September 2, 2020
We hope you noticed last week that the Fed has moved the goalposts…
The Fed will now let inflation run higher than normal until the economy gets well back on track. And it is likely to keep rates lower and longer than you can believe.
And today, Dan Ferris – financial analyst, Extreme Value editor, and Stansberry Investor Hour podcast host – translates what the Fed’s decision really means for your money…
The Real Message of the Fed
By Dan Ferris
The modern-day world is filled with ambitious, overeducated, politically well-connected men and women. These folks think they know how to control whole economies by pulling the levers of monetary and fiscal policy.
And they really go bananas when faced with an economic crisis…
In 21st century America, the quintessential man who meets these criteria is Federal Reserve Chair Jerome Powell…
During his speech at the Kansas City Fed’s Economic Policy Symposium – an event normally held for an exclusive audience in Jackson Hole, Wyoming – Powell displayed his desperation for the whole world to see through the virtual broadcast.
But today, I (Dan Ferris) feel the need to help translate Powell’s message…
As a reminder, the Fed has a congressional mandate of creating monetary policy that fosters maximum employment and “price stability”… which means to control inflation.
However, the Fed now has decided to change all that. As Powell said last week…
Going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals.
Put simply, from now on the Fed will focus more on trying to create higher inflation…
The central bank introduced a 2% inflation target back in January 2012. And for the most part, inflation has stayed consistently below that target in the eight-plus years since then.
So now, the Fed will target average inflation of 2% over some unnamed period of time… meaning it will allow – and even try to push – inflation to rise above its previous target of 2% for stretches in the near future. From the Financial Times…
The centerpiece of the Fed’s new approach is the move to an average inflation target, which will allow it to overshoot the U.S. central bank’s 2% target to compensate for persistently low inflation, which has been weighing on the U.S. and other economies in recent years.
“Following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time,” Mr. Powell said.
Allow me to translate for Powell…
“Screw unemployment. I’m tired of hearing about it. If you bring it up in a meeting, I’ll see to it that you’re making less than $100,000 a year by the end of the week. I don’t care if everybody in this country is employed, and there are still 100,000 jobs to fill.
“We said we were going to hit 2% inflation, and we’re enraged that we can’t do it. It’s almost like the Fed can’t just create inflation whenever it wants to or something… and that can’t possibly be true. I will create 2% or higher inflation if it’s the last thing I ever do!“
If Powell really wanted to be honest, the translation would continue like this…
“Let me spell it out for you, since you numbskulls seem a little slow on the uptake. You’re supposed to own assets, not dollars. Anything but dollars.
“Buy a house with the biggest loan those idiots at the bank will give you. And if you haven’t refinanced your current home by now, what the hell are you waiting for?
“Don’t have a credit card? Get one and buy whatever you want. Don’t have a brand-new car? GET ONE.
“Buy, buy, buy. Buy stocks, bonds, real estate, whatever you want. Just spend the money… That’s what it’s for, you twit.
“Because if you idiots don’t start spending more money, I’m going to get a case of Red Bull, head over to the Bureau of Engraving and Printing, and run the money-printing machines until every square inch of this country looks like the season finale of Hoarders.
“I bet you’ll get rid your dollars then, won’t you? I bet that’ll stimulate some economic activity. You think I’m kidding? I’m not. I swear to God, I will blow the U.S. dollar to hell and gone to prove that I’m the best central banker who ever lived…
“Wait a minute… That sounded different inside my head.”
With my translating help, Powell might have some more specific messages for various groups in the economy. For example…
To people who save money, “I told you to spend, not save. As long as I’m in charge, you’ll never earn a thing on your savings. The beatings will continue until morale improves.”
To people who borrow money, “Dude, we just made another huge beer-and-weed run, and my parents won’t be home until Sunday. Call everybody you know. Crank up some Beastie Boys. Let’s get nuts.”
To people with money in the stock market, “There is no alternative. You want to buy gold and silver, like some kind of weird little Harry Potter goblin? OK, but try buying a house with it. It’s my job to make sure you can’t do that.”
Now, to be fair, during his actual speech, Powell also said, “The Fed has less scope to support the economy during an economic downturn by simply cutting the federal-funds rate.” (We’ll discuss this quote further in a minute, by the way.)
But let’s not be too fair…
Sticking It to Low-Income Households
After all, it’s not like Powell is decent enough to resign or anything…
He’ll stay in office as long as he can. He’ll just keep pulling on economic levers, looking like an even more cartoonish Wizard of Oz in a Brooks Brothers suit.
That’s because Powell still believes he controls the U.S. economy… despite his failure to ever meet his inflation target. It’s clear when he makes actual statements like this one…
Inflation forecasts are typically predicated on estimates of the natural rate of unemployment, or “u-star,” and of how much upward pressure on inflation arises when the unemployment rate falls relative to u-star.
There is no natural rate of employment. They make this garbage up to justify their actions after the fact… not because they have any clue of what they’re targeting in the first place.
The worst thing the Fed does is pursue a policy it knows full well will generate bad outcomes. Here’s more from Powell’s actual speech yesterday (with my bold emphasis)…
Many find it counterintuitive that the Fed would want to push up inflation.
After all, low and stable inflation is essential for a well-functioning economy. And we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.
However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.
