The Federal Reserve: Land of Oz Inhabitants ask, “What did the Wizard Say?”
On August 23rd Federal Reserve Chairman Jerome Powell assured the public that their series of rate increases fixed inflation. This is likely an erroneous conclusion since the Consumer Price Index increases that began in April 2021 and peaked in June 2022 clearly reflected two extraordinary factors. The first, government mandated post-COVID supply-chain disruptions were global in scale and scope. Their imposition effects were as rare and profound on the economy as the pandemic was on humanity’s health. Second, government sponsored transfer payments – known as fiscal stimulus – exacerbated the condition. Imagine a period where artificially increased demand confronts a debilitated goods supply-chain. Result: Consumer Prices increase. They must.
A lack of precision in the Fed’s inflation message doesn’t help. The Chair and its Board members continually perpetuate the fallacy that all Consumer Price Index increases are inflation. Prices can increase for a variety of reasons. Most of them are not monetary. Milton Friedman said it best: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Nowhere in either the Fed’s end of July “no change” policy announcement or its August reversal telegraphing guaranteed rate cuts do they reference anything resembling comments about “…a more rapid increase in the quantity of money than in output.” Dr. Friedman would be disappointed. The Committee deliberately conflates any increases in the Consumer Price index as prima facie evidence of inflation. Moreover, that initial increases and subsequent declines are close to if not 100% attributable to their policy changes.
More broadly, rarely does any developed market Central Banker ever mention money – its oversupply or lack thereof – as a factor in their policy decisions. Their motive for this deliberate omission is obvious but tangential to my point.
Market-based behavioral evidence leads to a more plausible conclusion. That short-dated market-based interest rates have risen along with changes in the Fed’s moves says more about the market’s willingness to accommodate the Fed and nothing about the Fed’s ability to control it. The longest and deepest US Treasury curve inversion in decades is a not-so-subtle reminder. The market capped Ten-Year risk-free rates at a 5% peak in October 2023. The Fed’s abrupt opinion reversal is more an acknowledgment of the long end of the bond market’s message to the Fed than the other way around.
Observe the market response to the Fed’s persistent short-term administered rate increase campaign. Consumer Price Index readings approached 9% in June 2022. Federal Government stimulus checks drove U.S deficits to unimagined levels. Yet, the highest long dated risk-free rate for the entire cycle has been – drumroll please - 5%.
In fact, the Fed’s easing confirms that the market’s interpretation of the actual monetary condition was superior to the Fed’s. Just like 2000. Just like 2007. And less well known, just like 2019. No matter, per their bureaucratic imperative Fed officials will associate all Consumer Price Index changes with their policy decisions. The public, business press, financial professionals and elite academic economists participate in this ruse. The Land of Oz could not exist without inhabitants. Objective observers with money on the line – many of them among the market’s more sophisticated, successful players – know who the real boss is. And it ain’t the Fed.
The Gold Sector: Navigating Market Movements
Gold and gold-related investments have recently shown signs of a potential downturn, while the U.S. Dollar Index has indicated the opposite. It’s not unusual to see these kinds of opposite movements between gold and the dollar around this time of year. For gold and its equities, this could mean temporary declines ranging from 5 to 15%.
While this might lead to a short-term dip in our portfolio’s performance, it’s important to note that these patterns often set the stage for strong buying opportunities. These opportunities typically emerge within a few weeks and offer some of the best risk/reward scenarios for the entire investment cycle.
Since the Agio Gold Sector Fund is not fully invested at the moment, we’re preparing to take a more proactive approach to investing our available cash. Rest assured, we’ll keep our investors informed about relevant market developments as they occur.
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