BALTIMORE – The funny money gets funnier in the U.S., too…

Yesterday, as expected, the Fed raised its key short-term lending rate by 25 basis points to 0.75%.

Stocks fell. Bloomberg Markets:

Federal Reserve officials raised interest rates for the first time this year and forecast a steeper path for borrowing costs in 2017, saying inflation expectations have increased “considerably” and suggesting the labor market is tightening.

The Federal Open Market Committee cited “realized and expected labor market conditions and inflation” in increasing its benchmark rate a quarter percentage point, according to a statement Wednesday following a two-day meeting in Washington. New projections show central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

Debt Monster

You know our prediction: The Fed will never willingly lead interest rates to a neutral position.

It can’t. It has created a debt monster. It must feed this Frankenstein with easy credit.

This time last year, the Fed began its “rate-tightening cycle.” That is, it began raising short-term interest rates.

It pledged to continue to do so in 2016. But then it diddled and dawdled, fiddled and fawdled… claiming to be on top of the situation… watching its “data” come in like a fisherman’s wife waiting for the return of the fleet… and not wanting to admit she was already a widow.

What it was really waiting for was a place to hide. 

The Fed can raise short-term rates. But it will have to follow, not lead. It will have to hide in the shadow of rising consumer prices, staying “behind the curve” of inflation expectations.

That way, the expected real interest rate – the rate of return on your money above the rate of consumer price inflation – never really returns to neutral.

Already, the price of a barrel of crude oil – a key input into prices across the economy – is twice what it was 10 months ago. Leading business-cycle research firm the Economic Cycle Research Institute says the inflation cycle has turned positive.

And already, foreign nations are talking about retaliating against Team Trump by canceling orders and imposing new tariffs in their own versions of “better trade deals.”

This, too, is bound to raise prices.

Funny Money Antics

But if consumer price inflation were really a concern, the bond market would race ahead of the Fed, imposing its own regimen of rising yields.

The Fed’s increases would be too little and too late to have any real effect on the outcome.

Bondholders don’t care much about nominal rates. If consumer price inflation were to rise to the Fed’s 2% target, for example, bondholders might clamor for a 4% yield to give them a positive 2%.

That is a big increase over the 52-week low of 1.32% the yield on the 10-year Treasury note hit on July 4.

But you don’t get that kind of seismic shift without cracking some flower pots.

Much of the world’s $225 trillion in debt is calibrated to borrowers who will have a hard time surviving a 3% interest rate world, let alone a 4% one.

This is an economy that can stand a lot of grotesque and absurd “funny money” antics. It can survive a bizarre financial world; it can’t survive a normal one.

As inflation expectations increase, investors do not sit still and watch their retirements, their savings, and their fortunes get broken by inflation.

They don’t wait for the Fed’s policy-setting committee to meet. They don’t reflect calmly as the Fed’s wonks collect their “data” and create their “dot plots.”

Instead, they act out. The monster gets mad and starts throwing things.

First through the window are the bonds. They get chucked out before inflation manifests itself fully… and long before the Fed increases its key short-term rate.

Then, the “boom” turns quickly into stagflation… as higher borrowing costs pinch off growth even as consumer prices continue to rise.

But more likely, inflation is not really surging… Not yet.

And most likely, it will be the painfully apparent when the U.S. economy goes into recession next year.

Then, it will be stocks’ turn to get tossed out, while bonds sneak back in through the side door.

It will also be apparent that the Fed has taken another false step… that the recovery was a sham… and that it’s the debt monster calling the shots, not Janet Yellen. 

Regards,

Signature

Bill

 

Market Insight


By Mark Ford, Co-Founder, Palm Beach Research Group


The whole time I spent getting rich, only a small portion of my net investable wealth was in stocks. Maybe 2% to 3%. And almost all of that was in no-load index funds.

Then I read Mary Buffett and David Clark’s The Warren Buffett Stock Portfolio, and I became a convert to Buffett’s philosophy of stock investing.

What Buffett has been doing with Berkshire Hathaway for the past 10 years or so, I’m told, differs in some ways than the stock investing strategy explained in David Clark’s book. I based my strategy on that original concept. I’ve been doing it now for five years, and so far it’s produced very good results.

The strategy comprises six simple rules:

  1. Invest only in big, simple businesses that dominate their industry because of some advantage they have that others lack.

  2. Don’t worry about year-by-year profits. Invest for the long term (and by that, I mean 10 years or more).

  3. Don’t invest in companies you don’t understand. You don’t need to know the company inside and out, but you at least need to understand how they sell to their customers, why their customers prefer them, and why it is that they are likely to continue to dominate their industries.

  4. Whenever possible, invest in “investor-friendly” businesses – companies with a long-term history of giving dividends to their investors year in and year out.

  5. It’s also nice if the company has lots of cash and an easy debt load.

  6. Never overpay. Even the world’s best companies can be overpriced. And if you buy them when they are, it may take you a long, long time to make up for your overpayment.

As I said, I used to put my stock money in no-load index funds. The idea there was to have some of my wealth in the stock market and expect, over time, that the return I would get would be equal to the market, plus or minus a percent.

I still think that’s a pretty good strategy for beginners or people who have zero interest in managing their own stocks. But I do think that the portfolio of stocks I have now, based on the six rules above, will give me more power and endurance than an index fund with equal or greater safety over time.

P.S. Over the last five years, I’ve worked with a team of bright people to develop essays, reports, and how-to manuals on building wealth surely. They’re based on my own personal experience or coaching others through them.

I can promise you this: It doesn’t matter whether you’re 60 years old or a youngster, rich or poor, Harvard educated or a high school dropout, handicapped or able-bodied. This program is the best in the world if you want to build a seven-figure net worth in the next seven years. For more information, click here.


Featured Reads

Biggest Hack Ever – 1 Billion Yahoo Accounts Breached
More than 1 billion Yahoo user accounts – including phone numbers, birthdates, and security questions – may have been stolen by hackers during an attack that took place in August 2013.

Work Longer = Live Longer
Baby boomers should stop thinking about putting their feet up when they retire – and maybe not retire at all for the sake of their health, according to the government’s chief medical officer.

The Fed’s Only Escape Is to Trash the Dollar
The Fed’s reckless actions have completely doomed our financial system… and the only escape may be to trash the dollar. But that will have a major impact on gold.


Mailbag

Nothing new to report in the Mailbag today. Have you seen prices rising in your day-to-day life? Do you believe the feds’ official inflation figures?

Share your thoughts with Bill and the team at [email protected].


In Case You Missed It…

What: RED ALERT – The trigger event that could effectively end the American Empire.

When: Sunday, January 1, 2017, 12:01 a.m.

Who: Jim Rickards – Ex-CIA insider and currency expert.

Where: A private website you can access when you click here.