The Federal Reserve has acted too late to cut rates and prevent a recession, signalling that the US economy is heading toward a downturn, according to economist Steve Hanke, professor of applied economics at Johns Hopkins University.
Hanke said that the US money supply has been shrinking since July 2022, marking only the fourth such contraction in the nation’s history. The decline mirrored previous instances that were followed by recessions, including the downturns of 1920–21, 1937–38, 1948–49, and most notably, the Great Depression, he said
“We need to look at the money supply, which has only contracted four times historically in the United States, and they’ve all led to economic downturns. One was the Great Depression, and the other three were recessions. So, recession is now baked into the cake,” Hanke said.
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“People focus on interest rates, but they are, in a way, kind of a secondary factor. The primary factor that moves the markets is changes in the money supply, which precede economic changes,” he added.
As the Federal Open Market Committee (FOMC) meeting approaches later on Wednesday, the CME FedWatch tool shows that traders are anticipating a 67% chance of a 50-basis-point rate cut and a 33% chance of a 25-basis-point reduction. Should the US central bank decide to lower rates at this meeting, it would mark the first rate cut in four years.
US Treasuries and gold as safe havens
Hanke cautioned investors to avoid risk assets such as stocks and equities, instead recommending US Treasuries and gold (GC=F) as safer investments.
He argued that equities and stocks were overpriced and would likely suffer as the economy heads into a potential recession.
“For some months now, I’ve been recommending the 10-year US Treasury bond. I started doing that when the yield was 4.8%, and now it’s down to about 3.7%. Not only are you getting a good yield, but you’ve had a big capital gain,” Hanke said.
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Interest rates follow inflation, and as inflation goes down, bond yields decrease as well, leading to capital gains for bondholders. “The yield on bonds is higher than the yield on stocks, which is another indicator that stocks are overpriced,” Hanke said.
He also expressed confidence in the future of gold as a stable investment. “Gold has been making new highs, and I think the gold bull market will continue. That’s a pretty safe bet,” he noted.
Hanke, who previously led the Toronto Trust Argentina — the world’s best-performing fund in 1995 — added that bitcoin (BTC-USD) could face heightened volatility in the coming months, particularly in the lead-up to the US presidential election on 5 November.
“Bitcoin is a risk-over-the-moon asset. It’s almost off the charts in terms of risk,” he said, categorising it as highly speculative. For those looking to reduce risk, Hanke advised against adding bitcoin to their portfolios.
The impact of the US presidential election
As the 2024 US presidential election approaches, Hanke voiced concerns about the economic policies of both candidates, Donald Trump and Kamala Harris.
Hanke criticized Harris for advocating policies he believes would lead to increased government control and reckless spending, including her proposals for tax credits for small businesses and $25,000 in housing assistance.
Similarly, Hanke was sharply critical of Trump, particularly his protectionist stance. “What is he talking about? Protectionism, this is bad news,” Hanke said, highlighting the potential economic damage that such isolationist policies could inflict on the already fragile US economy.
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