If the only tool you have is a hammer, every problem has to be a nail.
For the Federal Reserve, that hammer is fiscal stimulus. And recently, they’ve been swinging it with reckless abandon.
The consensus among policymakers at the Fed is that if they pump enough monetary lubricant into the global economic engine, it will continue to run as intended, COVID be damned.
But the problem goes far beyond the pandemic. The global economy’s delicate nature directly arises from decades of highly accommodative fiscal policies.
Sooner or later, the other shoe is going to drop – and you and your portfolio should be ready when it does.
A Long History of Risky Policies
Despite their short-term balming influence, the actions of global central banks inadvertently give rise to further economic problems further down the road.
This is a lesson we’ve learned time and again.
Take the Dot Com bubble, the first major economic bubble of the new millennium. In the early 1990’s, economic crisis in Japan saw the Federal Reserve flood the market with excess liquidity to keep the Japanese Yen strong.
Following the Dot Com Crash and the September 11th terrorist attacks, Fed Chair Alan Greenspan kept rates low throughout the early 2000s. Greenspan openly encouraged home buyers to opt for variable interest rates, which often saved tens of thousands of upfront costs.
A series of community reinvestment acts pushed lenders to extend home buying credit to uncreditworthy individuals. Cascading defaults emerged as the Fed began to raise rates. The hardest hit were the urban poor, who opted for variable interest rate loans — yet another damaging blow.
A fiscal response amounting to $1.2 trillion in government spending eventually got the economy back on track, bailing out unscrupulous banks in the process.
The stock market slowly recovered, ultimately giving rise to the longest equity bull market in history. By 2018, unemployment had slowly declined to previous lows.
In the eyes of many policymakers and economists, they had finally found the correct fiscal weaponry in the wake of the great financial crisis. Believers in the policymakers’ battle plan doubled down.
Equally problematic, the Federal Reserve’s balance sheet continued to grow, demonstrating a continuous stream of toxic assets migrating to the central bank balance sheet.
Despite a roaring equity bull market, the repercussions of loose fiscal policies coiled up like a spring. It was increasingly clear that even small macroeconomic irregularities required an outsized fiscal response to mitigate.
Unfortunately for everyone, the global economy’s next Black Swan was far more impactful than expected.
Behind Door Number 2020
The global Covid-19 pandemic threw the global economy into unprecedented disarray. In response, central banks quickly fired off round after round of record-breaking fiscal stimulus and market intervention to offset the economic fallout.
A firehose of over $10 trillion, a near-zero Federal Funds rate and direct stimulus checks to citizens saw policymakers pulling out all the stops to lessen the damage.
By this point, you’ve likely noticed a disturbing trend: each subsequent round of intervention by central banks requires significantly greater firepower than previous rounds.
This trend should worry anyone that participates in the global economy. Government debt is quickly losing its effectiveness in offsetting market downturns.
In 1966 every dollar of government debt generated roughly 90 cents in real economic activity. Today, that same dollar of government debt generates a mere 20 cents of value in the real economy.
Conversely, Main Street can’t save for retirement with ultra-low rates — they need some coupons to survive. This dichotomy, in which Main Street seeks ever-riskier investments to secure sufficient returns, further drives up asset prices, pushing the Fed into a corner.
For these reasons, even the Congressional Budget Office admits that Federal spending will continue to increase, likely amounting to 200% GDP by 2050. That parabolic increase signifies a worrisome end-game by central banks.
Rather than forego old methods in spite of diminishing returns, the Federal Reserve and other institutions have implicitly suggested their intent to run full-speed into financial oblivion. The show must go on.
No Silver Bullets Will Stop Economic Downturn! Protect Yourself With Real Assets.
But where does this leave you, the investor? If the Fed’s trillions of dollars in QE policies can’t keep markets propped up, what can?
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The answer is clear: real assets
Naturally scarce, real assets represent a grounding force in a disillusioned macroeconomic environment.
The inability of central banks to print physical assets serves as a stark historical lesson that we’ve witnessed several times in recent history. Even in places like Weimar Germany and present-day Venezuela, durable assets have held their value by orders of magnitude more than equities, bonds, or currency.
The Ultimate Hedge
Enter farmland, the most dynamic portfolio hedge available from the durable goods family. As the original durable good, land as an asset class is both scarce and productive.
The underlying value of land continues to increase globally. At the same time, the productive capacity of farmland offers investors variable yield via commodities. It is for that reason that people often refer to farmland as “gold with a coupon.”
Farmfolio’s Rio Alto farm. Click here to learn more.
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Like nature, markets will seek equilibrium, and the battle between policymakers and gravity isn’t likely to end well. Investors are well-advised to consider hedging their portfolio early with durable goods that offer a reasonable return.
The public and policymakers are collectively making a huge mistake by believing massive barrages of fiscal ammunition will solve an underproductive and deeply debt-imbalanced economy.
Recent economic events are not signs of a real recovery, and government injections continue to deliver diminishing returns. Currency values continue to decline just as assets of all types climb to ridiculous valuations.
While the future remains uncertain, the global economy will always require the raw producer inputs necessary to manufacture downstream products, such as commodities and farmland.
Policymakers will likely never find the magic bullet to defeat the economic beast of their own creation. But you don’t have to suffer for the mistakes of the bankers – learn how you can hedge your portfolio with farmland today.