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“Never fight the Fed.” — Larry Kudlow (Maxims of Wall Street, p. 219)
“Don’t fight the Fed — fear the Fed.” — Michael Sincere, MarketWatch (Maxims of Wall Street, p. 150)
The two-month rally on Wall Street ended abruptly last week when Fed chairman Jay Powell doubled down on the inflation threat and warned additional pain was coming as the Fed aggressively raises short-term interest rates even more.
It is times like these when I turn to the bible of finance, “The Maxims of Wall Street,” now in its 10th-anniversary edition. For those who are new subscribers and don’t have a copy, I urge you to buy one. (See below for details.)
In my book, you will learn from the following quotations:
“What is the greatest danger to your investments? Inflation!” — Paul Cabot
“When Washington sleeps, the economy [and the stock market] grows.” — William Rees-Mogg
Both quotes are found on page 151.
Powell’s hawkish comments surprised investors because in the recent past, he said any future rate increases would be “data” related. But now he’s coming on like another Paul Volcker who wants to prove to the world that he’s no pussy cat and will kill inflation for good.
The problem is that the Fed has traditionally overreacted in both directions to a crisis. The Fed leaders overdo it every time, either fighting recession by cutting interest rates too much and creating an inflationary bubble, or they fight inflation by raising interest rates too much and creating a severe recession.
In sum, the Fed is largely responsible for the boom-bust cycle in the economy and on Wall Street. Never forget that.
Paul Volcker’s Blunder
Even Paul Volcker went overboard in the early 1980s in a determined effort to kill inflationary psychology in the United States.
In 1980-81, his anti-inflation policy was so severe that his central bank pushed interest rates to 21%. Fortunately, he finally realized he had overdone it when Mexico defaulted on its loans in the summer of 1982. Volcker wisely backed off and became more accommodating.
The same may happen under Powell.
Before the 2020 COVID crisis, the Fed worked overtime to stimulate inflation through its easy-money policies (hence the title of a recent book “The Lords of Easy Money”), and finally, by increasing the money supply by 40% in two years (2020-21), it got its wish.
Easy money/tight money Fed policies, 2020-2022
Inflation suddenly took off, assisted by the Biden administration giving away trillions in free money to consumers and business.
Now, Powell & Co. have regrets and have suddenly switched gears from fighting recession to fighting inflation, causing a boom-bust in the economy and a bull-bear market on Wall Street.
Notice how the growth of the money supply went from 40% in 2020-21 to under 6% in 2022.
What this country desperately needs is a stable monetary policy. I’m not holding my breath.
‘End the Fed’?
Many critics of the Fed are in former Congressman Ron Paul‘s camp and want to “End the Fed! End the Fed!” But that’s unrealistic. It’s never going to happen, because the Fed is too powerful.
There are other countries that have adopted a “currency board” that links their monetary policy to the most prominent currency used in the country’s trading network, such as the dollar or the euro. Unfortunately for the United States, our currency is the U.S. dollar.
The best we can hope for is for the Fed to be limited by the Friedman Rule. The late Milton Friedman recommended that the Fed increase the money supply (broadly defined) at a steady rate and stop trying to manipulate interest rates. It would not solve all our monetary problems, but it would be a step in the right direction.
The Growing Financial Crisis
The sharp rise in interest rates engineered by the Fed could cause a financial crisis in the future. We are inching closer to the feared “inverted yield curve,” which spells recession down the road. Currently, the three-month Treasury bill rate is 2.8%; the 10-year Treasury is 3.1%; and the yield on the 30-year Treasury bond is 3.24%.
Thankfully, we still enjoy a positive yield curve. But not for long. The Fed plans to raise short-term rates even faster, so we may be hit with a negative yield curve soon. Stay tuned.
Biden Disaster Plan II is Getting Worse
Meanwhile, government spending under the Biden administration continues to be out of control, with massive new spending on alternative energy and a student loan bailout (costing an additional half a trillion dollars).
Fiscal policy is inflationary, and higher interest rates are damaging to the integrity of the federal budget. Who would think that with full employment, and even labor shortages, the Federal government would run $1 trillion deficits? Both Keynes and Friedman must be rolling over in their graves as the irresponsible “Modern Monetary Theory” seems to have taken over in Washington.
The national debt is approaching $31 trillion. It is always mesmerizing to watch the U.S. Debt Clock: https://www.usdebtclock.org/.
