Joe Withrow, Author at Zenconomics

What to do when trust is broken…

“Your dollar is a promise, a pact of trust,” President Nixon once assured the nation. “It will hold its value, come what may.”

The date was August 15, 1971. The day the world’s financial landscape was forever altered.

Nixon had just closed the “gold window”, a system that allowed foreign countries to exchange their US dollars for physical gold. This had been a cornerstone of the global monetary system for nearly 30 years.

The essence of this system was trust. But not in the US dollar. In gold.

If the United States started to print money excessively, the rest of the world could exchange their dollars for gold. That’s what the gold window was for.

The narrative behind Nixon’s “gold shock” is complex, but the aftermath is starkly clear…

Since Nixon’s decision, the US has created over $8 trillion out of thin air. This naturally diluted the purchasing power of each circulating dollar.

This is evident in the rising consumer prices we are all grappling with today.

But there’s another, less visible story unfolding. This chart reveals the truth:

The Fed Can’t Outrun This Economic Law

As regular readers know, my thesis is simple. The Age of Paper Wealth is over. This chart tells the story:

Here we can see the S&P 500 and the 10-year Treasury rate going back to 1980. The S&P 500 is the black line. And the 10-year Treasury rate is the blue line.

We’re using the S&P 500 as a proxy for US stock prices. And we’re using the 10-year Treasury as a proxy for interest rates. This chart makes it perfectly clear that the two are inversely correlated.

Interest rates started falling in 1982, and they fell consistently for the next 40 years. Meanwhile, US stocks consistently went up in value over that same time period.

But everything reversed in 2022. Rates started going up, and stock prices started to fall. We can see those moves clearly marked by the red arrows on the chart above.

So the period from 1982 to 2022 will go down in history as the Age of Paper Wealth.

And here’s the thing—what happened from 1982 to 2022 was not normal. Nor was it organic.

Instead, it was all driven by the debasement of our money.

Why the Fed Put Is Dead

Everything’s been on a tear this year.

Bitcoin’s up about 153% year to date. The S&P 500 is up roughly 20%. And gold has gained 13%. It’s now trading at all-time highs in all currencies.

These moves all occurred as the 10-year Treasury rate rose nearly 70 basis points – from 3.53% to start the year to 4.22% today.

This doesn’t make a lot of sense according to what’s become conventional wisdom over the past few decades. The market has come to expect assets like Bitcoin, stocks, and gold to fall in value when rates rise. So what gives?

Well, there’s been a lot of speculation that the Federal Reserve (the Fed) is going to turn around and begin easing again next year. In fact, the futures market is projecting a 45% chance that Fed Chairman Jerome Powell will cut the Fed’s target interest rate at his March 2024 meeting.

It’s not going to happen.

Clearly a large portion of the market still hasn’t accepted the core thesis that I’ve been presenting in these pages. The Age of Paper Wealth is over.

Ancient Secrets and Black Friday

I’ve got a bone to pick with Black Friday. And Cyber Monday. And Giving Tuesday…

I spent this past week wading through all the marketing emails that hit my inbox. I bet you did too.

Black Friday early sales… day-of sales… last chance sales… I lost count of how many there were. Then there was Cyber Monday. And all the emails for something called Giving Tuesday. I hadn’t even heard of that one before.

Of course, I don’t have any problem with these emails. I understand. I send out four emails every week myself.

But here’s the thing – the whole concept underlying Black Friday is a problem. That’s because it perpetuates the most common misconception we have around money.

It’s the consumerist view. The idea that the whole point of making money is to spend it on stuff. And then if we can make “good money”, we can buy even nicer stuff.

So many people view money in this way.

And as a result, they live their life on a treadmill. Constantly working for money… buying stuff… and working for more money.

I think it’s time we flipped the script.

Why it’s gotten tough out there…

“Your dollar will be worth just as much tomorrow as it is today,” President Nixon proclaimed on television with a straight face.

“The effect of this action, in other words, will be to stabilize the dollar.”

The date was August 15, 1971. President Nixon just announced that he was closing what was known as the “gold window”. This was the system through which foreign countries could redeem US dollars for physical gold upon demand.

The gold window was a fixture of the Bretton Woods System of 1944. That was the international agreement which established the US dollar as the world’s reserve currency.

What we’re talking about here is trust. The idea was that if the United States started printing too much money, the rest of the world could trade their dollars in for gold.

After all, nobody wants to hold a currency that somebody else can create from nothing anytime they want.

