economists and investors alike.

⁴

4. Disconnected Financial Markets

A growing disconnect between rising stock markets and increasing unemployment is once again evident. This pattern was observed before the recessions of 1988 and 2006. Since January 2024, the S&P 500 has climbed approximately 15%. Jobless claims have also risen, suggesting that the market may be due for a significant correction.⁵

5. The Sahm Rule: A Near-Perfect Predictor

The Sahm Rule was developed by former Fed economist Claudia Sahm. It has an impressive track record for predicting recessions. According to this rule, a recession is likely when the three-month average unemployment rate increases by 0.5 percentage points over the previous 12 months. As of June, this increase stood at 0.43 percentage points, perilously close to triggering the rule.

However, Sahm herself acknowledges the unique nature of the current economic cycle: “What the pandemic kicked off in terms of a business cycle is very unusual… What’s worked relatively well in the past to signal a recession — it should be no surprise that now they are missing something.”⁶

6. M2 Money Supply

Steve Hanke identifies the money supply as a sign that a soft landing won’t be achieved. The M2 money supply is a measure of how much cash and other liquid assets is flowing through the economy. It has contracted for most of the past two years. Compare that to the 27% surge in 2021 from the massive pandemic stimulus.

Hanke explained that interest rates will need to come down drastically to keep the economy going. But he doesn’t think the Fed will act in time to avoid a recession.

“It’s one of the worst performances of the Federal Reserve,” Hanke said. ⁷

Timing the Downturn

While precise timing remains elusive, many analysts anticipate the recession to hit in the latter half of 2024 or early 2025. This projection comes after the stock market’s recent record highs. A ‘last gasp’ steep climb in stock prices usually occurs before recession begins. Investors should brace for a potential sharp market correction.

Conclusion

Conventional wisdom held that two consecutive quarters of contracting GDP equals a recession. Despite U.S. economic growth being negative in the first and second quarters of 2022, the overall economy never qualified for the National Bureau of Economic Research’s official recession label.

So as economists try to reconcile trusted rules with new results in the post-pandemic economy, the convergence of these signals suggests that economic downturn is inevitable. If every sign points to rain and it’s still sunny out, that doesn’t mean you shouldn’t have an umbrella. The rain is coming, only now you have a chance to prepare for it. Moving funds into safe haven assets like physical gold and silver can protect their value from recession. A Gold IRA is designed to secure your finances for the long term. To learn more, contact us at 800-462-0071.

Notes:

1. https://www.businessinsider.com/recession-outlook-hard-landing-economy-inflation-fed-rates-steve-hanke-2024-7
2. https://finbold.com/buckle-up-these-4-indicators-suggest-recession-is-closing-in/
3. https://www.axios.com/2024/07/23/recession-indicators-signals-not-working-employment-trends
4. https://www.marketwatch.com/story/the-yield-curve-is-speeding-toward-inversion-heres-what-investors-need-to-know-11647977540
5. https://finbold.com/buckle-up-these-4-indicators-suggest-recession-is-closing-in/
6. https://www.axios.com/2024/07/23/recession-indicators-signals-not-working-employment-trends
7. https://www.businessinsider.com/recession-outlook-hard-landing-economy-inflation-fed-rates-steve-hanke-2024-7

• In response to political instability reaching new heights, investors are flocking to gold
• The move to gold is a “flight to safety” – preserving wealth by moving from risky securities to safe haven physical precious metals
• The U.S. Presidential election is likely to increase volatility, and in turn, raise the price of gold

Gold as Hedge Against Political Uncertainty

In a world reeling with political turmoil, gold is once again proving itself to be an unrivaled safe haven asset. Throughout history, gold has been a reliable store of value. As uncertainty increases, so will the demand for the precious metal. In today’s current unrest, gold prices are trading at new highs above $2,400 an ounce. Gold’s inherent economic traits make it a wise choice for those seeking insurance from the severe consequences of political chaos.

A “flight to safety” is at the core of gold’s demand. “Flight to safety” in investing refers to the behavior of investors moving their capital from riskier assets to safer, more stable investments during times of economic uncertainty or market volatility. This typically involves selling off stocks, high-yield bonds, or other speculative investments in favor of gold. The primary goal is to preserve wealth rather than seek high returns.

Reasons Investors Turn to Gold During Political Instability

Investors gravitate towards gold during times of political turmoil for several reasons. Primarily, gold serves as a preservation of wealth. Political instability often leads to higher inflation, devaluing assets. Currency can lose value as people lose confidence in the government, its economic policies, and future economic conditions. Inflation can result from increased government spending to address crises or maintain power. And as inflation rises, capital flight further weakens the currency, creating a vicious cycle of economic instability.

