There’s a trick to holding power these days. It’s a new trick, and it works better than anyone could have imagined. All you have to do is keep people confused, and disoriented.
For centuries, the biggest threat to power was a hungry population. More than external invasions, or even an act of God, leaders knew a starving public meant trouble. Kings and rulers feared an enraged, hungry mob wouldn’t stop until they drew blood.
But science changed all that last century. By the 1990s, we had more food than we could eat.
Advances in industrial farming and crop technology made the cost of food ultra-low. The average American now eats to excess. This low-cost edible cardboard leaves people unable to do much more than star blankly at their phones. It’s a struggle to get the vape pen from pocket to mouth.
If you’re in power, this is a good situation. People don’t notice lost freedoms, lost wealth, or even lost health. The best part is, it’s optional. They choose to live this way, because it’s easy.
Digital Confusion
Fast forward three decades and this subtle shift in our attitude has huge consequences.
The world got big, and nobody noticed. We were too upset about the issue of the day. We missed the bigger trend.
It’s like a pair of lovers who fight about what the other said one second ago. They forget what started the fight, or why they’re even together. Like a ball of confusion, constant turmoil prevents progress.
We’re not here to solve the world’s problems. If we’re being honest, we’re not even here to help. We merely want to protect our savings, and grow it.
There’s nothing wrong with that. In fact, it was the old narrative. They taught us America was great because of our free market. We had opportunity, a legal framework, and property rights. You could be anything! But not really…
And especially not when you’re bamboozled, stuck in a news cycle you don’t understand.
For instance, we have a central planning committee that managing our economic system. That’s right, it is a group of people with control of a powerful institution. That institution operates outside the laws of economics. It can’t go bankrupt, it can’t fail, and has access to unlimited funding with the click of a mouse.
The only thing that threatens the U.S. Fed is our faith in it. If we lost faith, we’d be no different from starving 17th century peasants storming the castle.
However, if the peasants got a little bread every day, the didn’t notice. And if we stay upset, confused, yet still hopeful, we don’t ask too many questions.
Our Altered Reality
There’s a 2016 documentary on this subject. It’s worth watching.
The premise doesn’t seem so crazy when you look at the facts…at how our society changed over the past few decades.
But we care more about where it’s going than where it’s been. For us, it means keeping a clear eye on what’s next for our money.
And the Fed knows it needs to keep things under control. It needs to keep our belief in the system. It almost lost that a few years ago.
Not long ago, most people barely knew who the Fed chairman was…much less the regional governors. It’s as if the institution got so powerful it became the whole system.
The Fed effectively has its own well-crafted public relations strategy. We all buy in, whether we want to or not.
It pumped ~$2.2 trillion into the economic plumbing in 2020. The reasoning was, virus issues threatened the western system.
Then it followed with monthly purchases of Treasuries and mortgage bonds. It kept new money flowing into government coffers. It kept home buyers artificially stimulated. This made everyone from Washington to Main Street feel rich.
Here’s what that looked like in chart form. The Fed balance sheet doubled in roughly one year.
Then things got out of hand. Valet parking attendants became option traders. People had money coming out of their ears. They also didn’t leave the house. It was a bad combination.
That’s what happens when you tinker with a free market. You get unintended consequences.
The Fed realized this. In 2022 it took dramatic action. This had nothing to do with helping you or me. It also had nothing to do with fighting inflation. That’s about as much of a distraction as the war on drugs or any other rallying cry from Washington.
The real reason it had to abruptly fix its money problem is people started to opt out.
The valet parking attendant doesn’t want to work anymore. It’s hot out there. Plus, according to the virus news, parking someone’s car is hazardous work. Sitting home trading options is safer, and more fun.
Next step, our trader buys a used Rolex. Then feels like one of the car owners who used to bark orders at the valet staff. It’s hard to go back to the other side…but it’s essential.
This whole episode disrupted the delicate money system. The Fed needs you working, earning, paying payroll tax, borrowing, and keeping your head down. March on soldier, leave the thinking to the experts.
Its own population is one thing, but the Fed had bigger issues. External threats added another layer of pressure in the wake of the Covid money flood.
The U.S. dollar underpins a vast network of world power. Just like valets, and everyday workers, the Fed needs dependent nations forced to borrow and spend dollars.
Subordinate nations started banding together to form their own alternative currency. Oil producers didn’t want dollars. Even freshly minted day traders wondered if Bitcoin or Dogecoin was a better store of wealth.
