Once again, the Federal Reserve is posturing as if it’s ready to taper quantitative easing (QE) and raise interest rates. Here’s the latest on that front from The Wall Street Journal:
Federal Reserve officials at their meeting last month eyed a faster timetable for raising interest rates this year, potentially as soon as in March, amid greater discomfort with high inflation.
Minutes of their Dec. 14-15 meeting, released Wednesday, showed officials believed that rising inflation and a very tight labor market could call for lifting short-term rates “sooner or at a faster pace than participants had earlier anticipated.”
As I wrote back in July 2021 in “Why the Fed Is Bluffing,” I’m not buying this. There is simply too much debt and economic chaos to raise rates and stop QE. The Fed’s loose monetary policy is what’s keeping stocks at record highs and bonds at record low yields. It’s what allows overly indebted companies to refinance their huge piles of debt.
In that July article I did discuss the fact that the Fed would likely try to taper and raise rates – and that it would not go over well with markets.
At times, I suspect the Fed will “attempt” to raise rates and reduce quantitative easing (QE). And the stock market will not react well to that.
After stocks tank, the investment world will demand the Fed throw gas on the QE fire and send rates back to near zero. While a pretty nasty correction might happen first, I think the Fed will eventually oblige.
Until then, the Fed continues to bluff about how it plans to handle inflation. I think these bluffing periods can be excellent buying opportunities for inflation hedges such as gold and bitcoin.
And indeed, now that the Fed is seemingly close to pulling the “tighten” trigger, stock and crypto markets are pulling back sharply.
We can see this clearly in the Ark Innovation ETF (NYSE: ARKK). Full of high flyers like Tesla and Square, ARKK was one of the best-performing ETFs for years. But now it’s down 45% from its all-time-high in February 2021.
Bitcoin has also pulled back significantly and may have more room to go on the downside. As the Fed moves closer to tightening, many investors seem to think the bull run is over.
But ultimately, I continue to believe the Fed will be forced to reverse course. It can’t tighten in this economy. The last time the Fed had to dramatically raise rates to control inflation – in the 1970s – federal debt to GDP was in the 30% range.
Today it’s more than 122% – four times the federal debt compared to GDP! And once you lump in personal, corporate, and local debt, the sums become ridiculous. Ultimately, the Fed will almost certainly need to dramatically increase QE over coming years and keep rates near rock-bottom.
Yes, inflation is painful. But a debt collapse is arguably much worse (in the short term). So no, I don’t think the Fed will be “normalizing” policy anytime soon. But it may try, and that could get messy for a bit.
It’s possible we’ll get a chance to buy bitcoin and other inflation hedges at bargain prices in the meantime. If you mean to take advantage of it, I recommend using dollar-cost-averaging (DCA). It’s nearly impossible to nail the bottom, but I expect using DCA will get you a good overall price if you buy on a roughly weekly basis.
Long term, there’s no inflation hedge I’d rather hold than bitcoin. But I remain bullish on gold, silver and miners as well. They’re some of the few places I see real value today.
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