D-Day:
War's over, man. Wormer dropped the big one.
Bluto:
Over? Did you say "over"? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!
Otter:
Germans?
Boon:
Forget it, he's rolling.
So, while the Deltas did indeed keep fighting, and won their epic victory over the Omegas, the U.S. economy is not "Animal House." Jerome Powell and his merry band of money-creators on Wednesday put an end to the Era of Easy Money that had defined the last three-and-a-half years. Before the token increase in March, the last Federal Open Market Committee (FOMC) rate increase had been on Dec. 19, 2018, when the rate was increased to 2.0-2.25%
The prior terminal rate hike -- the last in a series, which would be followed by cuts -- was on June 29, 2006, to 5.25%. Prior to that, the previous terminal rate hike had been implemented on May 16, 2000, to 6.5%
So, let's look at those terminal rate hike levels. May 2000: 6.5%. June 2006: 5.25%. And December 2018: 2.25%. The "final" level keeps shrinking. Why?
No one knows. There is nothing in the global financial markets that has made money cheaper. Electronic payments certainly make its transfer more efficient, but that has -- or should have -- zero to do with the actual cost of that money. Zero.
Where is the position paper, written by some 26-year-old MBA at the Fed and read by the esteemed chairman, that explains "why money costs less than it used to."
There is none. Fed officials will bloviate about inflation, but they are terrible at measuring it, love to exclude its two most important components, food and energy, when calculating it, and most gallingly, referred to it as transitory for quarters after there was numerical evidence that it clearly was not.
But that still avoids the direct question. Why is the fed funds rate 1% now? Why not 2% or 4% or a Paul Volcker-style 14%? There is no credible answer for this question.
Massive demographic shifts can reduce inflation and in extreme cases, such as Japan's aging population, actually produce deflation. That has never happened in the US, and while Janet Yellen rambled on about the risk of deflation in the U.S. economy for years, that was just a hoax.
Look at this chart and show me the massive shift occurring. There is none. A median age of 38.1 years is nothing in the grand scheme. I busted my legs yesterday afternoon running the amazing hills of Lisbon, and, let me tell you, I wish I were only 38.1 years old.
Without any hint of conspiracy theory, here is the truth: Money is cheaper now than it was five, 10, 20 or 40 years ago because Wall Street wants it that way. I spent more than a decade of my life working for big banks. I know how they roll, and I know how little respect they have for the Fed. In Europe it's even worse; the European Central Bank is a complete joke, although the Bank of England is still held in high esteem.
Yes, Warren, Wall Street is a gambling casino. And the odds just shifted massively. To continue that quote from "Animal House":
Disruption: dead
10x revenues: dead
Self-driving, battery-powered cars that can fly: dead
The Metaverse: never alive
Anything ever offered by Cathie Wood: (sorry, but it's true) dead.
This is a period of rising interest rates. Rising to a pathetically low level, yes, but rising nonetheless. Tech stocks have been bid up for so long -- this chart from longtermtrends.com is extraordinary -- but even that chart shows an inflection point in the Nasdaq/S&P 500 market cap ratio was reached in February 2021.
We are on the downside now. After living through the end of the Tech Bubble at the turn of the century, let me tell you, it does not end well. I have five model portfolios now -- HOAX, HOAX 2.0, SHORT, FKBGT and the one I created last week, DFNCE -- and the name of the last portfolio says it all.
It is time to play defense. Lighten up on Big Tech and free yourself from the next Lyft (LYFT) . Or Netflix (NFLX) . Or Amazon (AMZN) . Or Peloton (PTON) . Are you seeing a pattern here? You'd better, or you will end up poorer for it.
The easy money has been made. It's over. Steel your portfolio with natural resources. And that's not just energy. Food, for instance, is a vital natural resource. Just don't sit passively by and get hammered in the process.
