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We're living in unusual times, and trying to predict market movements is extremely difficult, which is why this time on the Big Picture, Jim Puplava discussed what's concerning him and where we might expect to see market challenges develop in the near future.
Based on a number of metrics, we are living in interesting times. National debt has ballooned to nearly $21 trillion.
Also, the Federal Reserve's balance sheet assets are up nearly six fold since 2008, and in many parts of the world we see zero or even negative interest rates.
Fed policy seems to be out of sync with other central banks, and it's at odds with fiscal stimulus implemented at what appears to be the end of the business cycle.
"We find ourselves in a situation, quite honestly, we've never been in before," Puplava said. "We've never seen fiscal stimulus come at the end of the business cycle."
We've also seen tremendous amounts of monetary stimulus worldwide. Yet, inflation has remained subdued. Also, we've seen the lowest interest rates in recorded human history.
All of this makes this whole business cycle a little bit more unpredictable, Puplava noted.
"And yet, we've seen some of the lowest bond volatility in more than 3 decades, which is surprising," Puplava said. "The problem is, when you have this amount of debt, and you have a central bank ... raising interest rates, you are opening up yourself to a mishap somewhere."
If they continue raising rates, that's exactly what's going to happen, Puplava stated. It's no wonder the traditional business cycle isn't playing out per the old "rules."
In the past, a recession would hit, the Fed would lower interest rates, and the government would implement fiscal spending, stimulating the economy. Then, the economy would heat up, inflation would rise, and the Fed would begin raising rates.
They would keep raising rates until they broke the economy, and eventually a bear market would form. Now, however, we've seen a scenario where it's taken the Fed 4 years to raise interest rates six times. It's expected they'll go again next week.
"Throw out most rules and models of the past," Puplava said. "They aren't working. The problem is, the Fed operates under economic models, and those models are flawed. ... The Fed is very much at risk here of (hurting) this economy. It's like putting somebody on chemotherapy when they don't have an illness."
We aren't seeing rising inflation. Yes, it may increase to the 2 percent level, and maybe even 3 percent. But, Puplava asked, are we going to crash the economy because of that?
"What they're not factoring in here is what technology is doing to business," he said. "They could come out with a killer app tomorrow, and it could basically take out a business. Take a look at what AI and robotics is doing to manufacturing to bring down costs of producing goods. We're producing more goods today than we were 10 years ago, and we're doing it with fewer workers."
These forces are deflationary, and that's not factored in to many of the Fed's models. While inflation may increase, Puplava doesn't believe it will rise to the level of being dangerous.
In addition to these challenges we've already discussed, we're beginning to see signs that China's economy is slowing down, the U.S. the auto industry has likely already peaked, and we're seeing clear signs now that the housing industry is beginning to peak.
Also, there's odd activity with the yield curve. Typically when the economy heats up and the Fed begins raising interest rates, the yield curve steepens, but it has not been doing that as much this time around.
Additionally, oil prices are rising, which generally puts pressure on inflation, and we're seeing several bubbles, such as in Bitcoin and FANG stocks.
We're also living in at a time where while government deficits are getting larger, central banks are beginning to pull back.
A lot of people know the Fed needs to normalize, Puplava stated, but they're asking why the Fed is talking about mysterious inflation that hasn't shown up.
"We're dealing with a lot of uncertainty, and there was a lot of euphoria built into the market last year," Puplava said. "Is 3 percent economic growth really something the Fed wants to put a stop to?"
Ultimately, these conditions are leaving us vulnerable.
"We're at risk here due to Fed policy," Puplava said. "It's operating on flawed economic policies. They're raising rates on an economy that is over-leveraged. I don't care where you look: the government, corporate, consumer and financial sectors are all over-leveraged."
Puplava anticipates that we may be looking at a more aggressive Fed.
Right now, the market isn't paying much attention. It's widely anticipated that the Fed is going to raise rates in January. The FOMC meeting to focus on is March, when we have a new Fed chairman. What will the Fed be saying then? If they're going to go again in May, Puplava stated, they'll have hints out in March to see how the markets react.
"It's going to be interesting to see if they do that," he said. "If we start seeing in the months ahead that more Fed governors are talking about four rate hikes ... it's not going to be long before the market wakes up to this fact and says, 'Wait a minute, we have an aggressive Fed here,' and that changes the market scenario."
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