Don't Let the Nanny State Ruin Your Thanksgiving

The 'Fed put' – and a big caveat... Bad news for bulls?... The Federal Reserve's real agenda... We can only watch as the forest burns... Politicians are at it again... A clear violation of our rights... Don't let the nanny state ruin your Thanksgiving...

We're not the only ones who can see the coming conflagration...

A couple of weeks ago, I (Dan Ferris) described one of the pillars of my own macro investing framework...

It's my belief that the Federal Reserve's actions create massive systemic risks, mostly as a result of the central bank's attempts to prevent the bottom from dropping out of stocks, bonds, and other asset prices. In short, the Fed is a machine for making the financial markets riskier.

In that November 13 Digest, I also cast doubts on man's ability to manage a $20 trillion economy from the top down by pulling simple levers like interest rates, money-printing, and taxes...

I used the example of how large, destructive forest fires are more likely to occur nowadays due to the U.S. Forest Service's ("USFS") meddling through the years... While the USFS aimed to protect the forests, it only loaded them with more fuel by stepping in to put minor fires out quickly. And as I explained, it's the same story when it comes to the Fed...

Mankind cannot manage nature from the top down – including the economies and societies that emerge within it. It's the height of hubris for anyone to believe they can control a $20 trillion economy by printing money every time a new problem arises.

Due in large part to the top-down interference in the economy by the U.S. government and the financial system by the Federal Reserve right now to a greater degree than any time in history, financial assets are exposed to massive systemic risks – just like the forests.

Just three days after my Digest, a well-known financial media outlet tackled this idea...

A Barron's article on November 16 declared, "Yes, the 'Fed Put' Really Does Exist." But the headline also included a big caveat... "That Could Be Bad News for Bulls."

According to Barron's, the Fed put is simply "the Federal Reserve's supposed commitment to ease monetary policy whenever the stock market suffers significant losses." The article cited a research paper by two finance professors – soon to be published in the Review of Financial Studies – called, "The Economics of the Fed Put."

I'll get to the 'bad news for bulls' part in a minute, but let's start with this research paper...

In short, as the Barron's headline shows us, the paper concluded that the Fed put is real.

Even though it's not official Fed policy, the pattern of the central bank's activity in the wake of market downturns is unmistakably clear... The paper contains a simple model showing that we can expect the Fed to cut its target for the benchmark federal funds rate by 32 basis points ("bps") following a 10% market decline.

The model served as a better predictor of the Fed's behavior than 38 macroeconomic indicators available on Bloomberg and the 85 indicators that comprise the Chicago Fed National Activity Index – a monthly index that gauges overall economic activity.

In other words... if you want to try to predict what the Fed will do, just wait for the market to drop 10%, then get ready for a 32 bps rate cut. (That's an average... The Fed usually cuts in 25 bps increments.)

I should note that the study was conducted before this year... So the COVID-19-induced bear market in March provided a real-time test.

The model predicted a 109 bps rate cut in this instance. The actual cut was 150 bps. I agree with Barron's that, "in the messy world of economic forecasting, that prediction has to be judged a success."

Now, about that wrinkle implied by the second half of the Barron's headline...

"That Could Be Bad News for Bulls."

The Fed put only seems to work when the market doesn't expect it to happen.

In other words, just like all those companies on Wall Street, the Fed needs to surprise the market and beat investors' expectations in order to keep the market happy.

And I can't imagine that the Fed can surprise the market today as it did in March... Right now, the whole financial world is focused on the amount of fiscal stimulus that Congress will approve and the amount of monetary stimulus that the Fed will perform.

The dynamics of addiction are all over this situation... The more drugs you take, the more you need to take to get high the next time – until one day, you overdose and kill yourself.

The Fed printed $1 trillion in 2008 in direct response to the financial crisis. This year, it has already printed three times that amount. Its balance sheet now exceeds $7 trillion.

Whatever you think the Fed needs to do to keep things running smoothly, double or triple it. Do you think the Fed needs to print another $3 trillion? I'd guess it had better be closer to $9 trillion... or the market will yawn and decline, possibly quite a bit.

That would definitely be bad news for bulls.

Earlier this month, Jerome Powell told the world that the Fed can do more... and that Congress needs to do more. So the expectation is already out there... It's in the market, and if it isn't delivered soon, the market won't like it.

The Fed will never truly admit to its schemes, though its leader unwittingly showed his hand in August...

Official Fed policy centers around the dual mandate of "price stability and maximum sustainable employment."

Price stability refers to the Fed's target inflation rate of 2%. The target has been official since January 2012, but St. Louis Fed President Jim Bullard has argued that it has been implicit since after 1995.

