The US government might not be able to save the financial system from blowing up during the next crisis.
Casey readers know that the US government fought the 2008 financial crisis with the biggest monetary stimulus in world history. It “printed” more than $3 trillion dollars. It cut interest rates to near zero. It bailed out dozens of huge companies by giving them loans.
This helped the financial system survive. But it also created huge unintended consequences… like the illusion that the government can save us from any crisis, no matter how big. This false confidence is a big reason why US stocks and bonds have gone on to new record highs.
The Wall Street Journal thinks the US government won’t have the “ammo” to rescue the financial system next time:
The Federal Reserve will have fewer monetary weapons in the next recession. It has less room to cut rates, and its swollen portfolio will make it harder to launch new rounds of bond buying.
The federal debt load, meanwhile, along with political rancor over deficits could dull the government’s capacity to stimulate the economy with tax cuts or spending.
• The US government has three main “tools” for pumping cash into the economy to fight a crisis…
One, it can lower interest rates. This makes it cheaper to borrow money.
But the Federal Reserve cut rates to near zero in 2008, and it hasn’t raised them since. So there’s almost no room to cut rates in the next crisis.
Two, it can cut taxes. This puts more cash in the hands of Americans and businesses.
But the government is in no position to cut taxes. It already spends about half a trillion more than it takes in. And it owes lenders $18 trillion… a number that doesn’t even include programs like Social Security, Medicare, and Medicaid. Economists estimate these programs will cost at least $100 trillion. Doug Casey thinks the total cost is closer to $200 trillion.
Three, it can “print” money, or what many call quantitative easing (QE). This is when the Fed pumps money into the economy by buying bonds from the private sector.
The Wall Street Journal explains why the Fed won’t be able to easily print money during the next crisis.
The next downturn could further expand Fed bond holdings, but with the central bank’s balance sheet already exceeding $4 trillion, there are limits to how much more the Fed can buy.
• We agree that the government will “use up” its traditional tools early in the next crisis…
But we don’t think the government will stop there.
In the last crisis, the government proved it would do anything to keep the financial system together. After it uses up its traditional tools, it will likely create new, more dangerous, ones.
It might find a new way to print money. It might make interest rates negative to force Americans to spend instead of save.
We can’t know exactly. But whatever it does, it will likely involve creating trillions of dollars. This is one big reason why we recommend owning physical gold, the only “currency” that governments can’t make less valuable.
• A master macro investor agrees with us…
Raoul Pal is one of the world’s leading “big picture” investors. He used to run a big hedge fund, but he made so much money that he retired from money managing at the age of 36.
Pal thinks governments and central banks are arrogant to think they can solve any problem by printing and borrowing money. He thinks their arrogance will eventually cause “the biggest banking crisis in world history.”
In a recent interview, Pal said:
They now think that they are omnipotent, because, essentially the government has said we are going to pass over all control of the economy to the central banks, they say to everybody else including financial market participants that “you don’t know, you don’t understand, we have our models and they are right”. And that kind of hubristic approach is when you sow the seeds of your own destruction.
The central bankers do not listen to financial markets. They are not listening to all of us… [We want] to get across to people “look, this is not a good situation. The answer to more leverage cannot be more leverage”.
And yet this is what we are doing. You know, at risk here is the whole fallacy of central banking.
Pal will explain how you can protect yourself and profit from the next crisis at our 2015 Casey Research Summit. Doug Casey, Marc Faber, James Altucher, and more than a dozen other investing all-stars will be there.
The summit is October 16-18 at the five-star Loews Ventana Canyon Resort in Tucson, Arizona. We hope you can join us. Click here for more information on the 2015 Casey Research Summit.
• Switching gears, the world’s largest retailer announced bad earnings…
On Tuesday, Wal-Mart announced that profits dropped 11% last quarter. Sales barely grew, and management cut its full-year profit forecast by 7%.
Management said that higher wages were a big reason why profits dropped. The company has given raises to hundreds of thousands of employees this year. It’s costing more than expected, as Bloomberg reports:
Wal-Mart announced plans in February to raise wages to at least $9 an hour this year and $10 by 2016, along with a related effort to improve training and bolster hours. The move will reduce profit by 24 cents a share, Wal-Mart said on Tuesday. That includes an 8-cent hit in the fiscal third quarter, which runs through October. Wal-Mart had previously said the effort would cost 20 cents this year.
Wal-Mart’s stock dropped 3.1% to a yearly low. It’s now down 21% in 2015, while the S&P 500 has risen 1%.
Many investors are worried that Wal-Mart is in a long-term decline because it can’t compete with online shopping. We don’t know exactly how much online shopping will eat into Wal-Mart’s business in the long term. But we do know that it’s still the most dominant retailer in the world…and that it still makes a lot of money.
Wal-Mart made $17 billion in 2012, $16 billion in 2013, and $16.4 billion in 2014.
It gives a good portion of those profits to investors, too. Wal-Mart pays a 2.9% dividend, significantly more than the market’s average dividend yield of 2.0%. And after dropping 21% this year, Wal-Mart is on sale. Its price-to-earnings ratio (a common measure of a stock’s value) is just 14. That’s significantly cheaper than its five-year average of 18, and cheaper than the stock market’s average PE ratio of about 19.
There are worse places to put your money than in Wal-Mart stock right now. It won’t give you a quick 500% gain in a couple months like one of Louis James’ top gold stocks might. But Wal-Mart is a mature, dominant, steadily growing company. It’s the kind of stock you can buy for a good price, set a 20% trailing stop-loss on, and forget about while you collect dividends for years.
Chart of the Day
Today’s chart compares two huge, but very different, retailers.
We explained earlier that Wal-Mart is the most dominant retailer in the world. Amazon is a dominant retailer too. But unlike Wal-Mart, it only sells things online. It doesn’t own a single store.
Wal-Mart is a mature company generating lots of profits and cash. Amazon is a younger company, and barely makes any profits.
Despite this, the market thinks Amazon is worth more than Wal-Mart. As you can see, Amazon’s “market cap” (its stock price multiplied by its number of shares in the market) is slightly higher than Wal-Mart’s.
However, Wal-Mart made $3.3 billion in profits last quarter… more than 35 times Amazon’s $92 million profit.
Delray Beach, Florida
August 19, 2015
We want to hear from you.
If you have a question or comment, please send it to [email protected]. We read every email that comes in, and we'll publish comments, questions, and answers that we think other readers will find useful.