Sept. 29, 2023: Let’s say I am the Fed and I want to protect the markets, consumers, and citizens from reality. So, I hide a T-Rex debt monster behind a curtain called the Fed’s balance sheet. I monetize or “feed” the T-Rex over-time by buying up newly issued IRS debt, and thereby increasing my balance sheet while injecting money into the economy during the Pandemic. This lowers interest rates and increases spending — indirectly through lower rates and directly through increased liquidity.
It appears as though I have successfully hidden the T-Rex until inflation from all the increased liquidity bubble shows up. Again, I want to hide my T-Rex so instead of selling off my balance sheet to absorb the excess liquidity and reduce inflation directly I choose to, instead, try to reduce inflation indirectly through raising short-term interest rates (the discount rate) in order to reduce aggregated demand and reduce inflation. In essence, I am attacking the economy more than I am attacking inflation. My balance sheet does go down a little, but only because I am letting bonds expire and roll off my balance sheet and thus not reducing the level of liquidity or my balance sheet all that much. In other words, I m playing “hide the debt monster.”
This process leads to a situation in which the only aspect of aggregate demand keeping my economy from falling into recession is consumer expenditures. But, I am weakening the economy and the consumer steadily though higher interest rates. And still, I have cooling yet persistent inflation. If the consumer begins to slip, as is now the case, the economy will go into a recession with persistent inflation that I the Fed failed to fight. This situation is called stagflation. If I the Fed decide to attack the recession with more money and build up my balance sheet again, it will only increase inflation all the more. Alternatively, if I the Fed attack decide to attack inflation directly by releasing the T-Rex of debt and sell bonds, then the recession turns into a depression as the already weakened economy is eaten alive by plummeting bond values and skyrocketing interest rates.
A dysfunctional congress then allows a debt default. Bond prices plummet further and interest rates go through the roof. The dollar’s international value then disappears and, thanks the the UAW, all three U.S. automakers again go broke. We are isolated and weak and Trump is again President. Will it be hello here is the IMF, and outside international financial institution to the rescue, or thanks to Trump, hello to Vladimir Putin to finally erase the U.S. from existence?
Okay, with such a rosy scenario up which to base your forward expectations here are a few stocks to consider. (Hey, there are still cheerleaders out there!): Consider LMB, CPYYY, MDU, NFG, ACDVF, BTU, LYV, and JBI. For dividends consider: BMA, CVI, MDC, PHG, RIO, AEG, ALE, CIG, and GPRK. Over the previous 3 months, the top ETFs were: XLF, DFS, MGV, VYM, and VTV. As always, Good Luck and Good Investing!
