Before I address my so-called predictions for what I believe is in store in 2019 for the economy and stock markets, let’s take a quick review of what transpired in 2018.
GDP was up along with the economy. But was it really? With infused cash and borrowing, the economy continued its torrid pace. Borrowing from the Fed will most likely have to continue for the economy to continue roaring forwards into 2019.
With the economy ‘strong’, interest rates rose but what is the Fed’s plan?
According to John S Tobey of Forbes:
The push for more inflation began many years back. First, the Fed warned deflation was raising its ugly head and could create another recession. Next, when the deflation fear was no longer operative, they said economic growth was slow because inflation was too low. Now, with growth up and inflation around the 2% target, that argument is moot, so the Fed has a new fear: the next economic downturn can only be countered by higher interest rates from which the Fed can lower more dramatically. Getting to higher rates, the economists argue, means higher inflation is needed. The Fed believes we should welcome their efforts to boost inflation so that the market-determined interest rate will rise higher, thereby allowing the Fed to step in and cut the market rate a lot (versus a little). That idea is worse than silly – it is economists attempting to construct their latest, idealistic vision of how the U.S. economy and financial markets should operate.
The one thing we do know from history is that the Fed will fail, and we will be the worse off for it. Economic history is littered with economist-instigated damage. Much of it was well intentioned, but flawed – usually by looking backwards, fearing the last problem and relying too much on ivory tower thinking.
So, will the Fed back down?
Probably not. The Fed self-touts its lengthy low interest rate policy as a success. Without opposition to that view, the Fed has the support and independence for carrying out this higher inflation strategy.
As investors, we may well be reentering the bad-ol’ days of the 1970s of big deficits, big debt, higher-than-desired inflation and… yes, higher than desired interest rates. The lesson from that time underscores the significant risk of having the Fed pursue higher inflation. By the late 1970s, the inflation engine was running so fast and the effects were so widespread that the then-current Fed could do nothing about it. It took Ronald Reagan’s new fiscal policies and the drastic steps of his new Fed Chairman, Paul Volker, to bring inflation under control. However, prior to mid-1982, when the stock market jumped as it saw success around the corner, the first 18 months into Reagan’s initial term were mighty uncertain and unhappy days.
What could this mean? I was about 10 years old in the late 1970’s and I remember my dad saying gold is predicted to go to US$2000/ounce – it was trading around US$800/ounce and already had a huge rise due to double digit inflation and interest rates. Families couldn’t afford their mortgages and many had to declare bankruptcy.
The economy could mimic that of the late 1970’s (as fashion already has), gold could be the real benefactor (more on gold to follow).
Continuing on the theme of what transpired in 2018, North Korea seemed to come along but for how long – just to be replaced by a trade war with China.
Poverty has seemed to rise witnessed first-hand by the increasing numbers of the homeless my charity feeds.
Once wealthy countries like Venezuela are quickly becoming third world countries.
Esports and cannabis were ascending while bitcoin and other cryptocurrencies lost its luster.
The markets were bipolar – especially the last month of the year.
So what does 2019 hold in store?
Note that these are my predictions – do your own due diligence.
I believe the markets will experience false rallies in the first half of the year. The price of oil will most decline. Then the increase in interest rates may take hold and the markets may likely begin its ‘real’ down turn. My loyal followers know that I have been calling for an economic downturn from late 2019 into 2020 and beyond. When I predict an economic and stock market downturn, I am not referring to a mild collapse.
So what sectors may benefit in an economic crisis? Firstly, precious metals. This may be time for gold and silver to finally shine. Could we finally see a breakthrough past $2000/ounce? We may very well before the economic crisis is over.
As well, generally during economic collapses, individuals consume more alcohol and gamble more. With the legalization of cannabis in Canada and some States, cannabis consumption may increase and related stocks may continue to outperform.
I am preparing by taking advantage of any swings in the market and diversifying more into precious metals. Let the bratty kids believe that cryptocurrencies will rule the world. I’ll keep on the gold train all the way to the bank.
Dr. Kal Kotecha
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