Unlike paper currencies or other assets, gold is a hedge against inflation. It retains its intrinsic value over time. The high liquidity of gold also adds to its appeal. It allows investors to quickly convert their holdings into cash if necessary. Additionally, gold provides diversification benefits, reducing the overall risk in an investment portfolio. Gold’s lack of credit risk and negative correlation to risk asset secures its role as a crisis hedge.

Market Dynamics

Gold and uncertainty are strongly linked. Studies have shown that during global crises, when things are most uncertain, gold prices go up. But even as these tension rise, the riskiness of gold as an investment stays stable. The flight to safety does not make gold markets more volatile. As a matter of fact, when it comes to safe havens, gold has consistently outperformed U.S. government bonds since the 1990s. ¹

Historical Examples

During the subprime mortgage crisis and Great Recession, gold prices climbed over 119% from October 2008 to August 2011.²  Similarly, gold jumped 22% after the Brexit referendum was passed. Prices also surged upward during the 2019 U.S.-China trade tensions. ^3,4

Risk Metrics

The Geopolitical Risk (GPR) index measures both actual and perceived geopolitical tension. A study by the World Gold Organization found that gold responds to elevated geopolitical risk when all other variables are removed. They discovered that an increase in the GPR index by 100 units positively impacts gold’s return by 2.5%. Gold spiked alongside the GPR following the Russia invasion of Ukraine and the conflict in the Middle East. Even as the GPR dropped back down, gold prices remained high.⁵

The Partisan Conflict Index represents the degree of political disagreement among U.S. politicians at the federal level. It is run by the Federal Reserve Bank of Philadelphia. It is significant as a measure of economic and political uncertainty. The index and gold prices often show an inverse relationship: when partisan conflict increases, gold prices tend to rise. When it decreases, gold prices often fall. The Fed explains that this relationship exists because higher partisan conflict creates political uncertainty. And this prompts investors to seek “safe haven” assets like gold, thus increasing demand and driving up its price.⁶

Gold and Elections

Presidential elections often create market volatility. Historically, U.S. election outcomes influence gold prices. After Democratic wins, gold typically rises, while Republican wins usually lead to a decline. Gold prices tend to increase following Democratic victories due to expectations of increased fiscal spending and loose monetary policy. Investors associate these with potential currency debasement. The 2020 U.S. presidential election contributed to gold prices increasing by about 25% in the year leading up to the November election. Gold hit a then all-time high of over $2,000 in August 2020. ⁷

⁸

Unstable Future Outlook

The current state of political instability looks likely to continue. A recent Reuters poll found that 80% of American voters believe the country is spiraling out of control. Eighty four percent are concerned that extremists will commit acts of violence after the election. Few people condone violence, with just 5% of respondents saying it is an acceptable means to achieve a political goal.⁹

This prevailing political and economic instability continues to drive the demand for gold as a safe haven asset. Physical precious metals, especially in a Gold IRA, can shield the value of retirement funds from the impact of social chaos. To protect your finances from an uncertain future, contact us today at 800-462-0071.

Notes:
1. https://www.economicsobservatory.com/is-gold-a-safe-haven-for-investors
2. https://www.deseret.com/2023/11/8/23952266/presidential-elections-republican-democrat-effect-price-gold/
3. https://www.theguardian.com/business/2016/jun/24/gold-jumps-22-percent-eu-referendum-vote
4. https://www.cnbc.com/2019/05/10/gold-market-us-china-trade-talks-tariff-threats-in-focus.html
5. https://www.gold.org/goldhub/gold-focus/2023/10/you-asked-we-answered-whats-impact-of-geopolitics-on-gold
6. https://www.gold.org/goldhub/gold-focus/2023/10/you-asked-we-answered-whats-impact-of-geopolitics-on-gold
7. https://www.royalmint.com/invest/discover/gold-news/us-elections/
8. https://kinesis.money/blog/gold/us-presidential-election-affect-price-gold/
9. https://www.reuters.com/world/us/four-five-americans-fear-country-is-sliding-into-chaos-reutersipsos-poll-finds-2024-07-16/

 

• The Congressional Budget Office is forecasting federal deficits to be $2.1 trillion higher over the next decade than initially predicted
• High government debt can lead to soaring inflation and dollar devaluation
• Precious metals, especially in a Gold IRA, can protect the value of your retirement savings from the consequences of America’s runaway debt

Out of Control Debt

In just six months, from January to July 2024, America’s national debt skyrocketed from $33.99 trillion to $34.86 trillion. That’s an astounding increase of $876 billion. With the budget deficit projected to hit $2 trillion, $300 billion more than last year, alarm bells are ringing across the financial and political spectrum.¹