Image courtesy of Peter G. Peterson Foundation
The rise in interest rates is taking its toll on interest payments on the debt. Paul Winfree, an expert at the Heritage Foundation on the federal budget, examined the numbers and came up with this troubling finding: in just 18 months, interest rates have doubled from 1.5% to 3%, adding $1.3 trillion of interest expenditures to the federal ledger.
This means that thanks to the Biden spending spree and the Fed raising rates, the federal government will have to spend more than $1 trillion more over the decade just to pay for Biden’s profligate spending.
That spells danger ahead. I hope the Republicans will regain the House in January 2023, and can slow down wasteful spending, but even that is not guaranteed anymore. According to www.electionbettingodds.com, the Republicans may lose the Senate, and their overwhelming lead in the race to win the House in the next election is starting to slip.
Where to Invest in These Troubled Times
In the Biden Disaster Plan video, I recommended three stocks, and they are all doing well, advancing by double-digit percentages.
In addition to the Big Three stocks above, I added a fourth that invests in infrastructure — highways, bridges, the electric grid, ports and industrial parks — in my upcoming video release, “The Cleansing of America,” also dubbed “The Recession That Saved America” from hyperinflation.
Despite the growing threat of a recession, investing in infrastructure will continue. My stock recommendation is already up 20% this year and headed higher.
‘The Maxims of Wall Street’: Advice for New and Old Subscribers
I’ve added several thousand subscribers to my newsletter, Forecasts & Strategies. I urge you to own and read regularly my classic book, “The Maxims of Wall Street.” And for those of you who have been subscribers for several years, I recommend it at as well.
There’s a reason why almost 50,000 copies have sold.
As Dennis Gartman, editor of the Gartman Letter, says, “It’s amazing the depth of wisdom one can find in just one or two lines from your book. I have it on my desk and refer to it daily.”
Recently a subscriber, Mike Antonovich, of Glendale, California, ordered a whole box (32 copies) of the “Maxims” book.
It turns out that he was the long-time city commissioner and mayor of Los Angeles County (1980-2016).
Mike is a happy subscriber to my newsletter and said that he wanted to get a head start on getting gifts for his family and friends for the holidays.
Now that the fall and the holiday season is upon us, consider ordering copies of “Maxims” now. They make excellent gifts to friends, clients, your favorite stockbroker or money manager and family members.
I autograph and number each book, as well as mail them at no extra charge (inside the United States). The price is only $20 for the first copy and $10 for all additional copies. A full box (32 copies) is only $300 postpaid. To order, go to www.skousenbooks.com.
You Nailed It! A Night to Remember at Angels Stadium
With all the negative news going on, it’s nice to take a break and go to a baseball game.
This week, my wife and I went to an Angels-Yankees game here in Southern California. It was a beautiful night and the weather was ideal.
It was a game never to be forgotten. In the third inning, there were two out and two on when the likely-to-be crowned American League Most Valuable Player Aaron Judge (6 feet, 7 inches!) came to the plate… It was a 3-2 count and…
He blasted a three-run homer, and the Yankees went on to win.
It was Judge’s 51st homer of the season. He may well go on to win the home run title and may even surpass Roger Maris‘s record of 61 homers in a season. Nobody else is close this year.
Angel Stadium offers a wonderful experience. Other stadium owners could learn something from it. It was packed, yet we got from our car to our seats in 15 minutes. We paid only $5 for parking in a private parking lot not far from the stadium.
There were no lines to go through the metal detectors — they have the most advanced security system. There is no need to remove cell phones, keys, coins, purses, etc., you just walk through… the Transportation Security Administration (TSA) could learn a thing or two.
Angel Stadium also allowed you to bring in any food and drink you wanted. We bought a delicious hot dog outside the stadium and took it in, no questions asked.
It was an entertaining night, and Jo Ann and I had a great time.
On another topic…
C-SPAN BookTV covered FreedomFest this year, and Peter Slen’s interviews are now appearing on BookTV.
James O’Keefe, president of Project Veritas, was the #1 hit at this year’s FreedomFest. He had a big crowd there, telling one story after another of his ordeals in exposing media bias and government abuse, resulting in his getting arrested, harassed, etc. Afterward, he told his story in a 20-minute interview with Peter Slen on C-SPAN BookTV, and reveals how the FBI is now corrupt and attacking journalists like James O’Keefe — unprecedented. He has a new book out called “American Muckraker.”