by John Persinos, InvestingDaily.com
Investing Daily Article of the Week
As Americans this week nervously awaited the official winner of the presidential election, all eyes have turned to our country’s interim leader. I’m referring to Jerome Powell.
The coronavirus crisis is getting worse, Congress is mired in political paralysis, and the presidency was hanging in the balance. In this vacuum, the U.S. central bank has been functioning as a de facto fourth branch of government. That makes Fed Chief Powell a highly influential voice.
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A new fiscal stimulus bill might get enacted during a post-election lame duck session of Congress, but in this fractious political climate, the odds aren’t good. We’ll probably have to wait until 2021, a reality that makes the Federal Reserve the major player right now in shoring up the pandemic-wounded economy.
The Federal Reserve’s rate-setting Federal Open Market Committee (FOMC) ended its two-day meeting Thursday by reiterating its pledge to keep short-term borrowing rates in a range between 0%-0.25%. In his post-meeting statement, Powell noted that economic activity remains well below levels that prevailed before the coronavirus outbreak.
Powell promised that the Fed would do whatever it takes to buttress the economy. “Is monetary policy out of power or out of ammo? The answer to that would be ‘no,’” he told reporters.
The Fed already has pumped trillions of dollars of liquidity into the financial system by scooping up corporate debt and slashing the lending rate. Ultra-dovish monetary policy has been a major factor in fueling the pandemic-era rally in stocks.
On Thursday, the Dow Jones Industrial Average rose 542.52 points (+1.95%), the S&P 500 climbed 67.01 points (+1.95%), and the tech-heavy NASDAQ soared 300.15 points (+2.59%). All of the key sectors closed in positive territory.
In pre-market futures trading Friday, stocks were set to open lower as election uncertainty lingered. Global stocks have been moving up and down in tandem with the main U.S. indices, as the world holds its breath over the Trump-Biden contest. A knockout blow to Trump could arrive sometime today, with final results from either Georgia or Pennsylvania, two states where Biden leads.
Bond yields continue to scrape historic lows as the recession and aggressive central-bank buying maintain elevated demand for safe-haven assets. The 10-year U.S. Treasury yield on Friday hovered at 0.77%, compared to the long term average of 4.41%. Falling interest rates cause bond prices to rise and bond yields to fall. Conversely, rising interest rates cause bond prices to fall, and bond yields to rise. When interest rates are low, as they are now, bond prices increase because investors are seeking a better return.
Low bond yields are a highly visible indicator that investors are worried about economic growth in the U.S. and around the world. The smart money tends to flee to ultra-safe government bonds during times of economic stress.
Powell hasn’t been shy about urging Congress to pass additional fiscal stimulus, but talks bogged down shortly before the November 3 election.
The U.S. economy partially rebounded over the summer after Congress in March approved a $2.2 trillion stimulus package, but key provisions, such as supplemental unemployment benefits and grants for businesses, have run out. Without additional help from Congress, the economy could lapse into a “double dip” recession in the fourth quarter.
Revenge of the zombies…
There are dangers in relying so greatly on the Fed. In buying a lot of toxic corporate debt, the Fed could be paving the way for disaster down the road. If the economy slows, it could trigger a round of debt defaults among “zombie” companies that are getting propped up by Fed largess.
Read This Story: Will The Fed’s Money-Printing Lead to Ruin?
The Fed’s balance sheet currently exceeds $7.1 trillion as the central bank buys everything from U.S. Treasurys to mortgage backed securities (see chart).
The pandemic continues to weigh on the economy and markets. Daily new confirmed coronavirus cases in the U.S. have surged 45% over the past two weeks, to a record seven-day average of 86,352, according to data compiled by Johns Hopkins University (as of this writing on Friday). Deaths also are on the rise, up 15% to an average of 846 deaths every day.
To counteract the economic damage from this public health crisis, the Fed is keeping interest rates at historically low levels. However, massive monetary stimulus is likely to rekindle inflation, which helps explain the substantial appreciation we’ve seen in gold prices.
The price of gold surged 3% to more than $1,950 per ounce on Thursday and probably has further to run. Now’s the time to increase your exposure to the Midas metal.
The rule of thumb is for a portfolio allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs), or the physical bullion itself. I prefer gold miners, which can reap exponential gains because of corporate operating leverage.
Looking for the best gold mining stock? My colleague Dr. Stephen Leeb has pinpointed an under-the-radar gold miner that shines above the rest.
Dr. Leeb is chief investment strategist of the premium trading service, The Complete Investor. Jump aboard this gold mining play now, while it still trades at bargain levels. Click here for details.
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