Picture source: Depositphotos.

My investment portfolio of 40 stocks went up 45.5% last year compared to the S&P500s gain of 23.3%.  I said more about that recently in That Was The Year That Was.  Three weeks into this year and my portfolio is up 15% compared to the S&P500 gain of 2.9%.

That sounds too good to be true and so I shall soon prepare for the Fed's next party spoiler. 

The picture above is a show of confusions that typifies that state of the Fed's confusion.  Its purpose is to prevent financial crises yet today states such nebulous things as its aim being to get to a neutral interest rate while the Fred chair Jay Powell states they lack clarity on where that is! How can they state their aim is to get to a target without knowing what the target is?!

Nor is this new and takes us on to view ...

The Fed's "successes"...

Around 700 B.C., a people called the Lydians became the first Western culture to make coins. Others followed and in 1907 after a bank run on US dollar coins Congress decided to split those coins into two halves called money and fiscal and created an independent federal reserve system to establish economic stability via monetary means. Fiscal matters were the responsiblity of others  Politicians being politicians they ignored over 2000 years of history that proved those two halves are inseparable parts of a whole. 

What followed has been a new history of...

Wreck, Repair, Repeat 

Since its formation in 1913 the US Federal Reserve Bank - the Fed - has rarely achieved its reason for being; to promote maximum employment and stable prices and to enhance the stability of the American banking system.. The Depression in the 1930s was blamed on the Fed by many economists. It failed to stop The Great Inflation in the 1970s, the dotcom bubble and bust of 2000 caused by venture capitalists, investment banks and brokerage houses. Behind all three stood the Fed.  The Great Recession of 2007/8 was caused by banks under its watch with their credit default swap/subprime mortgage "innovations". 

The Fed fed inflation following the Covid pandemic supply chain bust inflation that it attempted to control with very high interest rates instead of lowering them to ensure investment in new supply. That meant the last four years were the worst four years of inflation in many years and caused the first decline in "real" consumer incomes since the late 1970s.  

Among other damaging things that directly created a US home ownership affordability problem that still exists today – homes are now less affordable for many than at any time since the 1960s with mortgage rates now at around  7% making matters worse!  Statista calculated that a majority of Americans can no longer afford an average priced home. A concomitant of that has been rental increases that fed directly into inflation and thus meant the Fed has kept interest rates high – a self feeding negative cycle that is also pushing the US government debt mountain to unsustainable highs costing the country $1 trillion per year in interest rates alone, something the Fed itself is warning about!  

History is replete with examples of Fed failures but the Fed does not even learn from its admission of historic failures displayed on this chart on its own website... 

(Click on image to enlarge)

Source: Federal Reserve Board of Governors

Actual inflation targets are not in the Fed's mandate but it self-decided to explicitly target a 2% inflation rate in 2012.  The 2 per cent figure is totally nebulous. It was politically plucked out of the air in 1990 to be used by the Reserve Bank of New Zealand — a tiny country with agriculture as the main part of its economy — and later copied by many other countries whether or not it was suitable for their larger and mostly very different economies.
It had — and has — no scientific base.  That subsequently suppressed GDP growth and the strong economy that its policies should be supporting.  Facts show that US inflation averaged 3.3 per cent over 100 years from 1914 to 2014, during which time the economy did well despite that “high” level of inflation as the average real (inflation-adjusted) economic growth rate of the US economy over those 100 years was approximately 3 per cent, according to the Bureau of Economic Analysis.  During the last 10 years since 2014, while the Fed has strenuously attempted to keep inflation at or below its 2 percent 2012 target, the average growth rate has been below 2 per cent and 2.1% since 2020. Hardly the sign of an economy growing enough to reduce that debt mountain. 

Soon import tariffs might increase price pressures on already constrained incomes and the Fed will raise rates to"fix" that.  Currently the jobs situation is healthy partly due to fiscal initiatives so the Fed is likely to keep interest rates high until those high rates make it unhealthy and the merry go round starts again! 

Today the Fed also sits silently as other threats add to dangers of that debt mountain. Other red flags are flying and new bubbles could be forming ... 

Red Flags And Bubbles

- Consumer debt.  Bloomberg recently reported that  "Higher debt levels for mortgages, auto loans, credit cards and student loans last quarter drove overall consumer debt to a new record of $17.9 trillion". If people get the desperately needed pay increases needed to get out of that trap the Fed will raise interest interest rates!   

- Commercial Real Estate.  More than $1 trillion CRE loans are coming due for repayment this year - high interest rates and low occupancies could cause the collapse of many banks that do not get repaid.

