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Policy Predicament. Investment Instability Inevitable.

“They have 785 economists at the Fed who haven’t been able to predict anything.”

John Hopkins economics professor Steve Hanke joined Keith McCullough for a no-nonsense conversation about how the Fed has lost control of the U.S. economy. The video is included in this article.

“The Fed’s over-dependence on data risks financial instability, the central bank became too focused on inputs after misreading inflation in 2021.”

Mohamed El-Erian

“Today’s fiat-money regimes are characterized by ever-greater amounts of debt relative to real income — caused by policies that try to solve the economic problems caused by credit and money creation out of thin air by using even greater amounts of credit and money created out of thin air. And it is fair to say that the higher an economy’s overall debt level is, the more likely hyperinflation becomes.”

Thorsten Pollet

“One of the important factors behind the fluctuation between bull and bear markets, between booms and crashes and bubbles, is that investor memory has to fail us – and fail universally – in order for the extremes to be reached.” 

Howard Marks

Steve Hanke was by far the most accurate economist in predicting the recent 9% peak in US inflation. Remarkably the Fed has shown little interest in even reviewing its policies. His interview describes some of the policy making problems at the Fed, and updates the new challenges. Mohammed El-Erian clearly shares Steve Hanke’s concerns about Fed policy making.

Thorsten Pollet reminds us what the bigger picture is, which is what is forcing Fed action, while Howard Marks highlights the important function of memory loss in market extremes.



Today’s key Investment Instability issues:

1. Policy intervention increasingly dominates markets as never before, as we showed last week. Investment experts with the best tracks records are telling you what should be self-evident. 

2. The Fed is clearly on tilt in the way it manages the economy. It followed the largest negative real interest rates in history by completely missing in its forecasting of the subsequent inflation.Then the Fed took no steps to improve its policy management.

3. The Fed’s constant “data dependence” means that it remains backward looking in terms of its assessments, and it does not appear to have a credible forecasting model. 

4. The scale of policy intervention keeps growing along with the scale of debt in the economy. 

5. The scale of financing in the next few years will test the strength of the financial system. 

6. The banking system remains in critical condition, with a mixture of insolvency and high leverage. 

7. Gold finally broke out to a new all time high, as the dollar has begun declining. What signal is this sending?

How you invest needs to adjust for the Policy Predicament. Not only has the Fed become part of the problem, but the scale of economic problem keeps getting bigger along with the debt. 

Investors need to allow for much greater instability and become more policy aware.

Many banks are attempting to operate with very impaired balance sheets, from underwater bond portfolios and property loans. This will likely take a multi-year resolution. They have very little room for further loan losses and this is limiting their willingness to provide new lending.

This is an economy wide problem as total credit is also very weak as shown in the money supply data.

This is a key factor driving policy aggression.

 

Ever more leverage is being used to support already excessive leverage.Debt to GDP, equity value to gdp, equity value to earnings, bank leverage continue to rise. Yet the US banking system is lower than European and Japan bank leverage.

Now money supply is contracting, and bank credit is declining.

Persistent excess “stimulus” from US policy in part stems from this predicament. It’s buying time, but how can it actually solve the problem? Temporarily, perhaps, but only by digging a deeper hole.

 

These two videos describe the predicament very well. The first expands on the increasing instability of policy and markets.

 

 

 

The second is the conversation between Steve Hanke and Keith McCullough, which addresses the issue of policy.

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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