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Interest Rates: Here We Go Again

Written by Briton Ryle
Posted July 29, 2019

Well, it was nice while it lasted. For the last three years or so, the Fed has been acting downright rational. The balance sheet has been shrinking, and interest rates have headed back to "normal" levels. 

But it looks like interest rates are headed lower on Wednesday, when the Fed is scheduled to deliver its latest statement. (At least at this point we'd better hope the Fed is ready to give the market what it wants. Stocks have rallied nonstop since Powell signaled that the Fed would act. If it doesn't, holy moly, this market is gonna get a severe beat-down.)

Apparently the Fed has added a third mandate. In addition to price stability and full employment, the Fed is now in the bull market business. Powell said it outright: He will do what it takes to keep this 10-year bull market going. 

I guess a third mandate makes sense. Because it hasn't done so great with the first two. The Fed has proven that it cannot spark inflation to its 2% target no matter what it does. $3 trillion in bond purchases couldn't buy any inflation.

And the unemployment rate has been below 5% since 2016.

So the Fed is rewriting its mission statement so it can support the one-dimensional economy it created.  

And it's a damn sorry thing. Because the Fed's zero interest rate policy (ZIRP) and quantitative easing have done serious harm to the U.S. economy. The increasing wealth gap, the stagnant wages, the share buyback frenzy — these are just a few of the imbalances the Fed has created. And apparently it's not enough, because they're going back for more...

Stop Digging!! 

The big problem with the Fed is that it believes its own BS. The formulas appear simple. Cut rates, and you'll get some inflation. Cut rates, and businesses will invest and hire people. Cut rates, and consumers will borrow more money to buy houses and other stuff. 

Yeah, I may not have an economics degree from some fancy-pants college, but it's clear to me that none of these formulas make any sense in the post-financial crisis world. People didn't borrow because their finances were wrecked by the crisis, loan standards got tougher, and all the Fed and Congress did was bail out the banks!

Hey, thanks!! We're all so glad those who carry the most guilt for screwing us won't even get a slap on the wrist!

Quantitative easing was supposed to spark some inflation by flooding the economy with cash. But the simplest definition of inflation is too much money chasing too few goods. You know what happened to all that QE cash, right? NOTHING. It didn't chase a damn thing; it just sat in bank vaults. Oh, and no inflation, what a shock. Let's dump another trillion in and see what happens...

Sure, companies could invest... or they could borrow money for nothing and buy back their own, thereby generating 5% year-over-year growth the easy way...

All those Harvard degrees and Ivy League classes, and not one of them could think outside the box. Heck, they didn't even know there was a box!

The Rich Get Richer

Median household income hasn't budged in over 10 years. You know why? It's because average Americans had to hunker down and rebuild. After watching their retirement savings go up in smoke, they left the market permanently. And so they've missed this historic run for stocks....

Of course Wall Street is fine. Of course the 1% is fine. That's how it works. Money talks, everybody can take a walk...

It's infuriating. And the Fed is now about to go back for more. I'm not sure how much more "help" we can afford. 

I want to tell you that the solution is for you to get invested if you're not already, and to invest more if you are dabbling...

You can worry that stocks are expensive — they are. You can worry that the U.S. economy is imbalanced — it is. But none of that matters...

There's trillions of liquid dollars out there — pension funds, insurance companies, money market funds, retirement funds, ETFs — that need to make a return. 3%, 5%, whatever. It doesn't have to be a lot. It just has to be steady. 

This is what turns the financial markets. It's not a bunch of levered-up hotshots looking for the big one. It's trillions of institutional cash looking to make 3–5% a year. 

The Fed is telling these people that they can get that return. And so the market will keep on cooking...

Look, the S&P 500 is up like 20% for the year. Crazy. And very rare. We are due for a correction. And I won't be surprised if one starts this week. But if the market does answer the Fed with a sell-off, please don't jump up and say, "Ha! Ryle was wrong!"

You'll miss the good entry when it shows up. And it'll be my fault.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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