Dividends and Trump sees Fed rather than trade war as source of market turmoil

In a search for a solution, how you identify the problem is a key. The worldwide economy is slowing, or at least many indicators or signs are showing the way. President Trump sees the problem with the slowing economy as the problem with the Fed, its rates are too high.

The President wants a cut of 1/2 % from the 1.25 to 1.5% it is now. The President believes a half percent cut would sent the Dow to over 30,000 and the world would be doing great.

In an article by Reuters, on the Fed side, the yield on the 2 year Treasury note briefly went above the yield on the 10 year Treasury note or an inversion. Yield curve inversion is a classic signal of a looming recession. The US curve has inverted before each recession in the past 50 years. It was a false signal just once in the 50 years. When the inversion happens borrowing short term is more expensive than borrowing than longer term. This means funding day to day operations is more expensive than long term plans, which makes people to slow down on economic activity, this tends to affect consumers who see layoffs. The consumer who is 2/3s of the economy slow down in their buying and the economy slows and recession arrives.

In the Global trade world, the flows have slowed lead by Germany whose economy depends on exports. The economy went into negative during the second quarter. China’s industrial output has slowed down.

Last September, the US central bank had a rosy outlook for the economy, expecting the stimulus from the Trump administration massive $1.5 trillion tax cut package would sustain growth and justify higher interest rates. The stimulus faded faster than expected and cuts are likely. Most of the tax cuts went to companies paying higher dividends or buying back stock which helped the stock market but not necessarily the economy as a whole.

Linking to dividend paying stocks, how you define the problems is the way the solution will end up. If President Trump does not see tariffs are causing slowdowns in the world economy, he can go after the Fed but with rates so low will an small lowering affect consumers who will not see anything on their credit cards going lower? The way you see the problems will mean which stocks should you buy or sell or increase cash?

There are more questions than answers, till the next time – to raising questions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s