Without a world that needs dollars, the Fed has nothing. It kicked things into gear almost overnight.
Right In Front of Our Eyes
The rate setting function of the Fed matters less and less.
It’s what makes headlines, but the rate does very little these days.
As proof, notice the radical boost in rates from ~0% to ~5.5% did almost nothing to other interest rates.
Your savings account likely pays a fraction of that 5.5% rate. Even the U.S. Treasury issues 10-year bonds at 3.9% today.
It’s called a yield curve for a reason. Money should have value over time. More time, more interest due. A loan for 30 days should cost less than one for 30 years. And it did work that way….until things got out of hand.
Here’s the U.S. Treasury yield curve as of March 1, 2022. That’s just before the Fed kicked off its radical effort to arrest a free market they deemed wayward.
Notice the longer the loan, the higher the interest rate. That’s what any borrower would expect.
But then things changed, radically.
The Fed started cranking up interest rates. Almost overnight it took the key policy rate to ~5.5%...where it sits today.
The issue is, longer dated rates didn’t follow. Notice how the price to borrow for ten years is drastically cheaper than 30 days.
We spend all our free market energy trying to predict when the Fed will reverse course. We’re sure that will mean the money spigot opens back up again. Everything flies higher. The party restarts. But it’s not true.
Sell The News
Wise traders know the rumor is worth more than the news.
The Fed knows it must keep people distracted. If it wants to maintain control of the system, that is. It must carefully manage its public image to help with this.
Where we didn’t know the names of any Fed governors years ago, now they speak almost daily. They dominate financial news headlines.
More importantly, they make strategic statements that move markets. It increasingly looks like they do it to manage outcomes.
This means markets move more on statements form a bureaucrat, than on business fundamentals. Those are out the window.
Notice the comments below from certain Fed governors. On January 19, Mr. Goolsbee said inflation might go up requiring more rate hikes, then said it might go down implying rate cuts. That sends stocks down…for a few minutes. Until he says the opposite, which sends stocks up.
These minute-to-minute gyrations move markets to the tune of billions. Traders gamble using options and futures hoping to amplify tiny moves. They spend tremendous amounts on premiums. It’s the modern equivalent of bucket shop betting in the 1920s. Most of those gamblers knew little more about their bet than the ticker symbol.
And the moves go on like this every day. In fact, this analyst put 60,000 headlines and text from 6,200 Fed speeches into an artificial intelligence model. She reckons the central planners decide to fix interest rates lower in May.
But none of this matters. It’s a PR scheme. Monday, markets move on rates falling. Tuesday, they reverse on a contradictory headline. You’ll get whiplash trying to keep up. And that’s what they want.
Drain The Pool
The reason this works so well is nobody remembers what happened yesterday. Reality is curated through public relations.
You forget last week’s narrative. You’re too busy gearing up for the new one. Do this for a while and you forget the point of the whole exercise.
However, if you disconnect, you’ll see exactly what the Fed is up to.
The largest part of its virus action was ~$2.2 trillion in direct government stimulus.
This money had to come back out of the system.
The issue is, other stimulus, like mortgage loans, retire naturally. You’ll pay monthly, like a good citizen. Eventually the money from your hard work reduces the Fed’s stimulus pile.
But that’s not the case with the mailbox money of the Covid era. That’s slush, and it had to come out.
The $2.2 trillion largely ended up in a bucket called the RRP or the Reverse Repurchase facility. It’s categorized as a “Temporary Open Market Operation” and it is affected by the Fed’s ~5.5% interest rate.
Notice the facility went from ~$0 in 2020 to ~$2.2 trillion during the everything rally of 2021.
Today, this pile of Fed cash falls at a rate of ~$100bil per month, give or take. That’s almost exactly the pace of its QT program.
QT is Quantitative Tightening. It’s Fed speak for pulling money out of the system… in a hurry.
And QT is the inverse of QE or Quantitative Easing, which you might remember from the go-go years.
The falling pile of cash used in overnight repo transactions seems to match the Fed’s falling balance sheet almost dollar for dollar. If that correlation holds up, it would be finished draining the pool when repo usage nears ~$0.
It knew it had to drain the pool…and if it told you the plan directly you wouldn’t have been so well behaved during the process.
The daily gyrations in markets caused by excessive Fed speak might be the most effective PR campaign of all time.
Some Portfolio Changes
We have a few important changes to the portfolio in light of all this…
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