OK, we need another translation. I can’t let you try to make sense of that baloney on your own…
“We know low inflation is good for everybody and higher inflation is bad, especially for people who are already not making much money. But we don’t care about them.
“If inflation gets too low, asset prices might fall, making it really hard for me to get a hedge-fund job like former Fed Chair Ben Bernanke, who now works for Citadel, a $25 billion fund.”
Still not convinced Powell and his cronies aren’t fully aware that they’re sticking it to lower-income households because it’ll be great for asset prices? Then, try to explain this part from Powell’s speech yesterday (with my bold emphasis added again)…
With interest rates generally running closer to their effective lower bound even in good times, the Fed has less scope to support the economy during an economic downturn by simply cutting the federal-funds rate.
The result can be worse economic outcomes in terms of both employment and price stability, with the costs of such outcomes likely falling hardest on those least able to bear them.
My translation for you…
“Am I stuttering? Are you deaf or stupid? Am I speaking a language you don’t understand?
“I know the Fed’s policies are bad for low-income households. And… I. Don’t. Care.
“I work for well-connected, rich people. I go to parties at Jeff Bezos’ house, for goodness’ sake. If I don’t make everything more expensive, he’ll have a harder time putting all his competition out of business by making everything cheaper… And he’ll never invite me back.”
(You can read Powell’s full speech right here. Send in your own translations of your favorite parts by e-mailing us here. I’d love to read them all. As you’ll see, I’ve barely scratched the surface today.)
What’s Your ‘Sane Mantra’ Today?
Maybe you think I’m just trying to make you laugh with these translations…
First of all, I hope it’s working… I laughed out loud when I wrote my translated versions of Powell’s comments last night. But it’s only funny until it all becomes tragically sad(der than right now) for millions of people one day…
The Fed’s machinations – along with the federal government’s COVID-19 lockdowns – have inspired a new generation of speculators. By that, I mean the people trading options on Robinhood while wearing their pajamas and sitting in their (parents’) basements all day.
They’re happy to do what everyone else is doing… until it doesn’t work anymore.
The record put-option buying from a few months ago has given way to record call-option buying today. You can see them in your mind’s eye…
They’re like passengers gathered on the deck of a great ship… running to one side, then to the other, and then back again. And each time, the ship is listing farther and farther.
Is there any hope that they won’t all end up in the water when it’s all over? None.
Preparation is key. And a diversified portfolio is my answer to adequate preparation for potentially extreme action in markets that don’t quite operate the way the Fed, the pajama-clad crowd, or just about everybody else believes they do. It goes like this…
Hold stocks because the world finds a way to get out of bed every morning and get things done.
Hold cash because the markets have become volatile, and the lack of liquidity suggests more volatility lies ahead. Cash cushions losses. And when it’s employed during downturns, it acts as a no-cost, never-expiring call option on future opportunity.
Hold gold and silver because they’ve been money for at least 6,000 years and can’t be printed by the Fed or the U.S. Treasury. Macro investor Luke Gromen, contemplating the prospect of years of low-interest-rate Fed policy, recently theorized on Twitter…
The Fed is giving creditors of the world (sovereign & private) a choice of storing their hard-earned surpluses in: a) 0%-yielding bonds of finite duration & infinite issuance [U.S. Treasurys], or b) 0%-yielding bonds of infinite duration and finite issuance (gold & [bitcoin]). Choose wisely.
In brief, the Fed can print as many dollars as it wants. But it can’t print gold or bitcoin.
Hold bitcoin because of that, too. Plus, there’s a chance it could still become a 50- or 100- bagger – or maybe even more – from its current price of around $11,500. Bitcoin is already accepted as currency all around the world. A tiny 1% or 2% position will suffice.
In crazy times, like what we’re living through today, there’s value in repeating a sane mantra.
Here’s mine: Watch the macro scene like a hawk. And make sure you’re practicing true portfolio diversification… represented by a core portfolio of stocks bought at reasonable prices, cash, gold, and bitcoin.
Now here are some of the stories we’re reading…
Listen to Dan’s latest podcast: Where Does Crony Capitalism Come From?
During this week’s interview, Dan sits down for a conversation with Nick Sorrentino, co-founder of Against Crony Capitalism and the editor of ac2news.com. Nick works as a political and communications consultant whose clients have spanned the political spectrum. Dan and Nick spend their time discussing how we got to this insane level of cronyism in the government and the corporate world. Can anything be done to stop it?
P.J. O’Rourke Tried Deciphering ‘Fed Speak’ in our Very First Magazine
“Progress”? Since when does increased inflation make things better for people? The Consumer Price Index has gone up 2.2% in the past year with double-digit inflation on gas, 3.5% inflation on shelter, and 3.1% inflation on healthcare. You call that progress? Never mind that wage and salary growth has been stagnant since the Great Recession.
Market bulls and bears are having trouble as ‘unlimited’ Fed support short circuits models
“The Fed just told you they will let employment go to full employment before they pull the punch bowl… What multiple do you put on unlimited Fed support? In the past, recessions started when the Fed withdrew accommodation. The current Fed is telling you, we are not withdrawing accommodation.”
Individual-Investor Boom Reshapes U.S. Stock Market
It’s one of the year’s biggest market stories: Mom-and-pop investors have fallen back in love with stocks, lured by free trading apps, a resurgent bull market led by technology companies and a pandemic that has left millions of Americans at home with little to do.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
September 2, 2020