Gold surged back above the 1250 level, as rising political uncertainty threaten to completely derail President Trump’s economic agenda. Stocks are under pressure today as investors retreat from risk assets in favor of safe-havens, such as gold.
“If special prosecutors are hired or there is more talk about obstruction of justice being an impeachable offense, one can kiss the tax plan, health care plan, and fiscal stimulus plan goodbye for 2017,” said Andy Brenner, of National Alliance Securities in a note reported on by CNBC. One might then argue that all of the post-election gains in the stock market are vulnerable to retracement. That would be about a 13% retreat from present levels.
The dollar index has already retraced nearly all of its gains since November. Without a fiscal boost, the U.S. economy is likely to remain mired its current slow growth mode and could conceivably tip into a long overdue recession. That in turn could prompt the Fed to reevaluate the gradual tightening of monetary policy.
Since WWII, recessions have occurred about every six-years. It has been about eight-years since the Great Recession ended. We’re due.
If a recession does indeed occur, the central bank only has 100 bps of clearance above the zero-bound. At Jackson Hole last year, Janet Yellen acknowledged that that the Fed responded to the last nine recessions by cutting the federal funds rate “by amounts ranging from about 3 percentage points to more than 10 percentage points.”
Even the minimum would take Fed funds deep into negative territory! And with the Fed’s balance sheet already in excess of $4 trillion, would they dare to start buying assets again?
My guess is that both negative rates and more QE would have to be considered because they are the only tools available. However, the long-term consequences could be dire.
Gold remains the preferred safe-haven in such scenarios. While the yellow metal has regained considerable ground this week, it remains arguably undervalued relative to the degree of economic, political and geopolitical uncertainty.