The capital markets are bonkers having been thrown into contortions by perverse fiscal and monetary policy. Up is down and down is up. The Capital Markets remind me of Bizarro World from the Superman comics where everything is backwards.

FISCAL POLICY: One could argue that fiscal policy has been working against Americans since the days of FDR when that abomination of a President declared that Americans may no longer exchange Dollars for Gold among other actions that deliberately weakened the Dollar. We will save the detailed fiscal discussion for a separate note, however the key takeaway is simply that the U.S. continuously spends money it does not have. Running perpetual fiscal deficits has created a mountain of Debt ($32 Trillion in Treasury debt) and has massively devalued the Dollar, which of course has greatly reduced Americans’ standard of living post WWII.

MONETARY POLICY: The Fed has distorted the Capital Markets – I fear permanently – by allowing itself to become an appendage of the U.S. Treasury in support of errant fiscal policy. In doing so, the Fed’s mandate is no longer a strong Dollar in the absolute sense (yes, the Dollar is strong versus most other currencies, yet it has lost 99% of its value since the 1792 Coinage Act), but rather to support “stable markets” and “stable employment”. These mandates have no teeth and enable the Fed to do what it pleases, usually in collusion with Treasury.

Fed Funds Rate: The Fed Funds Rate is one policy tool that the Fed has at its disposal. The Fed Funds Rate has been moving lower since the days of former Fed Chair Paul Volcker. The Fed took Fed Funds down near 1% after 9/11, took it to 0% after the ’08 financial crisis and kept it there for a decade before momentarily raising it, only to go back to 0% in 2020. This rate action of course inflated asset values across asset classes.

Money Printing: For the time being the US Dollar is a reserve currency. Both the fiscal and monetary sides of Government abuse that privilege. What’s the abuse? Endless money printing to support errant fiscal and monetary policies.

Look no further than the COVID crisis. Rather than tell Americans “travel at your own risk”, our Government that told us we must shut everything down. The business we built, the schools we pay for, shut it all down (How would that decree have faired in the days of our founding fathers?)

The COVID economic shut down gave the Trump Administration the excuse to “stimulate” the economy by printing Trillions of Dollars. The Biden Administration followed by making the same, predictable mistake. Trillions of Dollars were directly mailed to Americans, Trillions were spread across the broad economy and were allocated to companies, to political friends and causes, to public schools, you name it. The second the Federal Reserve printed that money, the value of every Dollar in everyone’s pocket declined dramatically. Much of that freshly printed money found its way into the Equity market, driving valuations through the roof. Americans are poorer as a result (outside of equities for the time being), and the markets have been behaving in a way that I have never experienced nor have I previously read about.

For the Fed’s part, it has been using printed money since 2009 under former Fed Chair Ben Bernanke to keep interest rates low and to exercise yield curve control. We know this debt-funded, printed money yield control effort as Quantitative Easing or “QE”. Fed Chair Powell took QE to new heights during the COVID crisis to the tune of $120 billion per month allocated across Treasury and mortgage security purchases.

The Fed used printed money during the COVID crisis to create non-recourse credit facilities such as the Main Street lending program. In addition, the Fed purchased corporate bond issues, including debt issued by Apple (I was not aware that Apple required the Fed’s backing). If that were not enough insanity, the Fed bought Equity ETF positions through various intermediaries including BlackRock. All of these actions are outside of the Fed’s original 1913 charter (HERE) and have Socialized markets. The Fixed Income and Equity markets are no longer private markets driven by Capitalism, but are now Government Managed Markets, a form of Socialism. One could argue that the Fixed Income markets changed forever with QE back in 2009. QE was supposed to be a one-time, extraordinary act. Yet, like all temporary Government programs, QE became a permanent fixture of monetary policy.

One can see this money printing in the two charts below where M1 (the most narrow definition of the money supply as marked by the green line) spiked by almost 400% over 2020-2021. The Fed printed more money in one year than in any other time in our entire history.

The combination of near-zero percent interest rates and money supply (M1) growth has fueled debt levels and asset prices as the U.S. economy is addicted to Debt and free money. The problem is that Debt far exceeds Assets if you think of the United States in Balance Sheet terms. Treasury debt is approximately 1.3x GDP and Treasury Debt plus unfunded liabilities is approximately 3.6x GDP.

RESOLUTION: How do we get out of this mess?

• Drastically reduce fiscal spending such that we consistently run fiscal surpluses (that won’t happen as we pass one pork-laden spending bill after the other).
• Pass an Act of Congress banning the Fed from engaging in QE.
• Pass an Act of Congress banning the Fed from purchasing the debt and equity of individual companies and ETFs.
• Put the United States of America back on the Gold Standard.

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