Below we look at the serious topic (and lasting portfolio implications) of a tactically dishonest Fed with a little help from philosophy, comedy and the salvation of Perfektenschlag…
A very grumpy, egotistical, aloof yet nevertheless brilliant (and blunt) economic author and tail-risk investor, Nassim Taleb, once observed that the opposite of success is not failure; it’s name-dropping.
I will do my best, therefore, to avoid citing too many names below in making my point(s) as to what I’ve learned rubbing shoulders with some fancy lads in the world of finance, central banks, central intel and currencies, both digital and fiat.
A) Because name-dropping is lame and B) because most of the fancy lads I’ll refer to were, well, not so inspiring…
Taleb, the author of the now classic (and once-again, timely) book, The Black Swan, is also an openly self-educated philosopher, with a particular penchant for a misunderstood yet often scathingly accurate de-coder of the human mind, a certain Friederich Nietzsche.
Nietzsche was many things, and far too complex to unpack here, but he knew something (and wrote a lot about) human hypocrisy, ego, group think and intellectual posturing. In short, well-suited to poke fun at so-called market “leaders.”
He sure humbled my ego in college—which was needed then and still now…
Toward this end, Nietzsche took some of his thinking from an equally fascinating (yet largely unknown) French moralist, Francois de La Rochefoucauld, who among other things, observed that “The highest offices are frequently, if not predominantly, held by the most mediocre of lesser minds.”
And to this point, let me look at the great office of lesser minds which I so thoroughly enjoy debunking—the Federal Reserve, of course…
Again, and to avoid name-dropping (eh hmmmm), I will just say that three times in the last 10 years I was invited to private venues in New York and DC in which I was able to sit face to face with some folks who either run (or ran) the Federal Reserve.
Club rules as well as Taleb’s warning, will prevent me from naming names and venues, but not from taking a Nietzschean hammer to the hypocrisy as well as dangers I took away from those encounters.
I will premise what follows with three biases and take-aways which color my observations, but each premise below is critical nevertheless to understanding my take on current Fed policy and its now massive impact on the future of our markets, your portfolio and, sadly, society as a whole.
Premise One: The Fed lies.
Premise Two: The Fed long-ago (i.e. since 1987) understood that perception is often more powerful than reality, which means double-speak is not only a fault of the Fed, it’s a form of policy.
Premise Three: The Fed serves Wall Street, not Main Street. Period. Full stop.
Now, let’s dig in to each of these ideas…
1. Dishonesty as a Fed Policy Tool
As for the first premise of Fed dishonesty, the evidence of this is no longer circumstantial but now empirical—or as the lawyers say: dispositive.
I have outlined the math as well as facts behind this dishonesty in separate reports not worth repeating here, but for those who want a refresher, consider, inter alia, the following:
The reality of this dishonesty may at first anger or surprise you.
I mean, if you ever walked by the Fed’s office in DC or gandered at the fancy credentials of Fed leaders, it’s hard to imagine them as anything less than impressive.
But surfaces, like illusions, can often be deceptive…
And as Herr Nietzsche reminds, shattering illusions is the first step toward greater growth, just as falling out of a bad love is the first step toward finding a greater love.
As for love, including Wall Street’s love affair with debt and investors love affair with toxic bonds, I’ve been advising investors for years to re-think their infatuation with disfunctional credit markets in general and junk bonds in particular.
The bond section of our Signals Matter market reports is replete with clear reasons for this needed “break-up,” so again, I won’t repeat all of them here.
2. False Perception as Fed Policy Tool
The fact that the Fed objectively lies, however, segways nicely into the second premise above, namely the Fed’s deliberate use of perception tricks to re-configure reality via an astounding capacity for double-speak as a policy tool.
Without dropping names…I recall one interaction off 5th Avenue (six years ago) and another at a DC lunch club (4 years back) in which a former Fed Chairman expressed his deep concern for price stability in the current markets.
This concern came from the same Fed alumni who personally authored the greatest rate cuts in U.S. history, which lead to a credit bubble that spoon-fed the greatest equity bubble—and hence price stability crises– in history, to those dates at least…
As I like to say, the ironies do abound. The Fed has a knack for showing “deep concern” for problems which they alone created.
As to price stability today, we once again have a current Fed Chairman speaking beautifully out of both sides of his well-educated mouth in an effort to mask reality (and stubborn facts) with illusory perceptions and fancy, albeit often mind-numbingly boring words…
Powell the Oral Magician
In particular, I am referring to Powell’s recent virtual broadcast from Jackson Hole in which he openly admitted the Fed’s new stance that it “seeks to achieve inflation.”