However, the Fed has never hit its official 2% inflation target once since 2012. And going back to 1996, inflation has exceeded the target in just four years (from 2004 to 2007).

On August 27, at this year's virtual Economic Policy Symposium, Fed Chairman Jerome Powell noted that, "The persistent undershoot of inflation from our 2% longer-run objective is a cause for concern."

In other words, the Fed is worried that you're not paying enough for all the goods and services you buy. Your wages and salaries are going too far... and the Fed means to fix it – just like those folks fighting the forest fires. Low prices hurt the values of the assets held by top Fed officials and their friends on Wall Street... and they simply can't tolerate it.

I'm not joking... As I pointed out in the August 28 Digest, the Fed knows inflation is bad for you. But it doesn't care... It's trying to create it anyway. As Powell said in August...

We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.

However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.

Yes, he told the whole world his real agenda... to support asset prices via higher inflation.

Can you imagine the shame he'd have to live with if you wound up paying less for the goods and services you buy?

His cronies would never tolerate it. And he's looking out for his Fed afterlife, too... No respectable hedge fund or bank would ever hire a former Fed chair who failed to prioritize rich people's asset values at the direct expense of the purchasing power of everyone else's wages and salaries.

(And yes, everything after Powell's first sentence is pure, circular gobbledy-gook. He has no hope of dazzling you with brilliance, so he defaults to baffling you with bovine excrement.)

I danced around the topic in my Digest a couple of weeks ago, so let's make it clear today...

Make no mistake about it, no matter what the average intellectual sheep tells you... The Federal Reserve is in the business of supporting asset prices. It's not just stocks and bonds... When you're manipulating interest rates, you're manipulating the price of anything that produces cash flow – that is, anything with a yield.

In the Star Trek TV shows and movies, a rule called the "Prime Directive" prohibits the good guys from interfering with the normal development of any civilization... And it says that starship crew members are expendable to prevent violating the rule.

The Fed is the exact opposite of Star Trek. Its prime directive is to support asset prices for itself and its powerful friends... And the economic well-being of everyone else is expendable. Your economic well-being is expendable! I bet you're thrilled to know that.

That's especially true, given that "price stability" and "maximum sustainable employment" are impossible to define in a hopelessly complex $20 trillion economy.

It puts the Fed's leaders in the same position as Supreme Court Justice Potter Stewart back in 1964... Pressed to define the term "hard-core pornography" in Jacobellis vs. Ohio, he concluded merely, "I know it when I see it."

Powell's August speech tells us that he has yet to catch even a glimpse of the full monty of inflation... And the old pervert is determined to twist this economy into the most obscenely compromising position if it's the last thing he does.

As I outlined in the November 13 Digest, the Fed's actions – printing money and buying debt securities – are fundamentally deflationary. They remove interest income from the economy... and each new dollar of debt created by government and businesses is bound to be less and less productive.

That makes the Fed an OK tool for supporting asset prices and a terrible one for stimulating growth in the real economy that you and I live and work in every day.

The Fed apparently believes it can eventually push interest rates low enough by printing enough money and buying enough securities to do what printing money and buying securities has been unable to do so far... Never mind the fact that low rates, money-printing, and securities purchases got us into this massive mess in the first place.

The research paper featured in Barron's strongly suggests my macro view is right...

The Fed put is the central bank's continuous attempts to put out every fire at the first signs of smoke. But in the end, we're all going to watch the forest burn down around us.

If I'm right about the inevitability of a collapse worse than 2008...

That means financial market participants today are just picking up nickels in front of an approaching steamroller. And the big problem is... they think the steamroller has four gears and a slow top speed. But in reality, it has eight gears and can hit 60 mph in three seconds.

I've told you a number of times now what I believe you should do to get prepared...

Be truly diversified. Hold your stocks and bonds, as well as plenty of cash. Get some assets into long-term stores of value outside the financial system – like gold, silver, and bitcoin.

Also consider storing some of your wealth in nonfinancial assets that you know a little bit about. Whether it's land, Ferraris, vintage firearms, or something else... make it personal.

(A quick aside before we move on... In addition to talking about all of this on this week's episode of the Stansberry Investor Hour podcast, I interviewed Keith Kaplan. Keith is now the CEO of our corporate affiliate TradeSmith. He has a wonderful personal story about how he turned his financial situation around... paid down his debts... and became a successful investor. If you're looking for something to do over the weekend, please give it a listen.)

Speaking of making things personal, I must address one more topic in this week's Digest...

By now, you've probably heard about politicians ordering restrictions on holiday gatherings around the country... These actions are allegedly to fight the spread of COVID-19.