The story behind Nixon’s “gold shock” is very nuanced. But what followed isn’t…

The Rules of Money Changed

The rules of money and finance changed last year.

If we look at a chart of the S&P 500 going back to the early 80s, the picture is clear as day—stocks only went up over time.

Sure there were plenty of “dips”. But from 1982 on, we could buy a simple mutual fund or index fund and two years later we would have made money. Fifteen years later we would have made a lot of money.

Meanwhile, if we were to overlay a chart of the 10-year Treasury rate – the opposite is true. Interest rates only went down over time.

That dynamic – stocks go up, rates go down – was largely thanks to the Federal Reserve (the Fed). It had a hand in both via “loose” monetary policy.

But the game’s over.

The Fed pivoted in 2022. And Fed Chair Jerome Powell made it abundantly clear that he will no longer push interest rates lower to support the stock market.

And that means The Age of Paper Wealth is over.

We’re in uncharted waters here. Nobody under the age of 60 has been an adult in a world in which the Fed didn’t push stocks up and rates down.

So to me, the big takeaway is that we have to rethink financial planning 101. And I’m talking about the entire “nest egg” approach to retirement.

The Beginning is Near

We’re at an inflection point in history right now. Things aren’t going back to how they used to be.

I don’t think the financial media understands this yet. But the bread crumbs have been in plain sight for over a year now.

It comes down to an arcane change at the core of our financial system.

Last year something called the Secured Overnight Financing Rate (SOFR) went live across the board.

I bet very few people out there even know what this is. And of those who do, I doubt many understood SOFR’s significance.

SOFR is a benchmark interest rate for dollar-denominated loans and derivatives.

We don’t need to go down a deep rabbit hole on this. What’s important to understand is that the interest rates for all loans in the U.S. are now influenced by SOFR.

The London Interbank Offered Rate (LIBOR) used to hold that privilege. Before this year those who influenced LIBOR could also influence interest rates in the U.S.

And that means the Fed did not previously have full control over U.S. monetary policy.

SOFR changed that.

Thankful 2023

Hey friends,

In the spirit of the upcoming holiday, I felt compelled to share a quick note of appreciation with you today. No markets, economics, investments, or theories today… just thankfulness.

We talk a lot about becoming a good steward of civilization inside our investment membership The Phoenician League. What that means is a little different to each of us… but it’s tangible. And practical.

If we look around our world today, there’s something that’s blatantly obvious – yet none of us recognize it for what it is. We have conquered scarcity.

This statement is considered blasphemous in certain circles, but it’s true. It’s evident.

If a person who died prior to 1940 were to somehow magically appear in our world today, this is the very first thing they would realize. Humans conquered scarcity. That fact would smack them right in the face… because they didn’t think it was possible.

What I mean is this…

What to do about uncertain times…

People who are in or approaching retirement today face immense challenges that those who retired in the years before them did not.

Simply put, we’ve been living in a bubble world since the 1980s, but the bubble popped in 2022.

I think most of us know this to be true. We can feel it. But this next chart tells the story quite well:

Here we can see the S&P 500 and the 10-year Treasury rate going back to 1980. The S&P 500 is the black line. And the 10-year Treasury rate is the blue line.

Interest rates started falling in 1982, and they fell consistently for the next 40 years. Meanwhile, US stocks consistently went up in value over that same time period.

But everything reversed in 2022. Rates started going up, and stock prices started to fall. We can see those moves clearly marked by the red arrows on the chart above.

I keep coming back to this image because I want to hammer the message home. The Age of Paper Wealth is over.

The question is – what comes next?

The Fed, the Treasury, and the future

We’ve been talking all week about how the Federal Reserve (the Fed) and the New York banks have broken ranks from the globalist power structure.

The two factions now appear to be in direct conflict with one another. They are fighting a secret financial war for the future of our economic system.

This is something that’s hard for those of us schooled in Austrian economics to accept. We tend to lump all these people into the same Deep State category. But the signs of the current power struggle are everywhere…

When the Fed switched the US interest rate benchmark from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) last year—that was directly against the globalists’ interests.

Then when the Fed proceeded to raise rates farther and faster than ever before in history – exceeding even the pace of Fed Chair Paul Volker from 1979 to 1981, and even as the United Nations (UN) screamed at them to stop from across the pond—that was a shot across the bow. The war was on.

And Powell made it clear that he wasn’t going to back down. He even told the media over the summer that his Fed would not finance out-of-control government spending. Here’s that dialogue: