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.
There were two primary trends from 1982 to 2022. Interest rates went down. Stocks went up.
And each time those trends threatened to reverse, the Fed stepped in to cut rates and push stocks higher again. That became known as the “Fed Put”.
This began in 1987 under Chairman Alan Greenspan. Then Ben Bernanke and Janet Yellen kept the Fed Put going as his successors at the Fed. We came to see it almost as a cosmic fixture.
But then Jerome Powell put his foot down last year.
Powell executed the most aggressive rate-hiking campaign in the history of central banking in America. And he made it clear to all who would listen that the jig was up.
I suspect those whose understanding of economics is informed by superficial mainstream sources missed the memo. They simply don’t have any historical context to compare it to. And the concept of malinvestment isn’t on their radar.
For those of us well-versed in Austrian economics—Powell’s actions are still hard to accept.
After all, the Fed is the enemy of free markets. It’s the institution that, more so than any other, has enabled Big Government to metastasize and distort so many areas of our economy – hollowing out the middle class in the process.
So we figured the Fed would do everything it could to keep rates at zero. That’s what’s necessary to monetize trillions in government debt and support all these uneconomical government programs.
We were wrong.
It’s become clear that the Fed isn’t blindly loyal to the US government. Its allegiance is to the interests underpinning the New York banking scene.
This is a faction unto itself. And its power and wealth reside here in America. As such, it needs a strong American economy and a robust commercial banking system.
That’s why the Fed Put is dead.
The Fed Put “financialized” everything. It created a world where we associated market health and economic health with numbers going up.
The stock market… gross domestic product (GDP) – as long as those numbers went up, we thought everything was fine. And when those numbers went down, we expected the Fed to rush in and save the day.
This directed trillions of dollars and countless man-hours to the financial industry.
Wall Street created roughly 71,492 mutual funds from 2009 to 2022. And while we don’t have exact data for exchange-traded funds and index funds, we can be sure that they created tens of thousands of those in this same time period as well.
None of this drives real economic activity. It simply herds capital into the financial markets where fund managers can siphon off big fees year after year.
Meanwhile, the fiat monetary system divorced American wage growth from economic productivity… which obliterated the American middle class.
Now our system of industrial capitalism is teetering. And if it falls, the legacy financial system falls with it. That would be very bad for the Fed and the New York banks.
That’s why they reversed course.
Tomorrow we’ll look at how a fundamental law of economics ensures that the Fed’s days of backstopping the stock market are over for good.
-Joe Withrow
P.S. It’s also a misconception that normalizing interest rates will eradicate consumer price inflation. With nearly $34 trillion in sovereign debt and a $2 trillion budget deficit, inflation is baked into the cake.
The bad news is that many are falling into the trap of thinking that the Fed’s rate hikes are about beating inflation. That’s not it. The good news is that if you understand what’s really happening, you’ll know exactly what financial moves to make.
I’ll have a big announcement for you on that front next week.