Joe Withrow, Author at Zenconomics

The Fed and Warring Factions

It’s a big club and you ain’t in it.

The late great comedian George Carlin loved spitting this quote in his skits. He would talk about how the political power structure and the media always seem to march to the same beat… regardless of which political party happened to be in power.

What Carlin was talking about is often called the Deep State today. It refers to what appears to be a shadowy coalition of people behind the scenes who drive government policy.

Donald Trump catapulted Deep State into popular vernacular. But to be fair, Bill Bonner was using the term years ahead of Trump. Let’s give credit where it’s due.

But the question is… does this view of the power structure explain the macroeconomic events we are seeing play out today?

To be sure, the Deep State view can explain why nothing much seems to change regardless of which political party is in power. But it cannot explain the break between the Federal Reserve (the Fed) and the international power structure—the globalists.

As we discussed yesterday, the Fed coordinated monetary policy with the world’s central banks in the wake of the 2008 financial crisis. It certainly looked like there was a big club at work.

But the globalists did not want the Fed to raise interest rates aggressively last year. The Fed powered forward anyway… and fired the first shot in what’s become a secret financial war.

Powell closed the door on the globalists

Jerome Powell wasn’t having it.

“Just close the &#%!@?! door”, he instructed his security team as they rushed him off the stage.

Powell was speaking at the International Monetary Fund’s (IMF’s) annual research conference in Washington, D.C. last week. The event lasted two days – last Thursday and Friday. Powell’s speech was the headliner.

The Fed Chair took the stage to talk about the Federal Reserve’s (the Fed’s) outlook on inflation, interest rates, and the US economy. But about a minute into his talk, a group of “climate activists” rushed the stage to heckle him.

They shouted angrily about “fossil finance” and held up a big sign in front of the audience and the cameras. It read, “Business As Usual Is a Climate Disaster”.

Of course, the media dismissed it as a random event. It’s just those feisty climate activists wanting to be heard.

But let’s think about this for a minute…

America is at a crossroads…

For the last two generations, the success plan was clear.

Go to school —> get good grades —> go to college —> get a good job. If you followed that plan and had a good work ethic, a successful middle-class lifestyle would come easy to you.

And for those more ambitious, there were very few roadblocks to starting a business. Opportunity was everywhere.

That was the American dream. It’s what inspired countless immigrants to leave their homeland to create a new life in this country.

But that dream is fading.

The traditional success plan – go to school, get good grades, get a job – it no longer guarantees success. Colleges today load students up with debt and fill their heads with all kinds of useless claptrap.

Meanwhile, the Administrative State peppers small businesses with all kinds of regulatory burdens. Those small business success stories from a generation ago would be hard-pressed to recreate the same success if they had to start today.

And to top it off, reckless government spending has driven up everybody’s cost of living dramatically in recent decades. They finance this spending with printed money, and that creates consumer price inflation. It’s wiping out the middle class.

And that’s not just an opinion. It’s all in the data. Today I’ve got two tables for you that spell it all out, clear as day.

Gold Never Left

Gold served as base money for thousands of years prior to 1933.

In other words, gold served as the foundation of our monetary system. It was the monetary reserve upon which the financial system operated. Even when gold coins were not used to settle transactions in the private sector, the banks would redeem the paper currency in circulation for gold upon demand.

That all stopped in 1933. That’s when the United States and other countries transitioned to fiat currency not redeemable for gold. By the way, the word fiat is Latin for “let it be done”.

This transition paved the way for The Age of Paper Wealth. It lasted forty years from 1982 to 2022. During that time the world’s central banks created trillions of dollars out of thin air to drive interest rates down and stock prices up.

But that era is over now. The Fed’s aggressive rate-hiking campaign last year marked the end of it.

So if The Age of Paper Wealth is over… what do we think that means for gold going forward?

I think it’s wildly bullish.

We aren’t going back to the days of using gold as base money. But we can’t ignore the fact that the US government still owns 8,133.5 tons of gold. That’s worth over half a trillion dollars at current prices.

And official records suggest that the world’s central banks hold 26,866.5 tons of gold. That’s worth over $1.7 trillion today.

These numbers aren’t large in the big scheme of things with gold priced around $2,000 an ounce. But they could become significant if the price of gold roared higher.

This shows that the world’s central banks never abandoned gold… even as they worked hard to convince people that gold was a “barbarous relic”, as famed economist John Maynard Keynes put it.

Why is that?

What the “normies” are missing…

The world as we know it changed last year.

From 1982 to 2022, the Federal Reserve (the Fed) created over $8 trillion from nothing to flood the financial system with liquidity. This drove interest rates consistently lower while pushing stock prices higher for forty years.

Nobody under the age of 60 has known anything else in their adult life.

In that era, stock prices tended to move in tandem. When an index like the S&P 500 or the Nasdaq was going up, most stocks in that index would go up also.

