Monetary equilibrium out the door as markets soar

Almost every market, U.S. stocks, bonds, oil, and even gold, soared last week after the Federal Reserve suggested a rate cut next month and the European Central Bank announced that they would resume their bond-buying program. The market’s reaction spells the end of normal market principals, where asset classes are supposed to perform out of unison and independently from each other. What we’ve seen describes a new reality as almost every asset class moved higher in unison. This challenges the long-held practice of diversifying a portfolio as a risk reduction tool in the event of a correction. So, what does this mean for the future of monetary policy and how should you manage risk going forward?

Since the 2008 Financial Crisis, global governments initiated stimulus programs such as cutting interest rates and buying securities in large quantities. After more than ten years of this program, no real inflation has been created, only the amazing skyrocketing of U.S. stocks. The U.S. debt balance is reaching $22t and no current plan for paying it down. Any rate increase means higher payments on that debt and slower growth from a stronger dollar. “Looking ahead, conditions reflect a Goldilocks environment with dovish central banks, continued growth, and muted inflation.”^1

Monetary policy as we know it is under huge threat. The never-ending practice of ultra-low rates rewards investors to take a risk and invest, promotes the reinvestment of corpororate stock, and removes the Fed’s ability to help in a future crisis. If rates are already so low, what tools are left when another crisis hits? Libra, the new cryptocurrency created by Facebook and other corporations, could mean the end of a central bank’s main function, the control of the supply of currency.

The ongoing risk management of investments must be more than diversifying across asset classes. A technical approach means understanding risk as illustrated on a chart and when to reduce or overweight a certain investment; it might be the best approach for risk management going forward.

At Eureka Wealth Management, I offer my clients a technical approach to investing and discuss market risk as others may not see them. I also do retirement analysis, insurance, and tax & estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.

Sources

^1 FT 6/22/19: “Stock funds attract soaring inflows on helps of central banks will cut rates soon”