Update - March 14, 2023

What to Watch in This Crazy Market

Think interest rates aren’t important? That they’re not, as we’ve said for so many years, the “hormones of the economy”?

Look around.

The Fed’s been adding artificial juice to our hormones… and things are getting wonky.

Very wonky.

I won’t rehash what’s going on. That’s not the purpose of these weekly updates. But I will tell you that the No. 1 factor in what’s going on is the cost of money.

It’s a critical lesson. It meshes perfectly with our strategy.

Remember, interest rates determine the future value of assets. When rates rise, values tend to fall. That’s certainly the case with bonds. As rates rise, bond prices fall. And when rates and prices start to swing dramatically, the system shakes free of its foundation.

That’s what we’re seeing now. Banks buy bonds at one price today… then the Fed meddles with rates… and they’re forced to sell them at a lower price tomorrow.

The effects on the economy, as we’ve seen, are often fast-moving and unpredictable. We don’t know exactly where the trouble will show up… we just know that it’ll show up.

It’s why the strategy behind our Modern Asset Portfolio is vastly different from the traditional asset allocation model. The textbook model is blind to interest rates. It would have us investing the same way regardless of where rates are or which direction they are moving.

That’s silly. And the results are what we’d expect. The model is broken. Many investors are paying the price for it.

We’re tracking interest rates daily and adjusting our strategy accordingly. But as you likely know, we don’t track nominal rates. No. This is our real advantage. We track “real rates” – the cost of money after inflation is subtracted.

Even at this level, there are plenty of misnomers and places for investors to misstep.

For example, there is the “official” real rate… and then there’s the true real rate. Knowing the difference is huge.

The official real rate is based on the market’s price of the 10-year Treasury. The true real rate is unknowable, but it is almost certainly different from what the market expects.

I’ve been showing the chart below to my VIP subscribers for months. It’s very important.

It shows the Fed’s key interest rate (green line) versus one of its favorite inflation measures (red line). Interpreting it is very simple. Throughout most of the Fed’s history, its rate has been higher than the rate of inflation.

That creates a positive real rate. In other words, factoring in inflation, it actually costs money to borrow money. That’s the normal way for an economy to work. It’s just as we’d expect.

But things changed after the dot-com bust. That’s when we went from cheap money to easy money. Since 2009, inflation has been higher than the Fed’s rate. And even with Powell sending rates higher at a record pace, inflation is still outpacing them.

Money borrowed today will be worth less tomorrow even before accounting for the additional cost of its interest.

It’s easy money. The current interest rate is still artificially pumping the market.

The question now is: Do the Fed and the government behind it have the guts, the backbone and the political fortitude to go back to a “normal” system?

Judging by what we’ve seen so far this week, the answer is no.

Understanding that idea – and understanding that inflation is likely to run higher and longer than the market currently expects – is our advantage.

While so many investors are blindly following the headlines and investing as if we’re in an era of tight money, we realize very little has changed. The Fed has not kept up with inflation. It hasn’t for nearly two decades.

Our portfolio is taking strong advantage of the action. We’re playing the “true” cost of money… not the market’s mistaken view of it.

As history proves, once the market figures out what we already know, we’ll be rewarded handsomely.

I’ll keep you updated…

Note: While our strategy takes a bit of a longer view of things, our friends at Monument Traders Alliance are taking full advantage of the wild short-term swings we’re seeing in the market. Tomorrow afternoon, they’re hosting a free training event that details a proven strategy for times like this. If you’re serious about making money, I urge you to check it out.