The Federal Reserve and the banking system now see no alternative to perpetuating the extraordinary valuation of financial assets relative to GDP, shown in the chart above. However, the system also constantly drains wealth from the many to the few. Consequentially, the household value of financial assets matters only to an ever declining percentage of the population.
David Stockman explains how this system has “generated a dangerous and ever widening disconnect between the real main street economy and the nominal value of assets in the financial system.”
Once again, as has been the pattern for 6 years now, the Federal Reserve’s interest rate forecasts have had to be slashed. This time by up to 100bp from what they were just 6 months ago. Once again the Federal Reserve realizes that the risks of raising rates is too high, and their models have significantly overestimated real growth in the economy.
Has the Federal Reserve cornered itself in an ever repeating loop of failing economic optimism with ever diminishing returns from its now oxymoronic “perpetual extraordinary” policies?
Understanding this dynamic has become crucial in shaping appropriate investment strategy, and requires creative and dynamic solutions.