This has Nietzschean humor (and Fed irony) running all over it.
First, we have already been suffering from secret inflation for years, so Powell’s statement of seeking to “achieve” more of it is a deliberate farce and just riddled with double-speak.
The key farce, of course, is the fact that while feigning an interest in “target inflation,” the Fed has been deliberately under-reporting inflation for years, as my above reports confirm and as brave former Fed insiders, such as Danielle DiMartina Booth, have been confessing with refreshing candor from an organization in which candor is otherwise utterly absent.
Powell, for example, is now pretending to seek a target 2% (or higher) inflation rate. That’s the perception game he’s playing.
But reality, like facts, are stubborn things, and Powell left the following facts out of his canned Jackson Hole thespian performance.
The fact, for example, that the Fed intentionally ignores rising healthcare and housing costs in devising its “inflation scale” is no honest oversight, but a deliberate policy to trump reality with false perception.
The core PCE inflation to which Powell loves referring understates these two costs by a wide margin.
According to the Organization for Economic Cooperation and Development, for example, the average married American worker with two kids paid an 18.8% tax rate in 2019.
Meanwhile, Harvard’s Joint Center for US Housing recently reported that the median asking rent for an apartment went up by 37% between 2018 and 2020.
Folks, that’s obvious inflation pain, but the PCE scale which Powell uses to measure it intentionally gives it only a 21% weighting…
It’s the same game of deliberate inflation under-reporting with healthcare costs, as the PCE imputes them from Medicare and Medicaid reimbursement rates that are infinitely lower than those paid by most individuals paying private insurers—all of which have higher deductibles and premiums than a year ago.
In short, Powell is not missing this point, he’s deliberately lying about it.
Because, the great Fed experiment of direct intervention (i.e. low rates, cheap debt and unlimited fiat money) in just about every needle-peak bubble asset class from stocks to real estate has been a blatant price-stability failure, which rather than confess, the Fed twists with words and bad math.
Again, perception, properly managed (manipulated) is deliberately employed to mask reality.
It’s dishonesty. It’s fantasy. But as I’ve written elsewhere, fantasy can work—until it doesn’t anymore…
3. Wall Street over Main Street as Matter of Fed Policy
Speaking of fantasy, or at least, fantastic times, this brings us to our third premise, namely how the Fed favors Wall Street over Main Street.
Look, I’m a capitalist. I’m a self-confessed polo-playing cad. And I like money, and of late, more so than ever.
And I’ve been a direct beneficiary of the Wall Street bubble handed to market professionals who have been front-running the Fed’s fat pitches for years.
But this doesn’t mean I can delude myself, or you, with open double-speak as to just how far from real capitalism the Fed’s love affair with Wall Street has taken us.
As I’ve reported here, and countless other places, the Fed plays a rigged game with Wall Street.
Hell, I even wrote an entire book about how this works, and it’s co-authored by a straight-shooting insider who knows as well as me how this game is played, from the World Bank to Morgan Stanley.
This is no grand confession, just a blunt recitation of experience, facts and shared bewilderment.
Anyone who has been paying attention knows that Wall Street and the top 10% of the US (who own greater than 80% of the risk assets in the US markets) have been the direct and primary beneficiaries of our rich Uncle Fed.
Decades of low rates, cheap to free debt and years of “quantitative easing” (talk about a Fed euphemism…) have been an absolute windfall for one strata of the US economy.
This was no accident. But there are risks beneath this rigged game…
The social unrest and disgraceful wealth disparity we are now no longer able to ignore (even at a FOMC broadcast of double-speak) cannot be simply explained as an “unintended consequence” of Fed over-reach or the almost too convenient arrival of COVID to quietly bail out, again, Wall Street.
Let me be clear: The Fed was not designed to create wealth equality, it was intentionally designed by a cabal of private bankers to help, well… bankers, banks and the market actors who rely upon them.
Take Fed low rate policies as an example. Cheap debt is great, right? It keeps the cost of borrowing down, so everybody wins, right?
Not everybody gets the same access to that cheap debt.
Most of the zombie companies currently sleep-walking through the S&P, for example, would be dead and buried long ago had the Fed allowed natural yields and rates (and hence natural capitalism ) and natural price discovery to determine their allegedly-desired “price stability.”
Instead of using debt-rollovers to stay alive, the majority of the junk bond issuers as well as publicly traded lesser companies on today’s stock markets would just be rolling in a well-deserved grave had it not been for direct Fed intervention (aka: “accommodation”) into the rates markets.
