- David Morgan, author of "The Morgan Report," likens the financial system to "basically one mass manipulation at this point in time."
- Morgan blames the actions of Federal Reserve for frothy markets and thinks their utility will ultimately be mitigated moving forward.
- Morgan's assessment of the Federal Reserve's policies are similar to that of Ray Dalio, the founder and cochief investment officer of Bridgewater Associates.
- He also warns of frothy valuations within the market and a 'likely' downturn.
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"I'm looking at the big picture — the failure of the economic system as we know it. Or probably, more precisely, the Fed or monetary system as we know it."
That's what David Morgan, the author of "The Morgan Report," said on Palisade Radio in reference to his current macroeconomic outlook.
For context, here's a look at what the Federal Reserve has been up to since mid-March:
- Cut interest rates to zero
- Announced unlimited quantitative easing
- Started purchasing corporate bonds
- Announced an initiative to buy state and local bonds
As a result, he Fed's balance sheet has expanded by about $2.8 trillion — and to Morgan, that's cause for concern.
In Morgan's mind, the Federal Reserve's effectiveness will be muted moving forward. To him, the central bank is out of levers to pull. What's more, he thinks that any further intervention will do more harm than good.
Allow him to explain.
"All this money-printing from this point forward is only going to exacerbate the problem, make it worse, and cause the failure to basically accelerate," he said. "We've already printed all the money that's worked up until this point. And now, from this point forward, no amount of money-printing is going to help at all."
Morgan's assessment of the landscape is similar to that of Ray Dalio, the founder and cochief investment officer of Bridgewater Associates. For years, Dalio has spoken about the Fed's inability to print problems away.
Here's how Dalio described the Fed's conundrum in August of 2019. He labels the different approaches the Fed could enact — Monetary Policy 1, 2, and 3 — and explains the difficulties within each.
- "Monetary Policy 1 (i.e., the ability to lower interest rates) doesn't work effectively because interest rates get so low that lowering them enough to stimulate growth doesn't work well.
- "Monetary Policy 2 (i.e., printing money and buying financial assets) doesn't work well because that doesn't produce adequate credit in the real economy (as distinct from credit growth to leverage up investment assets), so there is 'pushing on a string.' That creates the need for …
- "Monetary Policy 3 (large budget deficits and monetizing of them) which is problematic especially in this highly politicized and undisciplined environment."
Clearly, both Morgan and Dalio think the Fed's ability to combat a downturn in the future is null.
"The financial system is basically one mass manipulation at this point in time," Morgan said. "It's not aligned with reality."
To Morgan, the Fed's unprecedented maneuvers have resulted in a frothy equity market.
Earlier this week, Bank of America provided the following chart portraying the S&P 500's current valuations against historical benchmarks. Clearly, on a historical basis, stocks aren't trading cheap.
"Fundamentally, I can build a huge case around why the stock market is overvalued and why it should come down," he said. "I think it will — I still think that's a more likely case."
In addition to sky-high valuations, and a Federal Reserve that's run out of proverbial bullets, Morgan thinks that stocks won't be able to provide safety from an environment where inflation runs rampant — an idea that has been pushed to the forefront of attention in the wake of massive monetary and fiscal stimulus efforts.
"The problem with that is, one, it's better than money in the bank, but it isn't sufficient to keep you ahead of the inflationary depreciation of your currency," he said. "Even though your stock has doubled, the purchasing power of your fiat has been cut by 400%."
Morgan isn't the only one who's worried about inflation. UBS strategist, Bhanu Baweja, also expressed his concern over a decrease in purchasing power.
"Further, the inflation surge could happen quickly and with little warning," Baweja stated in a recent client note. "That inflationary outlook may be aided by additional rounds of stimulus checks, enhanced unemployment insurance benefits, tax reductions, and PPP loans that keep disposable income from falling even in the face of high unemployment."
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