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- Inflation Is Not Cooling Down, But the Fed Will Cut Rates
Inflation Is Not Cooling Down, But the Fed Will Cut Rates
Let me explain
I have been following global financial trends since 2016 and I have figured out a thing or two. One of the most important things I have learned is the difference between what is happening and what everybody says is happening.
They can know what is happening but they will only say what they are supposed to say. I have seen many experts come on business TV to give their perspective and it is always measured. They speak their narrative. They want to influence the way you think.
I have since caught on. The thing about investing is that when there is a consensus narrative driving a bull market, you look like a fool if you speak otherwise. Some even assume you have lost your hedge.
Only if you end up right do you get people hailing you as a kind of genius. And sometimes, you don't even get that privilege.
This is just to show you the nature of the business. I have said this since last year 2023 that inflation is not cooling down. However, I didn't understand the whole thing about rate cuts until recently. Let me explain.
Why Inflation Won't Cool
The two root causes of inflation were the oversupply of money into the system (in 2020 especially), and the supply chain issues (mostly stemming from the lockdowns). Now, the question is this - has anything improved on those two things to justify inflation cooling?
Remember that interest rates were zero or close to zero in most places before the lockdowns. So, the additional cashflow that caused a surge in total supply did not come from low-interest rates. Instead, it came from quantitative easing.
It was surprising to me that the central bank thought that raising interest rates was the appropriate response to the money supply issue. While that was necessary to an extent, it was supposed to be a support measure.
The main measure was to mop up all that extra money created during the lockdowns. Raising interest rates makes getting additional capital difficult going forward. It's not mopping up the money already created. The program designed to mop up the money created is quantitative tightening.
While the Federal Reserve says that they are on a tightening cycle, if you look at their numbers and charts, they were net quantitative easing in 2023. This means that instead of mopping up money, they created more money.
They created more money for banks. But a lot fewer people could borrow money from banks. (This will only lead somewhere nasty).
So, the money supply didn't get significantly reduced. It just concentrated more in the hands of those closest to the system. The money supply actually increased.
Now, to the second point. Has supply chain issues been resolved? To a large extent, the situation has improved since the height of the lockdown. However, more issues keep developing on the wings of that.
Consider the Red Sea complication and the fact that freight costs have surged again. Now ships have to go around the African continent to go from Europe to Asia and vice versa.
While I don't expect that inflation should go back to the 2021/2022 highs, it is fairly certain to me that it is not going back to 2%. At least, not with these menial measures by the central banks. And 2% remains the goal of the central banks. This is a serious issue.
So, expect inflation to remain sticky at around 3% to 4%. To the Wall Street people, that means nothing. But to the average everyday working person, it means a whole lot.
This is why I say the world is treading dangerously close to the worst-case scenario which is extreme wealth inequality. I hope things change before getting out of hand.
So, if inflation is not cooling, why will the Fed cut rates?
Why the Fed Will Cut Rates in 2024
First, you have to understand that the Federal Reserve was created to support banks. They are the insurance policy to prevent banks from collapsing. That is their secret mission.
Now, why do banks still collapse then? Why did Bears & Stearns collapse in the 2008 crisis? Why did SVB collapse in 2023?
First, listen to what the central banks say. Now, they tell people that their mission and goal is stability in the financial system through monetary policy. They say they want to keep inflation low. But it is all a nice front.
Due to this front, they have to make their goals less obvious. So, when bankers do things that break the system, they have to make someone a scapegoat.
All of the things Bears & Stearns did in 2008 to warrant a failure, all of the other banks did too. The only thing was that they cracked first. Whoever cracks first gets to be the scapegoat. The central bank will save everybody else in the name of ensuring "stability".
The same thing with SVB. Almost all banks had the same problem. They all did the same thing. They all packed their depositor's money in treasuries. SVB was just the first to fail.
The first to fail gets to be the scapegoat. Everybody else gets saved one way or the other. Now, here is the trick question for you:
If the central banks had to pick one between raging inflation and saving the banks, which one would they pick?
Yes, that is exactly right - they will save the banks. And that is why they will start cutting rates in 2024 despite inflation still raging. I don't know when they will start cutting and I don't like to guess. But it seems to me that they will do what the banks want eventually. They will cave in to the pressure of the banks and the governments. Remember, it's an election year in many places in the world.
The temporary funding measure the Federal Reserve created to hide losses of the banks (after the failure of SVB) will expire in March 2024. I'm guessing it will be extended, but let's see what happens there. That is more important than whether there will be rate cuts or not.
Inflation is not cooling. And it doesn't look like it would cool soon. Expect it to stay in the 3-4% in the foreseeable future. The Fed will cut rates in 2024 because of the banks. The moment someone brings up a good argument for rate cuts (with no reference to inflation), you know it is about to go down.
I'll start listening for that too. The moment I hear it, I'll let you know. I'm guessing someone should come up with a good argument on or before March. And when you see the Fed chair backing up that narrative, you know it's about to go down. But things may take another direction though. You never can tell.
This is why you must never trade the markets for short-term gains. Don't gamble. You have to invest with a long-term strategy. And I have created one for you called the millionaire investing playbook.