Powell Admits Mistakes: How This Affects You | Mark Moss

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Summary

➡ Mark Moss talks about Jerome Powell from the Federal Reserve admitting to making mistakes about the economy. He said they were too slow to react when inflation started to rise, which caused problems in the market. Now, they want to be more proactive to prevent such issues. This could change how we think about our future investments.
➡ The article talks about how the Federal Reserve (Fed) is ready to change its plans if needed. They don’t have to wait until inflation reaches 2% to make changes. The Fed is more worried about stopping progress than about inflation increasing again. They would rather have inflation than deflation because deflation could lead to a recession. The Fed is also keeping an eye on issues like falling commercial real estate values and increasing national debt.
➡ The US government is borrowing money from future generations, which can be both good and bad. This could lead to a different kind of market crash, where instead of falling, prices shoot up. To deal with this, it’s important to manage your money wisely, like keeping a mix of different types of assets and paying attention to what’s happening in the economy.

Transcript

What if everything you thought you knew about the future of your investments was about to change? In an unprecedented admission of mistakes by Jerome Powells of the Federal Reserve, we get a glimpse into his head. We can see his thoughts, his motivations, and more importantly, we can see his plans and what they are for our financial policies for 2024 and what this means for our jobs, our investments and our future.

Now. Powell sat down with a candid interview for 60 minutes, and after watching it closely a couple of times to read between the lines, it’s clear what comes next. So in this video, we’re going to look at what were the specific mistakes that Powell admitted to. How have they affected the economy and the markets? We’re going to look at how the fed’s new plan differs from their previous strategies and what this means for 2024.

And hint, it’s not what most people want or expect and also what the impacts are likely to be on the markets. So let’s go. All right. Welcome back. If you’re new to the channel, my name is Mark Moss and I make these videos to change the way you think about money. Now, it’s difficult to understand because we don’t even know what we’re listening to anymore. And the rules are changing so fast, the answers change.

Now, today we’re talking about one of my favorite subjects. And before we dive in, I want to just go back and address what I first said in the intro. I said, what if everything you thought you knew about the future of your investments was about to change? Now, the reason why is because what everyone expects from the Fed has changed. Their policies have changed. The way they interact in the markets have changed.

And so, as Albert Einstein said, the answers change. And if you don’t understand how this changed, you’re missing the whole linchpin here. Now, I’ve covered it in depth in several videos, and I’m going to give you the overview again. But before I do, let’s take a look at what Powell just said in this 60 minutes interview. Now, Jerome Powell and the Federal Reserve must project an authoritative stance.

Right. They have to do this to instill confidence. As the guardian of the US economy, the Federal Reserve was empowered in the Great Depression to regulate the economy by controlling the supply of money and setting interest rates. It also regulates commercial banks for safety. And so it was a sudden and an unexpected turn to hear him on 60 minutes admit that he was wrong, not just once, but on two separate issues.

And this is something that you never hear from a politician or a governor. Now, this is something you never hear a politician or a government official say, so what was he wrong about? Well, they both lead to the Fed’s huge policy shifts, but let’s look at each one of them separately. So first, you remember back in 2000 and 22,021, I covered it extensively. If you’ve been watching the channel, the Fed couldn’t get inflation.

No matter how hard they tried, they couldn’t get inflation. So they were going to, quote, unquote, let it run hot. And then all of a sudden, then inflation started running hot. It started blowing up, and everyone started feeling the pain. You started feeling the pain at the pump. You saw the Biden stickers there. You started feeling it at the store. And they were all telling us, the Fed was then telling us that it’s just transitory.

Don’t worry about it. It’s going to go away. No big deal. It’s just going to go away, which it didn’t. And then when it got out of control, the Fed was way behind the curve, and they were forced into this, like, knee jerk reaction, which led to the fastest rate hiking cycle in history. Now, this caused damage through the entire financial system, including crashing the banks in March of 2023, which was a bigger crash than we saw the banks collapsing in 2008.

But look at them now. Look at Jerome Powell not only admitting the mistake, but also telling us why and how they missed it. Let’s listen to this clip. Was the Fed too slow to recognize inflation in 2021? So in hindsight, it would have been better to have tightened policy earlier. We thought that the economy was so dynamic that it would fix itself fairly quickly, and we thought that inflation would go away fairly quickly without an intervention by us.