- Gold. There has been a flight into gold for safety but where is it? The following is from Jensen's Economic, Precious Metals, & Markets Newsletter. Sep 02, 2024 "The heart of the problem that is the London gold and silver Over-The-Counter (OTC) cash trading market is that it is based on trading of promissory notes for immediate ownership of metal with only a tiny fraction of that metal available for delivery.

This August 24, 2024 post showed that there is an estimated 9,500 tonnes to 14,300 tonnes of standing claims in the London cash (immediate ownership) OTC gold market.

And yet, London gold vaults hold a ‘float’ of only 1,300 tonnes of gold that are not held by ETFs or the Bank of England for itself and other nations.

The large majority of the London 1,300 tonne vault float is owned by holders that do not trade gold - only a small portion of the float is available to market for settlement of these spot gold promissory notes when delivery is demanded."

Likewise in the US where no one seems to know how much gold is really held in Fort Knox, if any!   Garfield Refining tells us that "Few people – even U.S. presidents – have actually seen the gold reserves. The actual structure and content of the facility is only known by a few people, and no one person knows all of the procedures to open the vault. President Franklin D. Roosevelt was the only person outside of normal security personnel permitted to see the gold reserves up until 1974, when a group of journalists viewed the vaults. The journalists were granted access to quell persistent rumors that all of the gold in Fort Knox had been removed. (It hadn’t.)".  That is long ago and before today's US debt mountain existed.  Today central banks and official institutions keep buying gold and one wonders where they are getting real, physical gold from - if at all!   An almighty crash for almost all assets could happen if it proves the gold all are "buying" does not actually exist. 

- Credit Default Swaps, CDTs, a major cause of 2007/2008 Great Recession, have been reinvented by banks in the form of CRTs or Credit Risk Transfers. They transfer risk from regulated banks to nonbank entities that could be risky. Having done that "de-risking" banks are now  pouring money into cryptocurrencies!   

- Bank risks. The banking lobby has persuaded the Fed to reduce proposed capital requirements, making large banks even riskier. The new Trump administration favours less regulation. Lessons from the 2007/8 financial crisis no longer count!

- The new crypto craze that has an estimated 18 million Americans now invested in cryptocurrencies, according to the Federal Reserve, pouring billions of dollars pouring into something that has a market capitalisation of over $3.5 tn but has no cash flow or intrinsic value to support it.  That has all the signs of another dotcom bubble and bust.  Bitcoin alone is a $2trillion mammoth that was worth around $440 in 2016 rising now to over $100,000 yet nothing of substance justified that.

The so-called PNUT coin soared from $0.1 to $2.27 in a matter of days pushing its market cap recently to over $2 bn. Microstrategy has joined the Nasdaq 100 after a rapid ascent from being an unknown software company by selling shares to fund bitcoin buys. Its CEO is the same person who headed Microstrategy during the dot.com bust. Bloomberg has just reported that "MicroStrategy Inc.’s Michael Saylor may soon have almost as many common shares at his disposal to help fund the company’s Bitcoin buying spree as market behemoths Amazon.com Inc. and Alphabet Inc. have outstanding."  It is now the largest corporate holder of bitcoin.  Now banks are getting in on the act for fear of losing out. They will be the first to panic when the tide turns because of the other fear that drives them - the fear of losing!  A fundamental feature feature of a currency is that its value needs to be stable - cryptocurrencies are anything but stable! I also cannot understand why - if cryptocurrencies are new forms of currencies - are they priced in dollars? 

- US corporate bankruptcy filings hit a 14-year high in 2024 as filings continued in December 2024 and extended a trend from previous months. According to S&P Global Market Intelligence at least 686 companies filed for bankruptcy. Many of those were in the consumer sector hit by high interest rates reducing spending power. 

- Corporate defaults are surging. US companies are defaulting on junk loans at the fastest rate in four years as they struggle to refinance the cheap borrowing that followed the 2020 Covid pandemic.

- US credit card defaults are increasing and are now at the highest level since 2010 jumping 50% in 2024 from 2023. 

- Private Funds. These are at all time highs and,  according to this article in the Financial Times, offer clues to the origin of the next financial crisis. 

- Money supply shrinking.  The Fed has engaged in quantitative tightening since the middle of March 2022.

- Markets tend to ignore these things ...until they don't! 

