The U.S. Is Repeating Nixon's Mistakes

Editor's note: Even in incredible bull markets, it's important to remember one thing... after every Melt Up comes the Melt Down, when assets can struggle for years. And with the market riding an artificial intelligence wave today, our colleague Mike DiBiase, editor of our company's bond-focused Credit Opportunities newsletter, has a warning for what's coming next...

Richard Nixon wasn't about to let a bad economy run him out of Washington...

The midterm elections hadn't gone well. Unemployment was rising, and his approval ratings were plummeting.

So in October 1971, with a presidential election fast approaching, Nixon summoned his longtime friend, Federal Reserve Chair Arthur Burns.

Nixon told Burns, "I don't want to go out of town fast." He lamented that if something wasn't done about the economy, "this will be the last Conservative administration in Washington."

The economy needed a jolt of liquidity.

Cabinet member George Shultz advised Nixon, "The economy has to be good... So much at stake on that... Keep the money supply going up!"

The Fed listened. It expanded the money supply, unleashing massive stimulus. Unemployment fell. And Nixon won the 1972 election in a landslide.

Then, the bill came due.

Inflation surged from around 3% on election night to 11% by the time Nixon resigned less than two years later. Nothing worked to stop the surge in prices. And the country slipped into a 16-month recession.

Fast forward to today, and President Donald Trump is seeing his approval rating plummet, just like Nixon.

The midterm elections are later this year. Trump's approval ratings are at their lowest level since he took office. Around 60% of folks don't approve of the job he's doing.

Like Nixon in 1971, Trump appears to be getting desperate...

The Fed Can't Fix America's Affordability Problem

Affordability will be the theme of the upcoming elections. Trump does not want a recession to unfold. He is desperate to get interest rates down to juice the economy.

That's why he has been pressuring new Fed Chair Kevin Warsh to cut interest rates. But with elevated oil prices caused by the war in Iran, inflation is on the rise again. Warsh is now more likely to raise rates than cut them.

And cutting rates might not help anyway...

Since September 2024, the Fed has lowered the one rate it controls, the short-term federal-funds rate, by 175 basis points ("bps"). But that hasn't affected long-term rates one bit.

The 10-year Treasury rate has increased by more than 100 bps over that span, sitting around 4.7% today.

And the 10-year Treasury rate is what matters most to businesses and consumers. It's the basis for interest rates on credit cards, mortgages, and business loans.

In short, the Fed's actions have backfired. Rates have gone up, not down.

The only way the Fed is going to get long-term rates down is by buying loads of long-term Treasurys.

This is known as quantitative easing ("QE"). When the Fed prints new money to buy government bonds, bond prices rise... interest rates fall... credit loosens... and the economy rips higher.

The problem is, turning on the money firehose might seem like a good idea in the short term... But as we saw in the '70s, it always leads to more pain.

No matter what politicians try to tell you, only one thing causes inflation... a rapid increase in the money supply.

And even without any Fed intervention in the economy, the money supply has now increased for 28 straight months. Worse, the increases have been accelerating. The money supply increased around 5.6% year over year in both May and June, its fastest monthly increases since 2022.

If the Fed turns on the liquidity fire hose, expect those increases to be far greater in the next year or two.

Despite the best intentions of our elected leaders, bad economic policies have consequences you can't avoid...

The next credit crisis is closer than you might think.

Big money-supply increases like this take around 18 months to show up in inflation numbers. That's why next year, I expect the increases in the money supply to push inflation even higher... and the unemployment rate to rise sharply as a result.

That will cause interest rates to rise even higher and will kick-start the next credit crisis.

When it arrives, it promises to be bigger and last longer than the one in 2008. The Fed won't be able to save the economy in the long run this time.

The vast majority of investors will suffer when it does. Now's the time to start preparing... so that you don't have to be one of them.

Good investing,

Mike DiBiase

Editor's note: America's debt is becoming too expensive. Eventually, a wave of companies will go bankrupt as they can no longer afford to service or refinance their debt. But that's where Mike and his Credit Opportunities team have an edge. Their strategy focuses on investments with equity-like returns... without the risk of the stock market. And now is the best time to learn how to put this strategy to work.