All right, so there you hear him admit it. And in the admittance, it’s also the key for what we can expect going forward. Powell admitted that they were, quote, too slow to react, and so then they were caught off guard and they had to move much more severe than they wanted to, causing all types of ripples and problems in the market. And this, that right there, that’s the key to moving forward.

The Fed admits and recognized their slow reactionary response was a problem. And so now they want to be much more proactive. And if you understand that, then you start to see the silver lining for us anyway, those of us that are paying attention. And so what is this shift that he’s talking about? Well, let’s listen to a few more pieces of the interview so we can get a better understanding.

Let’s play the next clip. We want to see more evidence that inflation is moving sustainably down to 2%. We have some confidence in that. Our confidence is rising. All right, so he said that we want rates to drop back down, and we have confidence it’s moving that way. Notice the key word here, confidence. He didn’t say that it’s already happened. He didn’t say that it’s already done. He just said that they’re confident that it’s going that way.

And part of the reason why there’s so much confidence is because of the direction. When we’re looking at data, financial, economic data, it’s not just the number itself, but it’s the size of the move, the speed of the move, the direction of the move. Let’s play another clip here. Inflation has fallen from just over 9% to about 3%, near the Fed’s ultimate goal of 2%. All right, so you can see that is the direction we went from 9% down to 3% on our way to 2%.

We’re almost there. Okay, so now you can hear this huge shift. Now, unless you’re at a full time financial expert, if you’re a full time financial analyst, a psychopath like me, you’re probably not listening to all of the Fed’s press conferences. You’re probably not reading all of their press releases. And if that’s the case, then you might not be up to speed on what we call Fed speak.

And more importantly, how Fed speak has evolved and changed over time. Now, we first started seeing this term Fed speak back in the mid 1980s when then Fed chair Greenspan was running the show. And it was used as a technique to actually manage investors expectations by making deliberately unclear statements regarding monetary policy. They didn’t want to tell you. Exactly, so they kind of tried to hide it, and we had to sort of decipher it.

Specifically, they were trying to prevent markets from anticipating and moving on their statements, and so they were partially negating its effects by doing that. But things changed now. So again, if you’re still using old data, you don’t understand this. It changed. And the new strategy behind Fedspeak is now transparency, what we now today call forward guidance, which has been used by Fed chair Ben Bernacki, and it’s continued to play a big role in the markets.

It’s the biggest role we’ve ever seen. Right now, forward guidance is a lot different. It’s different that instead of being vague to not move the markets, now, forward guidance attempts to influence the financial decisions of households, businesses and investors by providing a guidepost for the expected path of interest rates. You see, before, they were trying to not move the markets. They didn’t want you to know what’s coming.

Now they really do. Case in point, November 2021. The Fed announced they were going to start raising rates, but they didn’t raise them for several more months until the following year, giving you lots of time to plan ahead. And that’s exactly what we’re seeing now. Specifically, they attempt to prevent surprises that might disrupt markets. That’s why they do this. They don’t want a big surprise that crashes things.

They want people to be prepared. They don’t want to disrupt markets and they don’t want to cause any significant fluctuations. So this means that you don’t really have to read between the lines anymore. They’re trying to tell us what is coming. And if you’re listening, you can hear exactly how the Federal Reserve’s new plan is much different from their previous strategies. So how is that? How is it different? Well, let’s take a look at a couple of the quotes from this interview, and I’ll break it down for you.

Now, you know how many times you’ve heard someone on tv or the Internet say that the Fed can’t pivot on rates, can’t go from tightening to easing because inflation, inflation is in fact down to their goal of 2%. No way they can pivot right now. Well, Powell, just let us know in advance that they can and they will. Let’s play this clip. Are you committed to getting all the way to 2.

0 before you cut the rates? No, that’s not what we say at all. No. So there you go. You heard it directly from him. They don’t have to wait till they get there. They’re ready to. I know, I know. I can already hear the comments coming in. I can hear you clacking on those keys. But if they pivot now, won’t inflation come roaring back? Won’t that undermine and ruin everything that the Fed’s done to get it back under control? How could they do that? Well, if you listen to Powell, he’ll tell you exactly how the Fed views it.

