The Federal Reserve Chairman recently gave you the truth, the whole truth, and nothing but the truth. Just kidding. It didn’t tell you the whole truth but it did provide some transparency on the current economy. As I’ve noted at Sentry Hill in the past, I did not believe in the economic recovery. Sure, we are seeing a stock boom in large cap stocks but we are seeing a correction in the small capitalized stocks. We saw bitcoin boom and then correct, sure, it is on another run up, but that does not mean anything. Bitcoin goes to its own beat, it may correlate at times to stocks.
This is a slight digression but it is important to note that a booming stock market is not representative of a fantastic economy all the time.
That is important to think about because it seems as if there’s market euphoria, extreme market enthusiasm as more people spend, borrow, and live as if everything is totally fine. While the Federal Reserve has noted in the past that the economy is strong and robust, it noted the other day that this is certainly not the case,
Federal Reserve Chairman Jerome Powell Says that the Economy will Not Be The Same as Before the Pandemic
The Federal Reserve Chairman, Jerome Powell, noted the other day that the United States economy has been impaired by the coronavirus pandemic and that it has been “permanently changed” by this global plague event. He went on to state “we need to watch carefully as the economy continues to get through the pandemic and try to understand the ways that the economy has changed and what the implications are for our policy.”
Of course, it was not COVID-19 that impaired the economy but rather the government response to the pandemic. As it shut down the economy and as other nations followed, this affected many a great deal. In fact, the United States border crisis, and upheavals around the world show that more people are economically squeezed and are far from happy about it.
At SentryHill, we’ve noted about Colombia, Cuba, South Africa, and more countries have seen significant issues due to the government response to COVID-19.
A Shift To Technology Adoption
The Chairman noted that there has been a shift to technology adoption. This means that more jobs are shifting over to the technology world. Further, we are also seeing that more individuals will have to obtain more training and skills to transition out of their current (dying) jobs to one’s that will be more relevant over the long-term.
“You have seen a world upended, but you have also seen a world that is rapidly changing — sometimes more in one week than some of us have experienced over the course of decades.”
A shift from one sector to the other sector is not easy. It will certainly take time. One does not easily go from one sector to the next sector quickly. There are a wide variety of barriers to overcome, from experience to skill, and other factors.
The conclusion is that the Federal Reserve will continue with its loose monetary policies to support the economy.
More Intervention and Accommodation Over The Long Term
The Federal Reserve Chairman, Jerome Powell, has noted that the central bank will have to accommodate the systemic changes. This is a significant statement. It represents a shift in sentiment. It indicates that the Federal Reserve will become more integral in supporting the markets. But this is not surprising at all. The Federal Reserve stepped into the markets in a significant fashion in 2020. That is when the markets rebounded. Portions of the market continue to soar today while other portions of the market have corrected steeply.
This begs the question, does the United States not have a free market system anywhere? If the Federal Reserve is becoming more involved and is becoming critical to the markets in an unprecedented way, there is no real price discovery, and zombie companies, those firms that can not pay their interest on their debt, continue to exist.
The Federal Reserve has increased their balance sheet, has engaged in Quantitative Easing or QE, continues to engage in monetization of the debt, and repo and reverse repo operations and much more actions.
The truth is that the Federal Reserve cannot back away from its intervention, it must continue its actions or see a potential significant decline in stocks and the wealth of many people in the United States and portion of people outside of the United States.
It has stated that they want to focus on full employment, and then increased its mandate by saying that it wants to help fight inequality, climate change, and other more abstract wars. The more that it wants to help fight, the more that it will be involved and stay relevant in the markets.