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The FED are like your grandparents who gave you extra allowance money.
Your PARENTS are like the media, economic and political pundits shaming them for spoiling you.
The truth is both are right.
When it comes to the economy — we sometimes need the extra BOOST OF MONEY especially during tough economic times like the past 12 months.
BUT we have to understand that this extra money causes UNINTENDED CONSEQUENCES:
…We become DEPENDENT on it
…We end up in BIG DEBT because of it
…We create an INVISIBLE MONSTER (inflation) that destroys it
Why should you care?
Because we are in uncharted territory. The FED has never printed this much money.
In many ways, though, they didn’t have a choice.
The alternative was let the economy and stock market crash — have a prolonged recession or potentially a depression, resulting in even more dire consequences…
This week, let’s break down the FED in <5 mins:
FED 👉 Mission
INFLATION, INTEREST RATES & DEBT 👉 Invisible Killers & House of Cards
GRITS TAKE 👉 What the FED said this week & How are we playing it?
Let’s get started!
1. FED: Mission
Fourteen years ago, when I started working in finance, every 8 weeks the market (and the investment team I worked with) would act like a deer in headlights hanging on to every word of 7 people in suits who don’t know how to smile.
This whole process used to confuse and bore me.
Today, the meetings have gotten a little livelier, the stakes are much higher and I understand what the hell is going on.
But all jokes aside, these meetings are important.
They affect everything from your mortgage to the cost of that delicious Big Mac at McDonald’s.
What is the FED?
The FED was invented 108 years ago with a MISSION to control the amount of money swimming around in the economy — especially during PANICS & CRISES.
The FED is the central bank of the United States aka the BANKER TO ALL THE BANKS.
Their goal is to keep the economy healthy.
Think of the economy as a spaceship with the FED as the captain. The captain has to keep the right amount of fuel (money) in the tank to keep the ship (the economy) sailing smoothly.
Too much fuel and the ship will explode.
Too little and the ship will crash.
To control the FUEL (MONEY), the captain has a:
It’s a constant dance between GAS and BRAKE to get this journey right.
The point of the FED meeting every 8 weeks is to communicate to the market how well the ship is flying and whether they will be hitting the GAS or BRAKE pedal soon.
And what you eventually learn is that:
"Successful investing is anticipating the anticipations of others." - John Maynard Keynes
So, by analyzing every word the FED says, Wall Street tries to gain an edge and adjust their investments: “Sir, Madam, do we strap on YOLO call options this week or crawl into a ball of bonds?”
Now, let’s talk about the consequences of overusing the GAS & BRAKE pedals and their limitations. Because at a certain point the FED is pushing on a string and it has to turn for help to its co-pilot, aka the Government, which has its own pedals.
GAS PEDAL = Stimulus, Spending & Lowering Taxes
BRAKE PEDAL = Reducing Stimulus, Spending & Raising Taxes
2. DEBT, INFLATION, INTEREST RATES & TAXES
There’s a famous saying ‘Nothing is certain except for death and taxes’… when it comes to the economy its DEBT & TAXES.
I encourage you to watch this video. Although a joke, there is a golden nugget of truth.
The entire world is in a lot of debt and at the end of the day we all borrow from each other. So if we are all in debt together, what can really go wrong? Don’t we always just find a solution?
The U.S has the biggest debt load in the world, currently +$28 trillion and counting. To visualize it:
“This would have you stacking $100 bills into the stratosphere and past the International Space Station. You would have to stack these bills 631 miles above Earth’s crust. That would equal one trillion dollars. Now imagine 28 stacks of 631 mile-high $100 bills. That’s America’s debt.”
To see it climbing in real-time CLICK HERE. A little scary to see that the debt per taxpayer is +$223,893!
But even more scary is the relative number. Today, the US deficit is at 16% of GDP, the HIGHEST since World War II.
So, who does the U.S owe all this money to?
