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Know THIS and have an edge on everyone - May 2024 (#18)

‘Sup dear reader. Your dude Brent just realized he know’s a little somethin’ that most don’t… And it has MASSIVE implications for where the U.S. economy is going. How do I know it? Because I’m a HUGE finance geek, and you are about to reap the fruits of my nerdy ways… Enjoy!

Also, my apologies… this article got lengthy quick... If your an impatient mugger skip down to my TLDR at the bottom. Your welcome.

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Motivation

If one does not understand a person, one tends to regard him as a fool.

-Carl Jung

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Take the time to educate yourself on the people who’s decisions impact your life the most. It will give you an edge when everyone’s guessing what they will do next.

Money

Alright. So what could I possibly know? What makes me think I’ve got a better understanding of where the economy is going than most right now? To share this, I’ve got explain a couple things first.

For starters, if I asked you who the most powerful person in the world is you’d likely say ‘The President of the United States’ and you’d likely be right… But what if I asked you who the SECOND most powerful person in the world is? Who would you say? Any idea? Vladmir Putin? Xi Jinping? I’d argue NO. Why? Because their influence isn’t felt nearly as universally as much as this crusty old white dude right here:

This guys name is Jerome Powell, or as us finance nerds like to affectionately call him ‘J Powell.’ Why is he so dang important? Because HE is the chair of The Federal Reserve Bank of the United States. The Federal Reserve (or as us in the nerdery call it THE FED) does many important things, chief among them is that it sets INTEREST RATES. It also creates money OUT OF THIN AIR, but thats a discussion for another time…

The INTEREST RATES that the fed sets influence what interest rates are WORLDWIDE. Anyone who borrows or lends money from Buenos Aires to Brisbane is influenced by what they decide.

Right now the markets are rallying virtually every time anything happens that signals interest rates might be coming back down. Why? Because lower interest rates JUICE the economy. This makes borrowing cheaper and economies tend grow faster with lower rates. And right now, nearly everyone is of the opinion that interest rates are coming down in the near future. And dear reader, I think they are WRONG.

Interest rates are high to begin with because inflation has been high. The Fed’s crude logic is this… if we crank up interest rates and hurt the economy we’ll lower inflation in the process. So the fed took interest rates to 11! Or at least what feels insanely high to anyone who’s a millennial or younger. Especially compared to having interest rates near zero for so long prior to this.

So here’s where I know something. Jerome Powell is VERY CONCERNED about inflation and wants to make sure it gets squashed for good. Jerome Powell also IDOLIZES a past fed chair who took on high inflation as well. His name was Paul Volcker. This cigar chomping giant from the 80s cranked interest rates up SKY HIGH. You think 7% for a home loan right now sounds awful? Try 18%! 

Paul Volcker was under the SAME PRESSURE that Jerome Powell is under right now. That is to cut interest rates back down to earth so we can get back to making money. However, I don’t think he’s going to do that anytime soon. Why? Because he idolizes Paul Volcker thats why! He knows as much as anyone about Volcker’s time as Fed Chair. And he certainly knows this: His hero Paul Volcker made a crucial mistake during his time as Fed Chair, he lowered rates too quick! He felt the heat, moved too quick to lower rates, and inflation shot RIGHT BACK UP! He had egg on his face and had to raise interest rates again. And it took longer to get inflation under control as a result.

For this reason, I am very confident that Jerome Powell and the Fed are going to keep interest rates higher for longer than most people are guessing. As a result the economy is going to be more subdued for longer, it could even dip into recessionary territory if it takes long enough. That’s what happened when Paul Volcker was chair. Everything from small businesses to Real Estate is going to feel the pain longer than expected as a result. Plan accordingly…

TLDR; Current Fed Chair Jerome Powell’s hero is former Fed Chair Paul Volcker who lowered interest rates too soon back in the 80s in his fight against inflation. As a result Jerome Powell is going to wait longer to cut interest rates than the majority of people are expecting. Economy will continue to be more subdued until rates are cut.

FINAL MEMES

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That’s all folks!!!

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