The Congressional Budget Office (CBO) has recently updated its projections. They are forecasting federal deficits to be $2.1 trillion higher over the next decade than initially predicted. The increase is due to new government spending bills and changes in data analysis. ²

The Peter G. Peterson Foundation is a nonpartisan organization focused on America’s fiscal challenges. They warn, “The CBO’s updated projections emphasize the nation’s unsustainable fiscal outlook, as the projections show deficits continuing to rise significantly over the upcoming decade.”³

⁴

These deficit levels are historically associated with times of war or recession-driven stimulus spending. U.S. net debt is nearing 100% of GDP. Large debts like these were once manageable due to near-zero interest rates. But recent aggressive interest rate hikes have turned these debts into a significant burden.

Dangers of Debt

Mike Pompeo is a former Secretary of State and ex-CIA director. He views this debt as a national security threat. He cautions that record-high debt could lead to dollar deterioration. This could potentially allow U.S. rivals to gain influence over the global economy. The BRICS+ economies are gaining geopolitical influence and attempting to establish a rival trading and monetary system.

Pompeo states, “Persistent high debt, interest rates, and inflation can combine to weaken the value of the U.S. dollar in the long run – a disastrous outcome that would only benefit America’s adversaries in Beijing, Moscow, and Tehran as they seek to recenter the global economy away from the United States.”⁵

The consequences of ignoring this mounting debt are dire. Higher debt servicing costs mean less funding for critical public services and reduced capacity to respond to crises. Increasing bond yields would be necessary to attract investors. This translates into higher borrowing costs, and in turn, slowing economic growth.

It also leads to a “crowding effect”. Investors choose to put their money into high interest government bonds instead of private investments. As a result, the economy stalls. In addition, high debt can also lead to dollar depreciation and inflation.

The Congressional Budget Office projects that by the mid-2030s, all federal revenues will go to mandatory spending, like Social Security, and interest on debt. This scenario would force the government to either borrow more or cut discretionary spending to finance basic functions. Defense, law enforcement, infrastructure, and education would all be endangered.

Escaping the Debt

An unlikely solution to the debt crisis is good fortune – inflation is defeated, interest rates go down, and productivity surges (maybe from AI). In essence, America can outgrow its debts.

The International Monetary Fund (IMF) has reiterated its warning that the U.S. debt “needs to be urgently addressed.” They suggest that the U.S. will need to cut spending or raise taxes by 4% of GDP to stabilize the debt by 2029.⁶

However, economists point to a more worrisome solution: sticking it to creditors by devaluing the debt with inflation. Inflation reduces the real value of government debt. Creditors are made to “pay” by receiving less valuable money. Government repayments during high inflation have less purchasing power than the original loan.

This could occur through various mechanisms. All of which are hazardous to the health of the economy: The Federal Reserve prints money to buy government debt. The Fed keeps interest rates low while increasing government spending. Or Congress allows unlimited borrowing, potentially compromising the Fed’s ability to control inflation.

Some analysts argue this process is already underway in America, though it’s too early to be certain.

Global Impact

The global implications of this debt crisis are significant. As the world’s reserve currency, a debased dollar would devalue global reserves. Capital would become more expensive worldwide, leading to global recession. Investors might seek alternatives to the dollar, potentially leading to a chaotic transition into a new world order.

Conclusion

As we face this looming crisis, the words of Mike Pompeo serve as a stark reminder. He said, “We must wake up to the threat America’s mounting national debt poses to the future of our country before it is too late.” The path forward requires difficult decisions, fiscal responsibility, and a clear-eyed view of the challenges ahead. The alternative – a weakened dollar, diminished global influence, and economic instability – is a future we can ill afford.⁷

JP Morgan doesn’t foresee meaningful improvement in the medium term. They advised “adding non-U.S. dollar–denominated assets and ‘real assets’ such as infrastructure, gold and commodities to traditional multi-asset portfolios.” ⁸ Precious metals, especially in a Gold IRA, can protect the value of your retirement savings from the consequences of America’s runaway debt. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
2. https://www.pgpf.org/blog/2024/07/the-nations-fiscal-outlook-just-got-worse-heres-why
3. https://www.pgpf.org/blog/2024/07/the-nations-fiscal-outlook-just-got-worse-heres-why
4. https://www.livemint.com/economy/americas-reckless-borrowing-is-a-danger-to-its-economy-and-the-worlds-11720510033537.html
5. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
6. https://finbold.com/imf-warns-u-s-to-immediately-address-its-chronic-fiscal-deficits/
7. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
8. https://privatebank.jpmorgan.com/eur/en/insights/markets-and-investing/tmt/how-worried-should-you-be-about-government-debt