5 Things To Know In Investing This Week: The We Warned You About Rebound Inflation Edition

Most of this week’s 5 Things relates to government mismanagement of the economy. We draw two conclusions. First, the government should involve itself in less of the economy. Second, we should have called this “The Government is Mismanaging Things Edition”. One month after DKI told you the Fed cut rates too soon, the Core CPI rises. Higher energy costs are going to be a problem starting with next month’s report. That big rate cut was supposed to lower borrowing costs. Instead, Treasury yields rose. What’s going on? We’ll explain. China throws stimulus at a weak economy and their stock market rises. China stops throwing stimulus at their economy and their stock market falls. We’ll call that bad central banking practices with Chinese characteristics. Liz Warren has garnered lots of headlines complaining about a small amount of crime in the $1.2T Bitcoin market. Then, TD pleads guilty to $670MM of money laundering for drug cartels over the past decade. Warren is on the bank regulatory committee. Our advice remains the same:  eliminate crime in the place you control before trying to regulate something else. Finally, we address the needs of young people who want to save, but who don’t work in finance.

This week, we’ll address the following topics:

• Fed cuts. Core CPI rises. Increased energy costs on the way. Are we going to remark that DKI said the Fed cut too soon? Yes. Yes, we are.

• The Fed cut was supposed to lower interest rates. So, why are the prices of Treasuries falling?

• China’s government provides stimulus leading equity indexes to huge gains. Then, they decline to provide additional stimulus, and markets fall. It’s a good warning for Congress and the Fed.

• Liz Warren, member of the Senate Committee on Banking, complains about money laundering in the $1.2 trillion Bitcoin market. Then, TD gets caught committing $670MM of money-laundering over a decade.

• Reader question:  How should a young person who wants to save and invest do that if they’re not in the portfolio management business?

Ready for a new week of returning inflation? Let’s dive in:

• One Month After Fed Cuts, Core CPI Rises:

The September CPI of 2.4% was both above last month’s 2.5% and below expectations of 2.3%. The Core CPI, which excludes food and energy, was up 3.3% which was both above expectations and above last month’s 3.2%. This increase came one month after the Fed reduced interest rates by 50bp (.5%). DKI warned that the rate cut was premature because inflation was not and is not under control. We termed this the “Arthur Burns mistake” because the exact same mistake by this former Fed Chairman led to the massive wave of inflation in the late 1970s. Making things worse, lower energy prices have been a key reason for disinflation (a reduction in the rate of inflation). Oil prices rose rapidly in early October, something that will be a big headwind when the October CPI is announced next month.

This was the first increase in the Core number in more than a year.

DKI Takeaway: Last month, the Federal Reserve debated cutting the fed funds rate by .25% or .50% and decided on the larger cut. DKI said this was an error. While we have recognized the weakness in the productive private economy for more than a year, excessive governmental stimulus has continued to bolster misleading GDP reports and create additional inflation. Almost all of the higher-than-expected CPI was related to food and shelter. You might be able to delay buying a new car and can definitely avoid buying a new television for a while, but it’s hard to avoid price increases for food and housing. The real solution to all of this isn’t going to be action by the Fed; but rather, reduced spending out of Washington DC. That’s not going to happen so make sure your portfolio is prepared for more coming inflation.

• The Fed Cut – and – Interest Rates Are Rising?!:

On September 18th, the Fed cut the fed funds rate by .5%. The market celebrated and expected a lower cost of borrowing. Instead, over the past few weeks, the yield on the 10 year Treasury rose by 44bp (.44%) and the 30 year Yield rose by 42bp (.42%). What happened? Why were the people celebrating the coming lower cost of capital wrong?

Post Fed cut, everything past 1 year got more expensive. Chart - USTreasuryYieldCurve.com.

DKI Takeaway: The Fed sets the fed funds rate, which is the overnight interest rate. The bond market sets the rates for the rest of the yield curve, whether it’s 1 month or 30 years. (There is an exception when the Fed buys or sells large amounts of specific securities to try to control the yield curve. That’s not happening right now.) When the Fed cut rates prematurely, the market correctly started to price in higher future inflation. The result was a reduction in the yield on the short end of the curve (0 to 6 months) and higher rates for longer-term bonds. Again, massive wasteful stimulus spending out of Congress is causing inflation. The Fed can’t stop that, and neither political party is trying to reduce spending. If your portfolio isn’t well-positioned for higher future inflation, reach out. We can help.