The most ridiculous example certainly comes from Pennsylvania... If you live in the Keystone State, Governor Tom Wolf said you must wear a mask in your home if you have a guest. And he also banned the sale of alcoholic beverages beginning at 5 p.m. today, the day before Thanksgiving, as a way to try to stop folks from partying too hard tonight.

New Jersey Governor Phil Murphy called for a limit of 10 people at household gatherings. And Nevada instituted a limit of no more than 10 people from no more than two different households. The state also reduced capacity at restaurants, bars, and casinos to 25%.

These are just a few of the asinine controls being implemented by state governments across the country. And this ridiculousness isn't just limited to the states, either...

The U.S. Centers for Disease Control and Prevention recommends that holiday revelers avoid singing or shouting at Thanksgiving gatherings. And it says they should also "keep music levels down so people don't have to shout or speak loudly to be heard."

Oregon Governor Kate Brown is taking a page from the playbooks of Joseph Stalin, Chairman Mao, and Pol Pot...

More strict than the other states I mentioned, indoor and outdoor gatherings in Oregon aren't allowed to include more than six people from no more than two households.

Brown told citizens to call the police and rat out their neighbors if they witness a party with too many holiday guests. She threatened jail time for violators. And she reasoned that it's just like calling the police because someone is making too much noise at 10 p.m.

But Brown doesn't seem to understand one key point... Americans' rights to celebrate the Thanksgiving holiday with their families in no way infringes upon my property or person in the way too much noise late at night does. And like everyone in government these days, she's also apparently unfamiliar with the First Amendment to the U.S. Constitution...

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Prohibiting holiday celebrations violates our right to peaceably assemble...

Like every other right, this one is not granted by government. However, it is explicitly recognized by the U.S. Constitution. No rights are granted by government. Government's activities are supposed to be limited, not those of we the people.

We're not a nation of children... And we don't need the nanny state running our lives. Brown, Wolf, Murphy, and their ilk want control. They don't want what's best for you... And nothing they do is about your health and well-being. Everything they do is about getting more power and keeping it.

And before you say that I just hate Democrats, again, please remember that I don't differentiate between the two major political parties. They're all the same to me.

But I don't want to appear like I'm favoring Republicans, so let me also say that Maryland Governor Larry Hogan – a Republican, at least in name – is just as bad as Wolf, Murphy, or Brown. Hogan is sending additional state troopers to every county in the state as part of a "wide-scale, all-hands-on-deck compliance, education, and enforcement operation."

You might recall from the October 16 Digest how God used the power of speech to bring order to chaos...

God did that when he said, "Let there be light."

And in that Digest, I explained how we humans do the same when we speak... Making our thoughts known brings order, even if those thoughts are downright evil or otherwise in error. (And perhaps especially so, given that – to paraphrase famous English philosopher Sir Francis Bacon – we learn more from error than we do from silence and confusion.)

We should all speak out and create private, bottom-up order out of the top-down, government-created chaos that upends more lives with each passing year. We should tell Tom Wolf, Kate Brown, Phil Murphy, and Larry Hogan to shove it.

Law-enforcement agencies should refuse to enforce unjust laws. They should all be like Andrew Kudrick Jr. He's the police chief in Howell Township, New Jersey... And he made it clear that in his jurisdiction, he won't enforce the "draconian" measures put forth by Murphy.

If we don't object strongly and peaceably to these sorts of violations every time they occur, I'm afraid the worst elements in our population will wind up fighting in our streets. (They were continuing to do that in Portland, Oregon as recently as last Friday.) Whatever sets off the violence will quickly be forgotten as an excuse for criminals to commit violent acts.

You and I take risks every second we live and breathe – global pandemic or not. Every grown-up knows that. The government's ham-handed measures do more harm than good... They've screwed up regular folks' ability to make a living and to move about freely as they see fit.

And it's no coincidence that these politicians' Wall Street and Silicon Valley corporate masters haven't suffered. The ones who suffer are the regular folks whose jobs require them to go out to meet their fellow man where he lives, eats, shops, and works. They have fewer resources to fight their own government's draconian restrictions.

Here's what I'm doing tomorrow and through the rest of the holiday weekend...

I'm getting together with friends and family – as many as I want, even if it's more than 10. And I'm also making a special point to sing, shout, drink, eat, and be merry.

It's my right. And it's yours as well, if you so choose.

Happy Thanksgiving, everyone.

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The mailbag is quiet heading into Thanksgiving... But we'd love to hear your thoughts about today's essay. Drop us a line at feedback@stansberryresearch.com.

And one final note... Our offices will be closed tomorrow and Friday, so we won't be publishing the Digest. We'll be back with our regular content on Monday, November 30. Enjoy the holiday.

Good investing,

Dan Ferris
Vancouver, Washington
November 25, 2020