🔴 Powell Dashes Hopes for a December Rate Cut - Ep 1048

The Fed's Rate Hike and End of QT [00:56]

• The Federal Reserve concluded its two-day FOMC meeting by raising interest rates by 25 basis points, setting the Fed funds rate between 3.75% and 4%.
• The official inflation rate is reported at 3%, but the speaker disputes this, arguing actual inflation is much higher, making real interest rates negative, even more so after accounting for taxes on interest.
• The Fed announced the official end to its quantitative tightening (QT) program in December.
• The Fed's balance sheet currently stands at $6.7 trillion, a significant increase from below $1 trillion before the 2008 financial crisis.
• The speaker recalls Ben Bernanke's denial in 2009 that the Fed was monetizing government debt, claiming purchases were temporary; the speaker argues this has proven false with the permanent expansion of the balance sheet.
• The speaker states that ending QT is the first step towards initiating quantitative easing (QE) again, likely next year.
• While maturing Treasury bonds will be rolled over, maturing mortgage-backed securities (MBS) will be rolled into Treasuries, not more MBS, causing the MBS on the Fed's balance sheet to contract, potentially leading to rising mortgage rates.
• Bonds were "clobbered" following the announcement, with yields on 10-year to 30-year bonds increasing, a predicted outcome by the speaker.
• The speaker forecasts further rate increases before the December Fed meeting, expecting rates to be higher in December than they were in November.

"We are no better than a banana republic. We are in fact a banana republic."

Fed Chair Powell's Remarks and Market Reactions [09:06]

• Jerome Powell repeatedly stated that monetary policy is not on a preset path and that a December rate cut is "far from a foregone conclusion," contradicting market expectations of a virtually certain cut.
• Before this announcement, a December cut was considered a lock; now, while still favored, the odds have decreased significantly.
• The market's reaction was not as negative as expected, with the speaker suggesting some believe a cut will still occur, possibly due to political pressure or the Fed wanting to appear more deliberative.
• The stock market, particularly the NASDAQ, hit new highs, with the speaker noting other indexes were down but not dramatically.
• The speaker characterizes the rate cut as "hawkish" in the sense that it was accompanied by language suggesting future tightening or caution, though the speaker believes everyone at the Fed is now dovish.
• There were two dissents at the meeting: one member advocated for a 50 basis point hike, and another for no change.

"If the economy is so great, why does the Fed need to slash interest rates, especially when inflation is as high as it is and going up?"

Inflation, GDP, and Employment Metrics [14:13]

• Powell presented a positive spin, describing the economy as being in a "great place" with near 2% growth and full employment.
• The speaker dismisses these claims as "BS," arguing that "full employment" is a misnomer due to current measurement methods and that GDP numbers understate inflation.
• Powell admitted inflation was 2.8% (core year-over-year excluding food and energy), and even claimed it was 2.4% if tariffs were excluded.
• The speaker argues that 2.4% or 2.8% is still significantly above the 2% target and that the Fed's focus on excluding certain factors is a form of manipulation.
• The speaker highlights that if inflation were below target (e.g., 1.6%), the Fed would be taking drastic measures, but when it's above target, the response is muted.
• Powell suggested that tariffs cause a one-time price increase, not necessarily sustained inflation, which the speaker disputes.

"If you can issue a token backed by dollars, why not issue a token backed by gold?"

The Neglect of Gold Prices [17:30]

• The speaker points out that the significant rise in the price of gold, reaching $4,000, was entirely unaddressed at the FOMC meeting, despite gold being a primary monetary asset.
• Former Fed Chair Alan Greenspan used gold prices as a barometer for interest rate policy, with $400 gold indicating he was too loose and $300 indicating he was too tight.
• The speaker questions what $4,000 gold signifies about current Fed policy, implying it signals extreme monetary looseness.
• Gold has fallen below $4,000 but remains in a support zone, with the speaker expecting it to hold and not fall significantly further.
• The current price of gold is considerably higher than when the Fed last cut rates, and the speaker sees this as gold signaling that the Fed's rate cuts are a mistake.
• The speaker criticizes journalists for not asking about gold or its implications during the press conference.

"Gold is reacting to a Fed that should not be cutting rates. Rates are too low and the Fed is making them lower."

Shift Gold Platform and Gold as a Medium of Exchange [24:53]

• A new "Trade" feature on the Shift Gold website allows users to buy gold and silver in small increments ($100 or $50) without taking physical delivery.
• Shift Gold will store the metal in a third-party vault. This method is presented as cost-effective, with purchases close to spot prices.
• The long-term vision includes debit and credit cards linked to these accounts, allowing users to spend gold in real-time or borrow against it.
• The goal is to create an ecosystem where gold can be transferred between account holders and accepted by merchants, effectively using gold as a medium of exchange.
• A "goldback token" is planned, similar to a stablecoin but backed by gold, offering real stability compared to dollar-backed tokens.
• The speaker contrasts this with Bitcoin, suggesting gold as a medium of exchange is more practical and achievable.