But did that Fed intervention and those rigged rate markets help all Americans, all businesses?
The companies on the S&P have the law firms, accountants and streamlined loan programs to stay unfairly alive and even enjoy a “boom” in the backdrop of a global recession and pandemic while most American small businesses “from sea to shining sea” are getting massacred as I type this, with over 100,000 set to permanently close in the coming 12 months.
Or how about the stock market or high-end real estate sector?
Grotesque levels of Fed money printing and cheap debt (as well as commercial paper, asset backed securities and corporate debt “liquidity assistance”) has been a great friend to these over-priced and risk-laden sectors for years. Prices have skyrocketed.
Many of you, like myself, have benefited from rising stock and real estate values on homes that my dog Aubrey (see video below) could sell despite the commissions real estate brokers and sell-side analysts unfairly acquire by calling everything a “buy” without bothering to notice (or report) the bubble under their face-shot business cards.
All is good right?
But here’s the rub. It’s not good for any of us, if the majority of us are broke, in debt and ignored by the Fed.
I’m certainly no socialist or communist (though Wall Street socialism is now a fait accompli), but the disgraceful wealth disparity we are seeing today is a sign or a broken rather than winning system, and the Fed (rather than just politicians whom nobody really believes anymore) is a key driver behind this broken yet still illusory “free market” system.
A beautiful house built on a foundation of sand is just a beautiful house destined to collapse. Enjoy it while you can.
US deficit levels this year stand at $2 trillion. Corporate debt stands (wobbles) at $10.5 trillion and household debt in the land of the free has most Americans enslaved to the tune of $14 trillion.
Folks, this is not a winning combination for American exceptionalism.
Additionally, the Fed’s recent gut-punch to the middle class by bogusly targeting higher inflation (to be paid for by more debt) creates a vicious cycle of debt-stupid rather than a growth cycle of actual productivity, which by the looks of US GDP over the last decade, is itself just a relic of the past…
Speaking of relics, Buffet once called gold a “barbaric relic,” but in a world now sustained by unpayable debts monetized by unlimited fiat money creation, the purchasing power of the dollar, as well as all other fiat currencies, is declining by the day, a fact which makes gold, as I’ve said so many times, anything but barbaric.
The Real Barbaric Relic
Which brings us all back to the Fed…and the real embodiment of the barbaric, as it is now placed its back in a corner where its only option (other than more money printing) is more perception double-speak rather than honest blunt speak.
Such Fed-induced mis-perception means more flirty real estate brokers selling more overpriced homes and more stock peddlers selling more over-priced shares and more bond issuers selling more crappy IOU’s to yield-thirsty suckers…
…until it all comes crashing to the debt-sandy ground upon which this everything bubble was built.
Meanwhile, the vast majority of the population looks to the Fed for some more magic, like universal basic income or more fantasies of debt without tears as less-sophisticated yet understandably angry interest groups join the wave of identity politics which ultimately destroys the true identity of any nation, as history repeatedly confirms.
As for healthy patriotism, I think Jackson Browne’s rendition ain’t so bad.
For now, however, the Fed will keep singing its bogus tune from both sides of its mouth.
Like I said: Fantasy works—even for a looongggg time… until it doesn’t.
For now, both knowledge and preparation are key as fantasy still rules the day.
Our Solution to a World of Double Speak? Blunt Speak and Market Signals
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Perfektenschlag—i.e. What Matters
In the interim, I hope your Labor Day weekend marked the end of a great summer, despite these COVID times.
I spoke at length of the 2020 market summer here, but have to confess, that despite travel restrictions and countless other macro headwinds, this has been one of my favorite summers of all—again the ironies abound.
I love talking about markets, but it’s more important to make time for the invisible joys which each of us can find outside of the markets, with or without puppies, polo mallets or beach breaks.
To each his/her own—but just make sure you find your own version of joy even in these Twilight Zone times. It’s good, alas, to simply feel good…
Dwight Schrute, far less prosaic (and German) than Nietzsche, captured this joyous concept of “Perfektenschlag” below:
As for my own summer of Perfektenschlag on the French coast, I’ll share its highlights spent with a great group of four-legged (and two-legged) friends, one broken e-cigarette (mint flavored) and some very informal stick-n-ball with my best #1 –my son.
Connection with friends, family, sports, nature and new faces is always our greatest form of true wealth, no?
Thanks as well to those at Medoc Polo who helped me compile this collage of special moments (and a special thanks to our film editor in the Hautes-Pyrenees). 😉
See the rest of you on Thursday, as we get back to these markets and a new and very interesting autumn ahead, to say the least.
Matt & Tom