Why Every Expert Has it Wrong: The Truth About the Fed

Here’s a look at what to expect for our financial market and economy over the next decade, as Ivan Lo reveals what the Fed’s true plan for our economy really is.

Why Every Expert Has it Wrong: The Truth About the Fed

As we get closer to summer, we are once again reminded to stay away from the market.

History tells us that we should sell in May and go away; what it rarely tells us is to buy back towards the end of June, when stocks often reach their lows for the year.

Since 2008, the end of June has ideally been the best time to buy stocks – with 2011 and 2014 being the exceptions. This has been true for both the Canadian and US markets – except the U.S market has been much hotter (as it should be, given the capital injections of QE).

So if we sold in May, should we buy back in June?

In short, if the financial bubble can find a way to sustain itself from popping, the answer is yes – and I believe that the market should perform between July and September. But before we do, we have to recognize the risks involved from a macrofinancial standpoint.

There are many forces working against the market, yet it continues to hover at historical highs.

While I have discussed the instability of global politics and warfare, let’s not forget the actual climate of the financial market.

When There is More of Something, It is Worth Less

Since 2008, the Fed, and other central banks, have slapped bandages on the world’s economy via long-term paper digital claims, otherwise known as bonds. Their trillions of dollars of newly created digital currency have been used to buy trillions of dollars worth of bonds – or, in Layman terms, debt.

As central bankers focus on preventing deflation (which attacks the power of the central banks), they have chosen the path of least resistance: focusing on short-term results via currency debasement.

Their unlimited purchasing power of debt has forced bonds to reach all-time highs, resulting in record-low yields. This has created a market where investors are rewarded while savers – generally the low-to-middle class – are penalized.

Eventually, however, some very logical and disturbing consequences will ensue as a result of their strategy.

The Macro Outlook

First, we know that inflation (created by central banks) erodes the value of capital over time. And with current extreme low yields, capital invested in long term bonds are sure to lose value – unless inflation remains subdued for the next decade.

The only reason the bond market has been hot in this climate is that bond traders have been able to front-run the central banks for the last seven years.

This will change.

While the financial market is complicated, the end game remains the same for everyone: to make a return on capital invested.

A bond is a debt that has been sold to an investor with the promise that the monies are to be repaid in the distant future, with small interest payments along the way to compensate the lender. This interest compensation is generally calculated based on risk of default and inflation.

In most developed nations, where the risk of default is presumed to be minimal, current prevailing interest rates are so low that investors who buy or hold bonds at current prices and rates will literally lose money if there is any inflation over the next 10 to 30 years (the maturity of long term bonds).

If inflation rises, anyone invested in the bonds of the developed world today will lose much of the value of their capital invested.

Yet, the bond market continues its march: German 30-year bond yield fell to under 0.5% just a month ago, and currently sits barely above 1%; U.S. 10-year yield is barely over 2%; Japan’s 10-year yield is not even 0.5%, while its 30-year is under 1.5%.

Why? How can the bond market be so hot with such low yields?

First and foremost, as I mentioned before in many past letters, most government bonds have been soaked up the central banks.

As a matter of fact, according to the bank of Bank of America in a 128-page report released this February:

“Since Lehman (2008):

…global central banks have cut rates 550 times, that’s a rate cut once every 3 trading days…

…global central bank assets now total $22.5 trillion, a sum larger than the GDP of the US & Japan…

…52% of all government bonds in the world currently yield 1% or less…

…outstanding amount of global government debt currently yielding 0% or less: $4.2 trillion.”

Aside from the ease in which a central bank can intervene through debt monetization, perhaps the central banks do have a plan.

The Fed Isn’t Stupid, Just Selfish

While it appears central banks are reckless, they certainly aren’t stupid – even if they may often act the part.

Perhaps they know something we don’t?

Could it simply be that central banks predict little to no growth over the next ten years?

Has the Fed effectively turned the U.S. into the next Japan – a country battling debt and deflation?

In practice, inflation rises relative to the increase in money supply. But this hasn’t happened, despite record amounts of central bank monetary injections. That is why experts claim that we are on the brink of major inflation.

However, what the central bank gives, it can also take.

In other words, if inflation begins to steer out of control, the central bank can immediately monetize their debt by removing money from the system; thus, leading to an immediate halt in our economy as lending and capital investment stalls.

Perhaps that is what ex-Fed Chair Ben Bernanke meant when he said they could stop any dangers of inflation rather quickly.