"What I'm ultimately going to be doing is building out a a a ecosystem where gold can serve as a medium of exchange."

Bitcoin vs. Gold and Market Bubbles [33:00]

• Bitcoin has fallen back to around $110,000, down 12% from its US dollar high.
• Bitcoin did not make new highs when gold did, and it has not kept pace with the NASDAQ's recent rally.
• The speaker predicts a significant drop in Bitcoin, especially if the NASDAQ experiences a correction or if gold rises further.
• The speaker criticizes the "consensus trade" around Bitcoin, where investors believe it cannot lose value and is guaranteed to multiply in price.
• This widespread conviction and lack of negativity around Bitcoin are seen as signs of a market about to "blow up."
• In contrast, gold is described as a lonely trade, with few investors owning it as an investment compared to Bitcoin.
• Jeff Gundlach's reduced bullishness on gold (from 25% to 10% allocation) is mentioned, though he still recommends gold and base metals.

"Bitcoin is not going up with risk assets. It's not going up with riskoff assets. It's, you know, it's it's just drifting down."

Stock Market Valuations and AI Mania [37:10]

• Reporters asked Powell about concerns regarding tech stock valuations and their relation to monetary policy, to which he responded that interest rates are not affecting AI stock prices, which the speaker finds ridiculous.
• The speaker believes cheap money is fueling the "mania" in tech stocks and that artificially low interest rates lower the cost of capital, incentivizing companies to invest in automation and AI, leading to layoffs (e.g., UPS, Amazon).
• Powell dismissed concerns about market overvaluation, stating the Fed doesn't "pay much attention or care about any individual price," and prefers to focus on the "totality of the market and the economy."
• Nvidia's market cap has exceeded $5 trillion, approaching the total market cap of Japan and representing a significant portion of the overall US stock market.
• The speaker compares the current situation to the 1990s dot-com bubble, dismissing Powell's assertion that current companies have actual business plans as insufficient to prevent a bubble, especially when trading at ridiculous multiples or relying on vendor financing.

"If it walks like a bubble, if it walks like a duck and quacks like a duck, it's a duck."

Tariffs and the Decline of US Manufacturing [42:43]

• The speaker critiques Donald Trump's rhetoric on tariffs, arguing that while they may protect a small segment of manufacturing workers, they harm consumers (who are also workers) through higher prices.
• The US has only about 7.3% of its workforce in manufacturing, meaning any potential benefit from tariffs would be limited.
• The US economy is described as a "gigantic distribution center for foreign produced goods," with the top employers being retailers and delivery services (e.g., Walmart, Amazon, FedEx, UPS).
• In contrast, countries like Japan and Germany have a large proportion of their top employers in manufacturing.
• The speaker contends that tariffs are unlikely to work because the US lacks the industries to protect, and they will only make remaining industries less competitive.

"We don't have a single one [manufacturing company] in the top 10 [employers]."

Fed's View on Inflation and Consumer Pain [47:06]

• Powell admitted that people are upset about inflation because prices have risen significantly and have not come down, a point the speaker agrees with.
• The speaker questions why the Fed targets 2% inflation when prices have already surged and never returned to previous levels.
• The speaker argues that the Fed should target falling prices to provide relief, not just a slow rate of price increases.
• The Fed's approach of averaging inflation over time, previously used to justify stimulating the economy when inflation was too low, is contrasted with their current stance that allows prices to keep rising.
• Powell's statement that wages need to "catch up" to prices is seen as a call for more inflation, which will inevitably drive prices up further, creating a "dog trying to catch its own tail" scenario.
• The speaker criticizes the Fed's belief that rate cuts stimulate employment by stimulating demand, arguing that job creation comes from stimulating supply, which is actually curtailed by low rates.
• The speaker explains that the only way inflation helps jobs is by eroding the minimum wage, effectively making it cheaper to employ unskilled labor, but this is not the stated goal.

"If you admit that people are pissed because prices are so high and inflation was way above 2% for so long, why based on the same rationale, why is the Fed not targeting inflation way below 2%?"

The Inevitable Dollar and Sovereign Debt Crisis [55:05]

• The speaker reiterates that the Fed's policies are creating inflation and expects a dollar crisis and a sovereign debt crisis.
• The speaker dismisses the idea that one should wait for a bond market collapse or dollar devaluation before protecting oneself, stating it will be too late then.
• Current opportunities include buying gold and silver and moving money out of US stocks into foreign and emerging markets.
• Base metals and industrial metals stocks have performed exceptionally well, hitting 52-week highs.
• The speaker remains bullish on oil, expecting a significant upward move despite its current price of around $60 a barrel.
• The speaker encourages listeners to visit Europac.com for investment opportunities and sign up for newsletters and subscribe to the Shift Gold YouTube channel.

"Right now, you still have the opportunity to protect yourself. You still can buy gold and silver."