I think today is the day…
I’m going to tell her.
It’s been coming for a long time.
Those three little words that will drive our future.
Three sobering terms bind our fiscal and emotional bonds.
“Higher for longer.”
Yes, my love, the Federal Reserve will keep interest rates higher for longer.
The cost of everything will keep due to supply imbalances and the Fed’s poor fiscal management.
Don’t plan on financing any construction projects.
Let’s not think about a new car payment.
Sure, the U.S. government is set to increase the national debt by $5.2 billion EVERY day through 2032.
But us… we will live within our means.
Higher for longer… Higher for longer.
It’s time to protect everything that we’ve built.
All Eyes on Powell
As we expected, the Federal Reserve did not raise interest rates on Wednesday, September 20.
This “pause” after raising rates from 0% to 5.25% over 18 months accompanied a statement suggesting the central bank may raise rates at the November meeting.
Jerome Powell’s speech after the announcement also confirmed what I’ve long argued.
First, inflation wasn’t transitory and still isn’t under control.
Second, the Fiscal pump by Congress and the current administration of the last two years is mainly responsible for the “expanding economy” and the Fed’s inability to control inflation.
Third, there is virtually no chance we will cut interest rates before the 2024 election. They say they’ll have their first cut by next September – but they’re just moving the goal posts, and planning to move them again.
Yesterday, the Dot plot – which tracks expectations for the Federal Reserve’s key funds rate – showed that the Fed’s committee only expects two rate cuts in 2024.
That’s down from a previous estimate of four earlier this year. Don’t be shocked if that falls to zero.
The Fed has come unhinged in its effort to fight against the never-ending orgy of spending pouring out of Washington. They only have one primary mechanism to fight inflation – the blunt hammer of interest rates.
The Fed claims it is an independent organization of the U.S. government and that it’s not political. But this is not the case. Every voting member is looking forward to retirement, to a job running a college, or working for a private equity firm.
They keep their mouths shut. If any of them were independent, they’d testify before the U.S. Senate Finance Committee, stick a finger at the face of the Congressional Members, and explain that inflation is a monetary phenomenon… one currently shaped by reckless government spending that will fuel greater instability.
This is the same problem former Fed Chair Arty Burns faced in the 1970s.
While the Fed made some mistakes with its rate decisions that decade, Burns would later lament in Yugoslavia in 1979 that the central bank couldn’t contain inflation while fighting D.C. fiscal policy.
In the 1970s, Nixon took the U.S. off the Gold standard and increased the money supply; Washington was fighting foreign wars, massive cost-of-living-adjustment benefits increased aligned with government programs, and America was paying for the Great Society programs.
But Burns waited until a year after his term to call out the challenges he faced… and did so in a speech more than 4,700 miles from Washington D.C.
Today, we’re engaging the same challenges while on LSD – from foreign war and increasing money supplies to GREATER government spending on programs and big hikes in COLA benefits to adjust for government-driven inflation.
But Powell just hums and haws at the podium. He explained that a Soft Landing for the economy is now the base case scenario… and he didn’t say what I’m going to today.
This is not complicated.
We’re running a $2 trillion deficit in “good times.”
What will this look like in 2025 or 2026 when the full might of the Fed’s rate hikes hit reality and weigh on Federal income tax payments?
If we cut the deficit to zero tomorrow – the Fed could cut interest rates next week.
But Washington needs to fund idiotic programs like a “Climate Corps” and reward its donor base with massive stimuli. And Powell and the rest of his merry band need to go to cocktail parties and receive consulting gigs at Carlyle Group in a few years.
The U.S. government will hit at least $50 trillion in debt by 2032. And that’s a conservative bet. With interest rates elevated – the cost of funding that debt will only worsen. We’re effectively borrowing money to cover the interest on our national debt.
Authors Minsky and Kindleberger – in their epic book Manias, Panics, and Crashes -describe this borrowing pattern to cover interest as “Ponzi” finance.
The Bond Market Tells the Truth
The bond market does not lie.
In the next 15 months… the United States will need to refinance about $8.5 trillion in U.S. debt at higher interest rates… plus new financing for roughly $2 trillion in debt… all while the Federal Reserve is likely to continue draining its central bank.
Who is going to do all the buying for U.S. debt?
Fiscal conditions are deteriorating in the long term.
The bond market knows this… It doesn’t believe Powell.
The bond market raised interest rates for him, taking the 10-year from 4.35% yesterday to 4.47% today.
I expect this to be the beginning and that we’ll see the 10-year bond climb to 5% (and even higher) over the next 12 months.
That’s terrible news for Zombie stocks like Beyond Meat (BYND), Charge Point (CHPT), and many companies still unprofitable yet trading at massive price-to-sales ratios over 10.
We’re still largely on the sideline (using money markets to our advantage) and holding energy positions (despite today’s selloff in names we like for the long term.) It’s going to be a bumpy ride in Q4.
Stay positive,