25% to foreign countries like Japan & China
75% to ourselves: the public, pension funds/insurance/banks & other U.S government agencies
In order to keep people wanting to buy & hold U.S debt, the following has to happen:
The bottom line is, to keep people wanting to buy & hold U.S debt they will need to:
Increases TAXES (Government):
To show that the U.S has a plan to pay down the debt, President Biden this week announced plans for the first MAJOR tax hike in American history since 1993. Good news: it’s mainly focussed on taxing the wealthy.
Increase INTEREST RATES (FED):
Higher rates typically mean higher returns, which helps entice buyers of bonds.
For now, though, the FED said rates are staying lower for longer. And there’s an important consequence of doing so… potentially more INFLATION aka the INVISIBLE KILLER.
Let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel on what he thinks inflation could do:
A DOCTOR’S DIAGNOSIS
Although crazy on his predictions, Dr Patel drives the point home, inflation makes things more expensive and therefore every dollar you hold today is losing value.
“Inflation is the rate of increase in prices over a given period of time.”
And although the FED says there isn’t much inflation yet, they used the CPI as their yardstick. I don’t believe that’s a good measure. It leaves out key things like the price of homes (now at record highs), using the cost of rents instead. This will be the subject of an entire newsletter at some point.
For me, I simply look around and see inflation everywhere: house prices, stock prices and commodity prices!
Don’t believe me, just look at a McDonald’s Menu. A BIG MAC has increased in price nearly 3% a year since the 1970s:
The good news is, inflation also makes every dollar of debt worth less. Which means as the U.S prints more money and inflation increases, that debt is being devalued, too. So if they can deflate their debt and inflate their assets, they become richer.
For example, if the UScan grow their economy (5-7%) faster than inflation (3%) than they can outgrow the debt in real terms (2-4%).
And thankfully, as I told you, 75% of the U.S debt is held internally. Countries like Argentina and Zimbabwe that became too dependent on foreign debt holders are the ones that got in real trouble.
The U.S doesn’t have that problem at the moment.
How Grit Is Playing It:
This week, ahead of the FED meeting, stock market volumes were low (a sign of uncertainty) and one of the BRAKE PEDALS (the 10-year treasury yield) hit the highest rate since pre-COVID.
Rising interest rates (rising yields) are bad for the stock market because:
BUT rates aren’t going up anytime soon the FED said this week.
They are keeping rates lower for longer with no rate increase until employment improves. The stock market is pricing in the 1st rate hike in December 2022 and 3.5 rate hikes by the end of 2023.
Last week, I wrote about how I believe the economy will ROAR back to life and highlighted re-open the economy stocks I own: airlines, commodities & entertainment.
These sectors should do well given what the FED said this week.
Plus I would also point out FINANCIALS. This week, Goldman Sachs, Morgan Stanley & JP Morgan (which I own) — all hit fresh new all-time highs.
A few reasons why banks have some of the BEST financial conditions they’ve had in years:
Strong Investment Banking Revenue: Trading, IPOS/SPACS, etc.
Reversing Credit Losses: Put in place as precautionary capital cushions due to COVID but many banks are reversing them now.
“JPMorgan, in fact, has already released $2.9 billion in previous credit loss provisions, adding 72 cents to its fourth quarter bottom line.”
Short-Term Rates LOW: Banks Cost of Borrowing Low
Long-Term Rates HIGHER: Banks can charge more interest on mortgages, etc.
And — last but not least — the FED said GDP could grow +6.5%… With this kind of growth things could look pretty WILD by 2025…
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Tesla has now made more money by buying and holding Bitcoin than in 13 years of selling cars.
What else we Grittin’ On:
STRIPE. Valued at $95 Billion. Becomes Top U.S. Startup. FinTech is eating the world!
FedEx. eCommerce boom results in BEST February quarter in the companies history. eCommerce grew 40% in 2020 to 21% of retail sales.
EV. Electric vehicles could cost less than $5,000 some day says Morgan Stanley analysts. Electrification of everything is happening!
DEBT. Interest payments about to balloon out of control. This is why interest rates can’t go that much higer!
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