“If you don’t know where you’re going, any road will get you there.” This quote, often misattributed to Lewis Carroll, aptly captures the uncertainty surrounding direction and purpose—especially in the realm of finance.
Today, we aim to explore the perplexing landscape of fake money, a term that encapsulates the current state of monetary policy and its far-reaching implications.
Take, for instance, the monetary outlook that emerged right after last month’s Federal Open Market Committee (FOMC) meeting—it was as clear as a flawless diamond. The central message indicated that inflation was under control and that the Fed, having faced pressure from political leaders, would soon lower the federal funds rate. Many felt confident enough to see it as a sure thing.
Wall Street responded eagerly to the news. Investors flocked to stocks and bonds without a second thought, enticed by the age-old saying: fortune favors the bold.
From June 19 until July 3, the market behaved predictably. The S&P 500 surged by 2.5 percent, reaching a record high of 2,995. Meanwhile, the yield on the 10-Year Treasury note fell by 13 basis points, as enthusiastic buyers anticipated the Fed’s moves.
However, the release of Friday’s jobs report unveiled some unexpected flaws. According to the Bureau of Labor Statistics, the U.S. economy added 224,000 jobs in June—significantly surpassing the projected 160,000. As the new week began, doubts began to seep into the market. What should investors make of this?
Powell Stays on Point
In today’s fake money landscape, clear thinking often proves to be a disadvantage for investors. What truly matters is the counterintuitive relationship between the economy and the stock market. Good economic data tends to translate into declines for stocks, while poor data can lead to gains.
With unemployment hovering below 4 percent, real GDP growth at an annual rate of 3.1 percent, and stocks at unprecedented heights, rationale dictates that the Fed should be raising rates instead of cutting them. However, higher rates translate to reduced access to cheap credit for stock speculation, which would in turn lead to lower stock prices.
This dilemma prompted many questions for Fed Chairman Jay Powell during his recent two-day testimony on monetary policy before the House Financial Services Committee and the Senate Banking Committee.
Powell—who has shifted to a dovish stance—managed to maintain focus during his testimony. He conveyed that the economy is soft, but not too soft, and assured lawmakers that the Fed will employ its policy tools effectively to stimulate the economy.
Wall Street reacted exuberantly. The S&P 500 climbed to a fresh all-time high above 3,000, and the Dow Jones Industrial Average crossed the 27,000 threshold for the first time. These milestones were achieved with such rapidity that Art Cashin hardly had a moment to adjust his hat.
The Four Dimensions of the Fake Money Order
The stock market has shifted away from evaluating future earnings or business profits. Now, it revolves around anticipating the Fed’s deployment of cheap credit. Thus, lackluster economic reports, which pave the way for additional monetary stimulus, have become bullish signals.
By “fake money,” we refer to the legal tender that can be conjured into existence by central authorities. This includes currencies such as the dollar, euro, yen, yuan, pound, peso, loonie, toonie, and virtually every other currency worldwide.
Recall the essence of the quote: if you don’t have a clear destination in mind, any path will suffice. Unfortunately, the rise of the fake money system has led us into four troubling dimensions: debasement, distortion, disfiguration, and destruction. Each dimension transitions into the next, albeit in a somewhat unclear manner.
Initially, the dollar faces debasement through directed and coordinated doses of monetary and fiscal stimulus. This, in turn, distorts financial markets, with the S&P 500 hitting 3,000, the DJIA reaching 27,000, and a staggering $13 trillion in sub-zero yielding debt. In this environment, even dilapidated homes fetch a million dollars due to skyrocketing prices.
Next comes disfiguration, where misguided economic policies result in excessive construction projects, extravagant glass skyscrapers, and urban landscapes marred with unnecessary transformations, all driven by artificial demand fostered by cheap credit.
Ultimately, the fourth dimension of destruction looms on the horizon. Here, the reckoning occurs—whether through hyperinflation, debt deflation, a wave of bankruptcies, or some combination of these forces. This is also when governments become increasingly oppressive in a desperate attempt to cling to power.
This past week undeniably pushed us further along this grim trajectory.
Sincerely,
MN Gordon
for Economic Prism
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