• Hang Seng Whiplash: The Rollercoaster Ride of Stimulus-Fueled Markets:

Last week, the Hang Seng soared, lifted by the People’s Bank of China’s liquidity injections. It seemed like the cavalry had arrived just in time to save the day—riding in on waves of government stimulus, sending the index up by a whopping 20%. Cue the confetti, right? Well, fast forward to this week, and the Hang Seng has retraced, reminding investors that what goes up, must come down—especially when the rise is on borrowed liquidity. This is the problem with a stimulus-fueled economy: when the government’s taps are gushing cash, markets dance like nobody’s watching. But turn the tap off? The music stops, and everyone scrambles for the exit. That’s what we’re seeing now: the stimulus high fading, with the market swiftly snapping back to reality.

Source: TradingView

DKI Takeaway: Relying on government stimulus is like building a sandcastle too close to the water. It may look great for a moment, but eventually, the water will come back in, and when it does, panic often follows. In this case, China didn’t remove its prior stimulus. It simply declined to provide more which disappointed investors. We have the same problem here in the US where Congressional stimulus spending is skewing the economy away from the productive private sector, and where the Federal Reserve has far too much influence over the stock market. Our solution: return to a free market and #EndTheFed.

• TD Launders Drug Money – Elizabeth Warren Wants to Regulate Bitcoin:

Last week, TD Bank admitted guilt to laundering money for drug cartels and agreed to pay a $3 billion fine. According to the WSJ, the bank laundered more than $670MM over the past decade. Incredibly, there was a message trail making it clear that bank employees and branch managers relayed clear concerns to management that it was obvious there was substantial money laundering occurring at their branches. Management knew and didn’t act. Of course, Elizabeth Warren, a member of the Senate Committee on Banking, Housing, and Urban Affairs, chose to comment.

I agree with her. She’s also part of the problem.

DKI Takeaway: I agree with Liz. Monitoring and prosecution of anti-money laundering laws is inconsistent, and can be ineffective. More than half a billion dollars of drug money over a decade at a major bank tells you that. I have two issues with her commentary. First, she’s complaining about poor oversight in the industry she’s responsible for regulating. I’d have been more impressed if she accepted some of the blame for this. Second, Warren has been one of the leading voices in the US government in favor of regulating Bitcoin; supposedly, due to its use by criminals. Perhaps Liz could deal with criminal use of the dollar, something within her purview, and then clean up the much smaller amount of digital asset crime. Alternatively, she could take on the loss of funds, misallocation of assets, and outright theft and fraud reported in government programs every single week. I promise you, there’s more than $670MM of government fraud going on right now. What do you think:  What government program do you think is wasting, stealing, or laundering money?

• How Should a Young Person Who Isn’t an Investment Professional Save?: 

Great question this week from one of Intern Alex’s classmates. He wants to save and invest, but doesn’t plan on a career in finance. What should he do? It’s a real problem. It’s no longer possible to save in fiat (dollars or British pounds) as those lose value every year. Investing is a full-time job – at least it is for me. So, if you can’t just put money in the bank, and you don’t have the time to follow a portfolio of stocks every day, and every quarter, and every year, what are a few practical solutions?

Image by Alex Petrou using ChatGPT

DKI Takeaway:  Starting with the basics, it’s important to spend less than you make. Sure, the expensive vacation and fast car are fun, but if you want to invest, you first have to save. Now, let’s think about investments that will do well for a long period of time against your constantly devaluing currency. I’d start with positions in Bitcoin and gold. Then, start investing in energy (oil and uranium) because energy demand will only grow over time. These are positions where the long-term trends help you. The stock market tends to be the best place for long-term investors so inexpensive index funds like $SPY and $QQQ are good options. Finally, there are places where you can get help and benefit from the work done by professionals. DKI maintains a list of current investment recommendations and has inexpensive student subscriptions. Check it out here and if you’re a student, reach out to me directly. 

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