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I made my way back to California last week and took a walk on pristine Santa Barbara beach towards dusk on Sunday. Even the biggest of big grouches would have had trouble not seeing the beauty of it, or to have found themselves enjoying ‘sunny and 76’. It was Miramar where we raised our kids over the years. Endless summers, beautiful fall days.
Saw a few friends and enjoyed the walk. On the way back an acquaintance and his wife wished me a ‘happy holidays’. I wasn’t ready for it. My gut reaction was ‘oh dear God, noooo’. And I didn’t have to search to find out why. I’ve thrown in the towel on the busted commercialism and stress of this time of year. I’ve entered the ‘this is free comedy’ stage of my life. Dark at times, otherwise a blank canvas I get to paint. Black Friday, you are my huckleberry.
With that, I offer you my brilliants mind’s take on Thanksgiving, and the bounty it offers. Like last year, I want to make an important correlation and venture down the rabbit hole that would put Fed Chair Jerome Powell as the Chef de Cuisine on Thursday, and the rest of the FOMC his sous chefs. It’s rather smart idea, one that I wish they would take seriously. ‘They’ are anyone of note and stature within the Eccles building in D.C. that could advance the cause of a ‘set it and forget’ rates policy. In Ron Popeil they should trust.
So, what are we talking about here? We are talking about this chart below. An absolute mess of one that has stoked massive disconnects in the economy. It’s yours, and you own it FOMC. Let’s look at what you’ve done over time to drive rates all over God’s green earth.
At the turn of the century the markets are tanking on the back of the dot.com bubble and then the unthinkable acts of 9/11 seize the economy up overnight. Rates go from 6.5% to 1% in three year’s time.
Okay, alright, we lived through that. What happens next? We basically go back to the beginning as Fed Funds Rates go from the 1%, back up to 5.5%
Think the roller coast is over? Negative. Just warming up. From the five handle perch the great ‘debt super cycle’ begins to unwind. And by unwind we mean looking into abyss and praying for a remedy before Lehman, AIG, Countrywide, et al take the whole shooting match down. Ready kids? Let’s take er’ back down to the bottom of the monetary policy Marianas Trench. ZIRP (Zero Interest Rate Policy) we go!!!! And we sit in that titanium mini sub for eight whole years. Eight! Having maybe learned something, the Fed then goes on what one might call a thoughtful and deliberate three-year rate hike cycle. We can live with zero to 2.5% and nobody dies.
That lasted a year, and then the pandemic hit, and all hell broke loose again. Having turned themselves in dogs of the Pavlovian kind, it’s straight back to zero. But they fooled around and fell in love one time too many.
Having reached a ‘wholy merde’ moment they realized that the world had not come to an end, and that while free money might have been a salve, it would unleash a level of inflation nobody on the Fed thought was possible. If there was any doubt, this was another of those Pavlovian occurrences. This time with severe long-term consequences for inflation and the economy.
In case you are wondering, yes, my fingers are hitting the keys on this keyboard hard out of pure frustration. But a writer must write.
Having realized that their addiction to ZIRP has finally caught up with it, the Fed jacks rates from zero’ish to 5.5%...again! This time over the course of about 18 months.
And now, we are back into a loosening cycle. The most absurd one I’ve seen in my 28 years on Wall Street. Jerome Powell, the most credible voice of reason for an unreasonable body is out of office in May of next year. And if the Grand Wizard of the United States gets his way, the next Fed Chair will be charged with dropping rates back to zero, regardless of economic need. It’s just what the dude in charge requires.
And there you have it, 26 years of an absolute roller coaster of monetary policy in 8 short paragraphs. That’s the upside of being a bipolar, obsessive compulsive, Wall Street journeyman. The downside, I remember the obscene paycheck I got in 1998. I hit my peak early, as they say.
The brutal reality to trying free money one too many times is that the economy is long-term ‘effed’. But not in a way that most people like to get ‘effed’. Please don’t make me explain what ‘effed’ means. Family program. If you need a hint, here is what it looks like in terms of the prices we are paying today for goods, and services are even worse.
‘But Bryan, what are you saying here? Inflation has gone down, not up over the past two years.’ To which I yell from the highest rooftop, it’s not going down! Simply going up at a slower rate. That three-year super spike in prices from 2021 to 2023 has put the zap on the dislocations in the underlying economy. If you were a ‘have’ before the pandemic, you are now ‘have a lot more’. If you didn’t, the life you want to live economically just got a lot harder to achieve.
Want to find an ‘affordable’ house. Good luck. The only place you will find one is on Fantasy Island where your neighbors are Bigfoot, the Tooth Fairy and Santa Clause. While this chart is about 18 month old, not much has changed except the brutal reality of how bad housing affordability really is.
Back to where we started, the kitchen where the Fed is running the Thanksgiving dinner. My important message to all six FOMC board members, set the temp of rates, and walk away for a year. Set them at 3% and leave. Do anything you want. Practice yoga, travel, learn top paint, do crosswords, anything. Jerome, go follow Dead & Co. and eat as many mushrooms as you like. Love you for that.
And here is definitively why. When you take rates to nothing, or nothing adjacent, you overcook asset prices. That is especially true now. Maybe you get a pass for round one and two. But this one is on you. While stocks might be smoldering hot, you have absolutely scorched the inflationary bird.
While much rarer, pun intended, when you raise rates above 5%, we get into the recessionary danger zone. This has been less true in the past several cycles, but it has had a strong historical correlation.
Channel that Ron Popeil inside. Get your hands off the oven dial. Walk away. Have one of the butler staff keep an eye on things. With a very high degree of certainty, you will wind up with something that looks like this in a year or si, and that’s the new economy end game.
And with that I bid you adieu, at least for now. May your hopes and dreams come true this year and next. If the holidays make you happy, call it a win. Regardless, be good to your fellow man…or woman. We only go around this round space rock once, make the effort to enjoy it every single day. Amen, and pass the potatoes.
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