Since the Fed has failed in its attempt to normalize, it's time to start considering some endgame scenarios. The Fed still has some 'ammo', although limited -
Interest rates - the interest rate 'ammo' available to the Fed (approx 2%) will be used up quickly during the next recession. Historically a 3-4% drop in interest rates is required to get out of a recession, and we only have 2% available.
Fed's balance sheet - Looking at the Fed's balance sheet available for more QE, the big question is what will be the upper limit (6, 8, 10 trillion) before confidence is lost in the dollar? Currently the balance sits at approx $4 tril.
Even a mild recession will put us at ZIRP or even NIRP, and on the Fed's balance sheet side, they can probably expand from $4 tril to $6 tril without a run on the dollar. But how much higher than that before you reach the confidence limit for the dollar?
Bottom line, we can see where this is heading (SDR bailout), and the only real question is how long? The key factors will be -
1) The severity of the next recession
2) Whether there is an associated financial crisis
With all the Derivatives out there, some type of financial crisis wouldn't be surprising once stresses start to build. Just look at the past week, where the Fed was forced to pump $275 bil into the repo market over four days.
To delay the process, all sources of instability should be minimized. So resolve the China trade war, avoid war with Iran, etc.
Meanwhile for us investors -- gold (10%), cash (30%), hard assets, Treasury notes, and for stocks mainly focus on the resource sectors (gold mining, oil, water, land, etc).
