MARKET NEWS / MCALVANY RECAP

Can the Center Hold?

MARKET NEWS / MCALVANY RECAP
McAlvany Recap • Mar 25 2024
Can the Center Hold?
MPM Posted on March 25, 2024

The issue of centralization vs. decentralization has probably dominated the history of the United States more than that of any other country. It’s not a new issue, nor is it peculiar to the US, but it has certainly loomed large here.

Philip and Alexander made a hegemon of the Greek city-states; Caesar Augustus did the same of the Roman Republic; Bismarck, of the German states, and so on. In America, centralizers developed the Constitution rather than revise the Articles of Confederation; the Union defeated the Confederacy; the central bank (the Fed) supplanted the decentralized banking system; and a standing army replaced the militia—among many other similar developments.

Whenever decentralizers get ahead, centralizers come along and usurp their gains and consolidate their efforts (which are typically greater under decentralization). Computers, the internet, and cell phones were initially huge decentralizers. Then the NSA used them for the biggest privacy invasion in history.

Block chain innovations threatened to return currency use to the decentralization of an earlier age, but then the IRS and regulatory agencies throttled the new currencies’ advantages and now the threat of central bank digital currencies looms large as the ultimate currency centralizer.

Is decentralization doomed? Will the power aggrandizers always win? Well, the answers to those questions far exceed the space allotted to this blog post. Suffice it to say that centralizing efforts often triumph among relatively homogenous populations, while decentralization usually wins out among polyglot, different minded, or ethnically diverse populations.

In other words, what’s outside usually—eventually—reflects what’s inside (strong emphasis on eventually). Those who are staging a violent revolution against America’s rule of law and WASP (is that a dirty word?) origins through multiculturalism should probably give that some thought.

The Federal Reserve System is a major centralizing component of the American trade system, which is a major component of the American “empire”—enclosed in quotation marks because it is different than more traditional empires, but with many important imperial characteristics nonetheless.

What will happen if this monolithic institution (the Fed) starts losing traction, spins its wheels, and starts sliding off of its high hill? This is a very real possibility, and the implications are immense and far-reaching. Most people on earth will be impacted. Will decentralization triumph—or will centralization return with a vengeance (as it did after the breakup of the Soviet Union with Putin’s takeover)?

If you’re concerned about this possibility, even as a simple practical matter, it makes sense to stay on top of developments analyzed by people who have spent thousands of hours studying our financial system and its mandarins at the Fed and Treasury. You can read these analysts’ work by clicking on the links below. As the discussion above indicates, this subject is astronomically important.

Key Takeaways:

  • Plan your work, work your plan
  • The Fed doesn’t know what it’s doing
  • Those pesky contrary indicators
  • The Fed knows what it’s doing

The McAlvany Weekly Commentary: David and Kevin cover a lot of ground this week, discussing the need to have a wise plan and constantly work toward it year after year; the Bank of Japan’s change of multi-decade pace; and the Fed’s nature, predicament, and actions. Discipline, attentiveness, and tenacity are necessary elements of successful investing, which Kevin illustrates with an anecdote and David demonstrates with a small glimpse into his own plan. Is the Fed the most financially beneficent or the most financially dangerous institution in the world? The answer is in the Commentary this week, along with more information on the Fed’s Scylla of inflation vs. Charybdis of recession dilemma. And the hosts note the BoJ’s first interest rate raise in over two decades. You’d need a microscope to see it, but it’s there—all ten basis points of it. Are baby steps really necessary for a country with a multi-trillion-dollar GDP? “Tune in” this week for the discussion.

Credit Bubble Bulletin: It’s been humorously noted that denial is not just a river in Egypt. Apparently it’s policy at the Fed as well. Doug quotes Jerome Powell directly, as the latter cites inflationary statistics and then downplays them. Powell is apparently channeling Drew Carey in Whose Line is it Anyway? where the points don’t matter. Except that the points in the Fed’s case are data points that reflect real-world developments. Opines Powell, “I think [the rising January and February CPI prints] haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward two percent. I don’t think that story has changed.” Doug reiterates a comment he made in an earlier CBB that “‘Powell is not that good at this.’ He repeatedly made what I viewed as gaffes, providing highly speculative markets pretext for believing Powell was more dovish than he actually was.” We could easily be entering the most crucial time in the American economy’s history, and we’re possibly doing it with an unsteady hand at the wheel. Be sure to read CBB each week to stay up on developments.

Hard Asset Insights: Morgan notes that, “Since November of 2023, the dominant messaging from the Federal Reserve seems to have turned decisively from ‘higher rates for longer’ to now ‘higher inflation for longer’ in an about-face only Wall Street could love.” And love it Wall Street does—with a caveat: “With another booming week in the books for stocks, however, investor sentiment extremes continue to proliferate. Caution is warranted.” Surging markets have astonishingly immense power to buoy sentiment, cause FOMO, and draw people in. This power is an emotional thing, and it’s surprisingly hard to resist, which is why Morgan provides so much factual evidence to balance the scales. When blue skies and calm winds suggest a deep-water fishing trip, it’s good to see the radar picture of a hurricane heading your way. This is the kind of thing you’ll find in HAI—a real-time big picture, including things you might not otherwise be able to see.

Golden Rule Radio: Rob is notable this week for a view that is contrary to the contrarian line. That sentence is almost Fedspeak, but it describes an understanding that the Fed is talking dovish, remaining hawkish, and therefore effectively holding at bay both runaway inflation and impending recession. Rob deems the performance laudable, and therefore parts company with his esteemed colleagues this week—though Miles agrees with him and Tory does not dispute the point. Is this a rogue group within the MFG? Well, Rob notes that the Fed has significantly reduced its balance sheet and increased the interest rate to fight inflation, so he likes the fact that the Fed has not yet reversed itself on these matters, even as it talks a dovish game. Still, there is enormous stress within the system, and the hosts pivot to talk about the bad news. They discuss the pressure on banks that has them shuttering branches by the score. Tory notes $400 billion that the Fed has to inject into the financial system before the election, which might not increase the Fed’s balance sheet, but is certainly inflationary. Miles then takes a look at gold in the wake of the Fed’s recent actions, and notes differences in the aftermath of the recent high in the gold price compared with what happened after the December 2023 high. His conclusions are extremely meaningful for anyone interested in gold.

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