In February 2009, the markets were still reeling from the credit crisis. In response to this, President Obama signed into law the “American Recovery and Reinvestment Act.”
This was an absolute firehose of Federal money. The entire package was $787 billion, which was a massive number back then.
Part of that spending bill was a one time, $250 payment to Social Security recipients, which made headlines as it was a $14 billion direct stimulus.
Back then we thought these were eye-popping numbers, but now it’s just the normal math of Federal spending.
In 2023, there was a massive cost of living adjustment for retirees, and they were granted an 8.7% increase in social security payouts.
That’s five times what we saw during the “firehose” spending from 2009.
And now, with rates above 5% and the markets pricing in rate cuts throughout the rest of the year, the Fed is between a rock and hard place once again.
They’ve been waiting for inflation to cool off before they start cutting rates, but they just can’t seem to get it under control.
What gives?
The U.S. operates with two separate economies.
The first is the “financial” economy. These are areas the Fed can directly control. Real estate, regional banks, credit markets– all things that are pegged to the rate window that’s set by the Federal Reserve.
The deflation risks are all sealed up into this economy. We saw the Regional Bank crisis in March of last year that was the direct result of the rate hikes throughout 2022.
And we’re starting to see softness here. Large corporations are reducing their employee counts, and they are taking a good hard look at what they can afford to spend now that the cost of capital is through the roof.
If this economy was the only thing the Fed has to worry about, then it’s in a good spot.
But then you have a second economy. The Real Economy.
The Real economy has inflation. It’s not going away.
Some of it is structural. When Social Security recipients continue to get an increase in their monthly paychecks, it bleeds over into asset prices.
You also have supply chain issues in the real economy that kicked off in 2020 and have still been rolling through, causing sustained price increases.
There’s also the political side of things. When you have 300,000 illegals coming across the border, that will have a direct effect on the cost of housing and goods inside the United States.
None of this is currently touched by Fed policy. And the problem for the Fed is that by the time their policy bleeds over into the Real economy, it will cause some nasty problems downstream.
They’re trying their best to “thread the needle” between both economies. Monetary policy can only affect the “financial” economy, causing job losses and a reduction in corporate spending and investment.
This comes down to an inescapable conclusion: the Fed must accept a higher level of inflation in the Real economy, because the alternative would be a “hard landing” recession that would explode the deficit and put the United States on the back foot with both its monetary and fiscal policy.
There’s no escaping this– the pieces were put in play years ago and we are witnessing the effects without the ability to stop it.
The US is in a debt-fueled Financial Black Hole. And the only way out is through.
This is not a call for a market crash. It’s simply looking at things the way they are and knowing that we will have to “inflate” our way out of this mess. That means stocks can continue to rip higher, but it may be concentrated only in a handful of names while rotation happens under the surface.
It also means that market volatility is going to stick around for a while, and if you’re an investor, you can’t afford to “buy and hold.” You need to be tactical.
Here’s the thing– while we are aware that all of this is going on, we don’t actually make bets on this. We know what the narrative is, and our job is to watch institutional money flow to see when they are making big moves, both buying and selling.
And we have a proven system for tracking those moves. I’ve put together a free training webinar that takes you through it step by step – you can watch it right now on this page here.
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