Sometimes I’m reminded of the last financial crisis. A trends forecaster named Gerald Celente warned in 2008 that by Christmas of that year, we wouldn’t recognize America. He was predicting near total collapse. I was a sergeant in Baghdad at the time, working in the ACE, and I remember feeling quite afraid of what was going on back home. I Google’d Gerald Celente everyday to see his latest appearance in the media. Christmas 2008 came and went, and Celente was still predicting collapse. In fact, I’m not sure that he ever stopped.
That’s like another guy — a guy I actually like and respect — named Jim Rogers. Like me, Jim Rogers grew up in Alabama. Before I’d read any of his books or watched dozens of his interviews, that was the first thing I really liked about him. Then I read Hot Commodities, A Bull in China, and several other of his best-selling books and realized that he was a very smart man when it came to investing and finance. But Jim Rogers became another ‘canary in the coal mine’, predicting a stock market crash and economic collapse every year since at least 2012. It was like clockwork: the current year was always going to be the worst financial disaster in history. Rogers still appears on CNBC and Asian financial shows and, as far as I know, is still calling for doom and gloom.
Well, eventually, these guys are going to be correct.
Today the Dow shed 1,600 points before rebounding to just below a five percent drop. They’re calling it the largest single-day drop in history. Meanwhile, the S&P 500 broke below its 50-day moving average, which is a significant barrier to break.
Is this a healthy correction or the start of something else?
As an intelligence analyst focused on national security, domestic instability, and systems disruption, today’s drop is somewhat concerning to me.
Part of the story is that computer algorithms were to blame for today’s sell-off. Once the Dow Jones index broke below a certain point, lots of computers started to sell, which caused other computers to automatically begin selling.
But the other part — the part that sparked the sell-off last week — was data pointing to a sharp increase in interest rates.
Since the 1990s, and accelerating during the 2008 financial crisis, the Federal Reserve had a policy called Quantitative Easing. Simply put, the Fed was injecting trillions of dollars into the economy to provide liquidity and try to spur economic growth. That may have saved us from the 2008 financial crisis, but it’s only dug us a deeper hole for the future because now the Fed is trying to unwind all that cash, which means liquidity is being taken out of the economy.
We know that despite the economic optimism of today, the fundamentals are not beneficial to the country in the long term. When famed investor Ray Dalio — head of the world’s largest and most successful hedge fund — talks about an economic downturn as a result of bad monetary policy, I listen. Here’s what he had to say at Davos a couple weeks ago:
“[W]hat I’m concerned about is what would the next downturn be like? I’m not worried about an immediate downturn. But I would say if we were to look two years forward, okay, probably right before the next presidential election, there is a good chance that you will have a downturn and if you have a downturn for that segment, I’m worried about how we will be with each other in that element of cohesiveness. I mean, basically the formula for having problems, social with political problems, is have a difference between, a lot of difference between rich and poor people…”
We’ve lived with the Jim Rogerses and Peter Schiffs and Marc Fabers and Jim Rickardses, who for years have been predicting financial catastrophe. We can’t say for certain that last week’s sell-off and today’s rout is the beginning of a serious financial catastrophe, but we can say that it’s likely on the horizon.
As interest rates rise, borrowing becomes more expensive and this economy that’s largely been built on loose monetary policy — especially since 2008 — is going to be tested. My concern aligns with Ray Dalio’s: at some point in the next several years, we’re very likely to have a recession. And due to this deep whole the Fed has dug for us monetarily, the next recession is likely to be worse than 2008.
Consider that the Fed historically has to cut interest rates by three percent to spur economic growth during a recession. Today, the federal funds rate is just above 1.4 percent. So what is the Federal Reserve trying to do? Raise interest rates back to three percent so they have something to cut when the next recession hits. This could absolutely turn out to be a no-win race because raising interest rates too quickly means more days like today and potentially an economic slowdown. Not raising interest rates enough means the Fed’s doctrine of rate cuts will not be enough to spur growth out of a recession. The consequences of the Fed’s bad monetary policy is going to cause a lot of pain (again) in the United States.
It’s not time to batten down the hatches just yet, but if you’re not already, then it’s time to get serious about building resiliency and planning for community security. You’ll be in good company if you do.