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The Federal Reserve and the BRRR!

The Federal Reserve has reportedly been found a fan of raising interest rates in the near future. They do not feel like the current situation is not positioned well enough to break the inflation trends.

The Fed believes that unemployment is directly associated with inflation. Unemployment can explain inflation and inflation can explain unemployment. But for the first time, unemployment is not explained by disinflation and this further explains the weird environment that we are in.

In the 1970’s when inflation was flying toward 15%, interest rates were sent toward 20% and unemployment was oscillating between 5 - 10%. All of these things were, more or less correlated.

Currently, there is less correlation. Likely because there is more debt in the system than there ever has been.

Consumer Price Inflation

Inflation is cooling and there is no doubt about it. We should no longer concern ourselves with the potential of inflation going back up in a second bought. While I do believe the 70’s are always a great way to study and learn about inflation, most economist fail to explain it best. I’ll write in a excerpt below.

The Inflation of the 70’s was lead by Baby Boomers coming of age and buying up everything in sight - from houses to cars. Inflation was also able to become entrenched because wage growth was a strong part of inflation. In the Quiet 20’s, wage growth is being stomped out and demographics suggest lowering demand, so before you expect recurring inflation, ask yourself, “Where will that demand come from?”

The inflation we’ve experienced was primarily the result of scarcity induced by supply chains & demand induced by fleeting stimulus.

Currently, we are watching inflation plummet from 9.1% in June of 2022 to 3.0% just a year later and I expect the velocity to be maintained throughout the next few months. Even into negative numbers.

Employment Data

Unemployment numbers, regardless of how gloomy they attempt to make them sound are very positive. Many people believe that raising rates would raise unemployment but the likelihood of that happening is low because of the drastic changes we have seen in the US Economy.

In the 70’s there was a great deal of risk taking in the economy, not in the form of leverage like today, but rather in research and development. The money companies borrow today for stock buybacks used to be borrowed to innovate. Innovation poses the risk of being unsuccessful and thus bankruptcy.

Raising rates then meant less risk, resulting in less jobs and less innovation. What do they mean now? Stock buy backs increase! It is a way to make the share look more rewarding than the company. In effect, we might not be doing well but our stock is.

With less innovation in the system, jobs are less at risk. The US Economy is dependent on consumption rather than innovation or manufacturing. According to the latest jobs data, the fastest growing sectors are government, healthcare & social assistance. Retail Trade, transportation, warehousing, mining, and financials saw negative or little growth.

My perspective is that unemployment will have a hard time topping out 5% even as rates go up. As wages continue to stagnate, I’ll be expecting slowing demand. Labor Participation Rate continues to remain well below its pre pandemic levels. Retirement is coming up for our Baby Boomers producing a drag on our working population & demand.

Will the Federal Reserve Raise Rates?

He’d be a fool to do so, but I am expecting foolish behavior. The Federal Reserve has devolved from its independence in the 1980’s under Volcker to being well under the hand of Wall Street. Since the days of Greenspan, the Federal Reserve has looked to inflate the system but now with a lot of debt, the bank has to keep debt cheap for the government.

Raising Rates further will balloon the balance sheet as banks continue tapping into the Federal Reserve for liquidity. It’ll balloon the cost of debt servicing and new debt. It could potentially manufacture the hard landing Powell is attempting to dodge.

I am not a fortune teller but I am weary of the idea of another interest rate hike with rates finally in the sufficiently restrictive zone. I do not believe the Federal Reserve Chairman is that dumb.

Regulations

The Regulatory climate of the last quarter was scary but the Securities & Exchange Commission has began its biggest potential onslaught. It has sued Coinbase & it has sued Binance. Even I don’t trust Binance is following the law, although I find CZ seems to do what is best for the industry often.

Coinbase, however, has a great case and likely will not be found guilty on the counts that count. Hope returned to the market when Coinbase was sued. Furthermore, the SEC was dealt a blow when XRP was recently declared not a security in and of itself.

I think Regulations will be in our favor in the long term but in the short term, expect nothing better than our current situation.

Expectations

CPI

Inflation is going down and it doesn’t look to be heading back up any time soon.

• July CPI: 2.6% - 2.1%

• August CPI: 2.3% - 1.6%

• September CPI: 1.5% - 0.2%

• Q4 2023: -1.0% - 0.5% (yes negative CPI).

This could challenge my theory as food inflation could jump as a result.

Jobs

I expect to see Jobs remain above or at expectations due to the industries we are seeing look for growth.

• July: 150,000 - 215,000

• August CPI: 140,000 - 200,000

• September CPI: 150,000 - 195,000

• Q4 2023: - 100,000 - 175,000 (yes negative CPI).

Federal Reserve Pivot

I am still looking for a Fed Pivot between Q4 2023 - Q1 2024. I genuinely do not believe that the Federal Reserve will maintain rates above 5.00% in a negative CPI. I do believe rates will find themselves near zero soon with the intent to combat the deflationary environment that is likely coming.

The Dollar Index has collapsed, liberating risk on assets. This has increased the price of Stocks to levels not seen since about January 2022.

Cryptocurrency, on the other hand, has not moved much in respect to the Dollar Index, as it normally would. It leads me to believe there is more positive price action ahead.

** Not financial advice, just putting my predictions on chain and sharing them