The reason experts are wrong in their inflation outlook is because they base their rationale that central banks – in particular, the Fed, want what is best for us.

I have discussed many times about the Fed’s plan to erode capital in order to preserve their system – not our economy – and that, “the Fed works only to pursue its own growth; to engulf more of society into its banking system.

In other words, the Fed could care less about our economy: If inflation rises, it just gives the Fed a reason to sell back the bonds they purchased at a better price.

What to Expect

As I mentioned in my Letter, “The Fed’s True Plan“:

“Eventually, the Fed will have to begin winding down its assets, which means there will be a lot of bonds to soak up.

Foreign liquidity won’t be able to soak up all that has been printed. That means money will have to come from somewhere else. And that somewhere – I believe – is from the stock market.

If the stock market continues to climb, it will create more liquidity for bonds. Why? Because the stock market will eventually correct at some point, and when it does, investors will seek the safety of bonds; thus, soaking up much of the bonds held by the Fed.

The higher the stock market climbs, the more money is available for bonds on the way down.”

So my prediction is simple: yields will rise (which they appear to be doing already), transferring equity-side investments over to bonds to soak up the piles of debt in the market.

Meanwhile, we have a long ten years of little to no growth coming our way, with a stock market crash headed our way in the near future as the system rebalances liquidity.

The Fed’s Biggest Threat 

The only threat to the Fed’s plan is one where confidence in the primary digital currencies of the world (dollar, euro, yen), central bankers, and political leadership begins to fall.

Perhaps that’s already happening.

We’ve already witnessed numerous countries around the world repatriating their gold from abroad, and this trend continues with Austria announcing this past week that it will repatriate its gold from the Bank of England.

We’re also seeing other signs: the McDonalds March, police brutality, etc.  – these are all precursors to rebellion.

So either the next decade will be one of rebellion and revolution, or it will be one of little to no growth.

Take your pick.

Seek the Truth,
Ivan Lo

The Equedia Letter

Comments 13
  1. Don’t accept the government lie concerning inflation. Real inflation is currently over %10 as is evidenced by the Chapwood Index. Corporate profits have been greatly enhanced by inflation as prices have soared in the face of declining input costs thanks to declining commodity costs.

    Bond holders are taking a licking as their real return, after inflation, is well into the negative territory.

  2. Am already a subscriber to the Letter. But this re-subscription is for getting in on the follow-up comments, as per below. Many thanks for the Offer and your Excellent Reporting on a subject matter that can at times be staid.
    Thanks again.
    Harry Jaglalsingh M.D.

    1. You’re right.After years of “recovery” the deficit is only projected to be $500 billion.Imagine what it will be in the next recession.Especially,if all this forced wage increases(AKA minimum wage) causes a lot of companies to replace labor with machines.

  3. Explain this please: If inflation rises, it just gives the Fed a reason to sell back the bonds they purchased at a better price.

    If inflation rises, interest rates should rise and the price of bonds should fall.

    1. You are correct that bond prices fall as interest rates go up, but what I think Ivan is referring to is that the Fed really pays nothing for them (since they are really the ones digitally printing money from thin air.)

      It means that if inflation rises, the Fed will stop it by removing the money supply.

      Lets not forget that bonds also mature, which means the Fed never loses.

  4. I doubt that money will come from the stock market to absorb the bond selling. The stock market has both buyers and sellers so there is no money on a net basis. The fact is as the stock market sells off there will be less money on an aggregate basis

  5. Of course you’re right.The game will continue,until it can’t,which is how govts operate.When people lose confidence in these abused fiat currencies,the game is over.I remember the late 1970’s,when the Dollar was nearing crash mode and inflation getting out of control.Volker was forced to raise interest rates to 15%,to restore confidence.I doubt,with debt levels much higher today,the Fed could do that,without causing a depression.It wouldn’t take much,for inflation to rise above today’s 5-6%.Got GOLD?

  6. It was the Lehman Brothers Chairman that indicated everything was fine in 2008.

    I wonder what he’s doing today? That might be a nice topic to consider.

    Remember that nothing happens overnight
    until it does….

  7. Batten down the hatches. Take down the sail. Drop anchor and try to ride out the storm.


  8. Amazing! The most thoughtful and informative newsletter in a torrent of the digital deluge of them. What incite! Not a big investor, just a retired librarian trying to save for the grandchildren appreciative of the news…good and bad (not good these days). EG

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