Surely the Fed should be watching and being proactive about the dangers those points pose - giving directional guidance and acting accordingly.  Instead it watches the past with the Fed chair, Jerome Powell, saying after the last meeting “Economy is hard to forecast beyond near term”; “I don’t know timing, substance of policy changes”; “We don’t want to do a lot of forward guidance” and “There is a fair amount of uncertainty.”  Other statements include "We don't guess, we don't speculate and we don't assume. With 23,974 employees one wonders what the Fed does do!  

He also claims to be "data dependent".  The data for the Fed's mandate of maximum employment come from the Bureau of Labor Statistics, BLS, measures labor market activity, working conditions, price changes, and productivity in the U.S. economy. That for its preferred measure on inflation - the personal consumption expenditure (PCE) measure is provided by the above mentioned BEA. 

The BEA has about 500 employees and an annual budget of approximately $101 million. The BLS has around 2,100 employees and a budget of around $800 million. 

In its own words on the Fed website the Fed has 23,974  employees and  "employs more than 500 researchers, including more than 400 Ph.D. economists, who represent an exceptionally diverse range of interests and specific areas of expertise. Our researchers produce a wide variety of economic analyses and forecasts for the Board of Governors and the Federal Open Market Committee".  From the actual 2013 amount to the budgeted 2023 amount, the total operating expenses of the Federal Reserve System have increased an average of 4.6 percent annually. It increased that budget by 10.3% to $7,123.7 million in 2024 showing it does not even attempt to keep its own inflation rate at or below 2%!  

 One wonders why the Fed exists at all if Powell's conclusions are all it actually produces with the actual data coming from other sources!   And it even questions that -  on January 8th, Fed Governor Chris Waller gave a speech titled “Challenges Facing Central Bankers“.  He basically admitted that the numbers aren’t accurate.   I learned that last point from this excellent Talk Markets article by Keith Schaefer titled Inflation - It's Lower Than You Think. 

 Those 400 PhD economists also appear not have learned Economics 101 that shows high prices cure high prices. High interest rates to stop demand now prevent the market driven supply growth price fix thus also ensuring higher future prices again when demand recovers. 

The separation of monetary and fiscal responsibilities has led to tug of wars between the two causing horrendous economic destruction for most people over many decades.  The Fed's monetary policies wreck, fiscal policies such as the Chips Act and IRA try to repair until the Fed wrecks again. Monetary and fiscal matters should be two sides on the same coin.

Companies do not separate them and some have market caps larger than the GDP of many countries. On that basis Apple is larger than all countries except the US, China, Japan and Germany. Apple also does well for most stakes holders without an ever growing mountain of debt. 

That Apple example provides a clue to the....

Solution 

Stop the Fed's game of Wreck, Repair, Repeat   

President Woodrow Wilson signed the independent federal reserve act into law and later said "I am a most unhappy man, I have unwittingly ruined my country". Wikipedia has more on that 

Close the Fed!  The Fed is supposedly accountable to Congress but in practice it is answerable to know one. Its own lack of cost control indicates the same internally.  If the US is to return to grow at that 100 year rate of 3% - but without the crises - it needs joined up fiscal and monetary leadership and the coin joined as one again.  

The Fed's life should be ended with future policies being made by the Treasury. The $7,123.7 million Fed budget would instead go towards lowering the government debt mountain, companies and people will be able to plan with a degree of certainty and the markets will overturn any Treasury attempts to do anything too risky. The recent Liz Truss moment in the UK showed what happens if they do.   Hopefully the incoming administration with its focus on efficiency will make this merger happen and will avoid those errors in the future. It will not happen overnight but I suspect President Trump will slowly move in on the Fed  one way or another.

Hopefully too that will happen before another Fed led downturn but - just in case - I am thinking about... 

Where to invest if there is a Fed led downturn 

I am fully invested at present and enjoying President Trump's honeymoon days. He will not want a market crash on his watch but also honeymoons don't last forever. I am preparing to follow the old adage and Sell in May 

I shall stay invested in US companies due to dollar strength and will stay mainly with my electrical supply vertical picks including nuclear...

• BWX Technologies (BWXT)
• Centrus Energy (LEU) 
• Cummins (CMI). 
• GE Vernova (GEV)
• MYR Group (MYRG)
• Nuscale Power (SMR) ... beware if you don't like big risk picks
• Powell Industries (POWL)
• Quanta Services (PWR)
• Sterling Infrastructure (STRL) 

Upgrading the US power supply system is long overdue and these companies should power through almost any downturn.

No doubt readers have their own ideas and mentioning those in Comments below will help us all crash proof our investments.

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