If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.
– Sun Tzu, The Art of War (~5th century B.C.)
Obviously, this is not the headline that’s driving the narrative today:
Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff
But it is the one you should be focused on if you’re concerned about America’s long-term health.
Of course, Bubblevision’s politics organs are whistling with Prosecutor Mueller’s indictment and arrest of “self-described dirty trickster” Roger Stone, a cartoonish goon with ties to both Dick Nixon and the Donald.
It may or may not be a “witch hunt.” But it is absolutely a sideshow. And it serves Wall Street’s and Imperial Washington’s shared purpose.
That purpose is to extend a 40-year status quo that’s enriched the Acela Corridor at the expense of Flyover America and the Main Street economy.
The Wall Street Journal suggests this morning’s story that we’ll have to wait until next week’s meeting of the Federal Open Market Committee to see what happens.
But the “smart money” is telling you all you need to know: “Helicopter Jay” caved, and the Dow Jones Industrial Average is up 250 points at midday.
There had been some hope among saner angels that Jay Powell’s commitment to “normalization” was true.
It turns out he’s just another in a long line of Keynesian clowns who preceded him inside the Eccles Building.
“I’m very worried about it,” Powell said at The Economic Club of Washington, D.C. “From the Fed’s standpoint, we’re really looking at a business cycle length: that’s our frame of reference. The long-run fiscal non-sustainability of the U.S. federal government isn’t really something that plays into the medium term that is relevant for our policy decisions.”
This is why we insist our monetary central planners are clueless.
Have they not spent decades suppressing interest rates at all points on the yield curve?
The whole point of “Operation Twist” and “ZIRP” and “QE” and all that extraordinary stuff was to goose the housing market and business investment via cheaper debt.
It actually accomplished neither of these objectives.
It fueled a massive rally on Wall Street. And it encouraged Imperial Washington to kick the fiscal can – right into the jaws of the Baby Boom retirement wave. That’s the “long-run fiscal non-sustainability” to which Jay refers…
The $2 trillion-plus annual deficits virtually guaranteed for 2028 and beyond?
That was baked into the cake back in 2013. That’s when the Fed’s “medium term” focus led to a three-month Treasury bill rate of 0.05%, a 10-year Treasury note rate of 2.1%, and a 30-year Treasury bond rate of 3.3%.
I learned – from my own hard experience negotiating a Social Security reform package in 1983 on behalf of Ronald Reagan – that ultra-low interest rates today drive fiscal outcomes decades down the road.
Were our monetary central planners really as wise as they pretend, they’d have understood that the period between 2000 and 2020 was the very last chance to get America’s fiscal house in order.
But focus on the “medium term” handed Congress a $117 billion spending windfall confected from thin air.
And there was no surge in the Main Street economy.
Housing starts are still 30% below their year 2000 level – notwithstanding the fact that the U.S. population has grown from 281 million to 329 million in the interim.
Real net investment in productive business assets like plant, equipment, technology, and intellectual property is also punk. It was $496 billion per year in the year 2000 – and we still haven’t gotten back to that level.
“Easy money” stimulated financial engineering, doing little but feed Wall Street with buybacks and M&A deals.
Indeed, who cares about Roger Stone?
CNN should be camping out at the Eccles Building…
You’re Smarter Than That…
The crash of 2008-09 was not some “once in 500 years” economic ailment that needed to be “healed” with “extraordinary” policies like “ZIRP” and “QE.”
To the contrary, the Great Financial Crisis was an intense but standard-issue bursting of a bubble. It’s the inherent result of monetary central planning and the systematic falsification of financial asset prices.
It’s going to happen again.
But it won’t be “all at once,” nor will it be a straight line down.
But we must prepare for a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.
I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”
All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…