So being in the best stocks wasn’t as important as just being in the market. Nearly 1,000 “passive investing” exchange traded funds (ETFs) formed since 2008 to capitalize on this dynamic.

But the game’s over. This chart paints the picture:

The Secret of Energy Royalties

Crude oil prices are going back to $100 and then $120 per barrel.

That’s what the portfolio manager of Smead Capital Management told Bloomberg recently. And I think he’s right.

It’s easy to forget that oil hit a 10-year high above $130 a barrel back in March of last year. But economic weakness and recession fears helped walk oil back down from that high.

And then the US government jumped in.

The Biden administration drained the Strategic Petroleum Reserve (SPR) to dump 180 million barrels of oil on the market. This was the largest SPR release in history.

The SPR is simply the US government’s emergency stockpile of crude oil. Congress established it back in 1975 in response to the Arab Oil Embargo which led to shortages across the US.

The current administration drained the SPR to push the price of oil lower. They got it back down into the $70s and $80s. That’s where oil’s traded for most of the year.

But here’s the thing… the rubber band always snaps back. When you push something in a direction it wouldn’t otherwise go in, sooner or later it’s going to come back.

And that’s especially true of oil when you have wars in Eastern Europe and in the Levant… and you have crazy people trying their darndest to escalate those wars into something bigger.

Meanwhile, the Environmental, Social, Governance (ESG) movement shifted nearly $2.2 trillion in investment into renewable energy development. All in just the last seven years.

Your only two choices

You have two choices when it comes to investing. You can own currency. Or you can own energy.

If you don’t trust the currency, you better own energy. But how you choose to own that energy is what will determine your success or failure in the markets.

This old-world wisdom comes from an investing legend. I chatted with this gentleman at an investment mastermind back in the summer… and I think we arrived at a fundamental truth.

Energy is the master economic resource.

Think about it… nothing happens without energy. Everything we see in our modern world today – and everything we use on a daily basis – is only possible because of energy.

It’s a simple thing. But if we truly ponder it, it changes our perspective.

My investment philosophy is this: I want to own energy in the most advantageous way I can. If we start there, all we need to do is figure out what form that energy should take.

The Fed’s Best Friend

The Federal Reserve and other central banks risk pushing the global economy into recession followed by prolonged stagnation if they keep raising interest rates.

The United Nations (UN) issued that statement in a report published on October 3, 2022.

The Federal Reserve (the Fed) had already raised its target interest rate five times by then, starting in March. Those hikes pushed the Federal Funds Rate – the rate at which banks lend to each other – from 0.25% to 3.25%.

So the Fed pushed its target rate 13 times higher in the span of less than seven months.

The UN publicly stated that this was an “imprudent gamble”. And many investors joined the chorus. They cursed the Fed up and down because these moves caused the S&P 500 to plunge 15.6%. Many individual stocks fell even harder.

The wailing and gnashing of teeth came from all directions. Except one.

The Fed’s bold moves had one industry smiling profusely. But nobody noticed… because nobody had paid much attention to this industry for years.

Well, it’s time to take notice. This one industry will benefit from the Fed’s rate hikes more than any other.

It’s time

It’s time.

If we want to secure our finances and live a comfortable lifestyle, it’s time to bulletproof our money. We can’t put it off any longer.

As we’ve been discussing, the Age of Paper Wealth is over.

From 1982 to 2022 interest rates always went down and stocks always went up. That made investing easy. All you had to do was buy some growth stocks and come back in five years… your account would be up.

Those days are over.

If we want to make money in the markets today, we must focus on five core investment themes. They are:

Reserve Assets
World-Class Insurance
Energy Renaissance
Gold Equities
Consumer Goods Inflation Hedges

We need to spread our money out across these five asset classes, each for a different reason. But they are complimentary. And together they will make our money bulletproof.

We’re in for a bumpy ride…

The macroeconomic front is starting to get quite complicated.

Under the surface, there’s a covert financial war raging. It pits the globalist power structure and their “Great Reset” against the New York banking faction who want to save the legacy financial system.

At the same time we have a war in Eastern Europe… and now a war in the Levant. And various factions are trying hard to escalate them into something much bigger.

And if that weren’t chaotic enough, we’re at the very beginning of a massive liquidation of all the malinvestment that’s formed since the world’s top central banks collaborated in 2008 to drop their key interest rates to zero. The economy is about to cleanse itself of the uneconomical projects and zombie companies that produce too little value to be profitable.

Put it all together and there’s only one thing we can conclude for certain. We’re in for a bumpy ride.

We can see evidence of this if we assess the most recent quarterly earnings reports from two of America’s largest banks – JP Morgan and Bank of America.

I found these reports especially interesting because JP Morgan appears to be the de facto leader of the New York banking faction. Meanwhile, Bank of America is firmly in the globalist camp. They now talk about the implementation of “stakeholder capitalism” (the Great Reset) in the bank’s annual reports.

And the way each bank presented its earnings release signals that this is a case of dueling banks. And dueling agendas.