Let’s play the next clip. Moving too soon would set off inflation again. You could, or you could just halt the progress. So there you have it. You heard it directly from his mouth. They’re not really worried about inflation roaring back, but more about maybe halting some of the progress. Right. That’s much less severe. Do you understand that? And the reason why he’s saying that is because there’s something much more severe.

There’s something much more dangerous than inflation. Right. Everyone’s afraid of inflation, and he is, too. But something’s way worse. The Fed and all central banks cannot have it, and neither can the governments if they’re forced to choose. The central banks would choose inflation every time. So what’s more feared than inflation? It’s deflation. Let’s play the next clip. And what is the danger of moving too late? If you move too late, then policy would be too tight, and that could easily weigh on economic activity and on the labor market.

Maybe a recession. Right. And we have to balance those two risks. There is no easy, simple, obvious path. So you can hear directly from his mouth what he’s saying. This is the tightrope that the Fed is walking. If push comes to shove and they are forced between inflation and deflation, they’re going to take inflation all day long. So the points that I’m making are. There’s three points that I’m making here.

One, the Fed admitted its mistake of being too late, and they learned their lesson, and they don’t want to be too late again. They want to be proactive instead of reactive. Listen to Powell admit a second thing that they missed. They got wrong, and they’re now implementing changes to fix. You seem confident in the banks, and yet the Silicon Valley bank, second largest failure in us history. Did the Fed miss? We, uh, we did.

And we forthrightly saw that we needed to do better. So we’ve spent a lot of time working on ways to make supervision more effective and also to adapt regulation to a modern context. So you can hear it again, they missed it. And now updated policy and regulation in a much more modern concept. He doesn’t say exactly what a modern concept is, but we don’t have to guess too hard what that means.

They’re willing to paper over any problem. Now, this is a point that I make often. Something big changed in 2008 with the introduction of QE. The way all central banks interact in the economy and the markets change. And it’s accelerated, for example, in 2007 when Bear Stearns went bankrupt, which is now widely accepted as sort of the trigger point that led to the entire banking system collapse, the crisis in 2008.

At that time, when they went bankrupt, it took the Fed seven months to get a bailout approved for them. And during that time, the entire banking system was collapsing and burning down. Before comparison, in March of 2023, when the banks collapsed, it only took six days to get the new BTFP funding facility set up to bail them out. The second point, number two, is that they’re not waiting for inflation to get back to 2% before they make the pivot.

They just want to feel confident it’s going in the right direction, which it clearly is. And this is another key point. You see, historically, a yield curve, uninversion, or a Fed pivot has been bad for the economy and the markets. But you have to understand the difference of correlation and not causation, because the markets were already melting down before the Fed, very slowly, as they self admit, very slowly, finally got around to moving, but only after it was too late.

But now you can see they’re changed their policy. They’re preemptively, proactively moving. They’re being proactive here. The third point is, when forced to choose between inflation and deflation, they’re going to choose inflation every single time, because the government can’t afford a recession, and neither can the banks. And so when choosing between a total collapse and a loss of everything, or just some more inflation, they’re going to let the printers go.

Burr. Okay, so now that we’ve got that figured out, when should we expect this? And more importantly, how are we going to play this? All right, so first off, let’s talk about timing. Now, most eyes have been on the Fed cutting in March of this year, but the Fed’s telling us they want to push this back. Let’s hear directly from Jerome. I think it’s not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.

The next committee vote then would be in May. All right, so you heard him. That’s what he’s saying. That’s what they want to do. Of course, we’ll still wait and see. But to the point, absent significant deteriorations to the downside in upcoming inflation data, it appears the path to a march cut is probably closed for now. But that doesn’t mean they won’t cut. In fact, Powell tells us it’s all but certain.

Let’s hear the clip. Almost all of the 19 participants who sit around this table believe that it will be appropriate in their most likely case for us to cut the federal funds rate this year. Okay, so maybe not by March, but by May. And we can see that almost everyone at the Fed is on board with this rate cut. And look, I don’t think it really matters one way or another.

It’s always the directionality in which it comes. And we can see the markets and myself, we’re already been front running this. I’ve been making videos for a year talking about this so hopefully you are as well. And the markets are not just front running it, but also they’re calling the bluff on the Fed’s projection. Right. The Fed is saying they’re going to have three rate cuts this year totaling 75 basis points.

In fact, the ods of six cuts have actually gone up from 83% to now 88% a week ago. Now for all the bears out there, all right, I hear you. I hear you grumbling the bears. I know there’s at least, I don’t know there’s a dozen things that could derail all this. But Powell took some time to tell us what they’re watching and more importantly, how they would handle any of these potential bear triggers.

Now one of the big pin pricks that I hear all the time that I see people point to is the problem in the commercial real estate sector. Right? You got all these office buildings are going default, the banks are taking them in, all those things. I understand that. And it has the ability to crush the regional banks. And Powell had something to say about that. The value of commercial office buildings all across the country is dropping.

Those buildings support the balance sheets of banks all across the country. What is the likelihood of another real estate led banking crisis? I don’t think that’s likely. And we’re working with them. So you hear they have their eye on the Ball and they have a plan to deal with it. And why is he so confident? Because he knows the Fed has the ability to paper over it. Just take the know right onto their books if needed, just like they’ve done for the last decade with mortgage backed securities.

So his forward guidance for us has been pretty rosy. Right. The Fed has it under control and is ready to paper over anything. At least that’s what he says. So what does keep him awake at night? What does he see as a big potential problem? Well, it’s the runaway government spending in which he calls an unsustainable path is a sharp increase in the national debt. 30 years from now.

It is projected to be $144,000,000,000,000 or $1 million per household. How do you assess the national debt? We mostly try very hard not to comment on fiscal policy and instruct Congress on how to do their job when actually they have oversight over us. But is the national debt a danger to the economy in your view? In the long run, the US is on an unsustainable fiscal path. The US federal government’s on an unsustainable fiscal path.

And that just means that the debt is growing faster than the economy. I have the sense this worries you very much. Over the long run, of course, it, we’re effectively, we’re borrowing from future generations. It’s time for us to get back to putting a priority on fiscal sustainability. You could see he clearly sees a big problem. He states that the US government is borrowing from future generations. Now, to be clear here, this is both good and it’s bad.

It’s good and bad, like everything, right? Everything has a cost benefit analysis, depends on how you look at it. So how should we look at it? What is the impact on us as individual investors? Now, when an airplane takes off from Los Angeles, flying to Tokyo, even though it’s basically a straight line from LA to Tokyo, from that takeoff to the destination, during the course of that flight, on average, a pilot has to course correct over 600 times to stay on track and avoid turbulence, other planes, things like that.

And as the Fed adjusts course, then so do we. If the Fed continues to paper over the problems, as I believe they will, and as Powell clearly said, they will, even more so what he says about the US treasury on an unsustainable spending path, then we see that that leads to a huge crash. But it’s not the market crash that most people are suspecting. It’s what I’ve been calling for about as a reverse market crash, meaning instead of crashing down, it’s a crash up.

So what are we going to do about that? For now, it’s about keeping our head above water, above the rushing tide of inflation. And so I continue to hold a barbell strategy. All right, it’s heavy, hard energy, scarce, energy intensive assets on one side, cash and cash equivalents on the other, and even more importantly, tactically, managing my portfolio, which doesn’t mean that I’m trading. I don’t recommend that for anybody, but rather I’m paying attention.

I’m paying attention to the research, the indicators. I’m listening to what the Fed is saying and I’m adjusting my plan on the way to Tokyo, if you get my drift. Now, if you want to go deeper on the two types of crashes, why I expect a reverse crash and what it is, and how you can play this, click on and watch this video right here. And if you want to understand how the answers have changed, specifically how the central banks interact and how it’s changed since 2008, then click and watch this video that I have up right here.

But either way, make sure to drop a comment. Let me know what you think about in this video. Of course, give me a thumbs up if you like it if you don’t. You can give me thumbs down. That’s okay. But at least leave me a comment. Tell me why. Of course. Hit that subscribe button if you’re not already subscribed so you can stay up to speed and adjust your own airplane as needed.

And that’s what I got. To your success. I’m out. .

See more of Mark Moss on their Public Channel and the MPN Mark Moss channel.

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