Jerome Powell and The Fed Just SCREWED UP Big Time

0:00Hello, everyone. It is Fed Day. All eyes are on the Federal Reserve as they finally cut interest rates. On top of that, we're going to discuss how markets should react to the announcement of a new Fed chair, and Darius Dale is going to sit down to explain the regime change happening at America's Central Bank. We're live today from the desk of Anthony Pompliano.

0:28Before we get into today's show, I need your help. I need to get to 1 million subscribers. That's my goal, but I can't get there without you. We currently have 23 ,164 subs, and that means you got to hit that subscribe button right now. Let's get into the show. Ladies and gentlemen, today is Fed Day, and Jerome Powell, he didn't disappoint. He cut interest rates by 25 basis points. Now, of course, I think it should have been 50 basis points, but at least Jerome Powell, he brought us some liquidity into the market, and cheap capital is all on the way. Now, Jerome Powell did this, but he also gave guidance that we should expect around 50 basis points more of cuts.

1:05That'd be 75 basis points cuts in 2025 before the end of the year. This is a good start, but the Fed has been behind the curve for a long time. And I said earlier that I thought that the basis point cut should have been 50, not 25. So here's my explanation as to why 50 basis points makes so much sense to me. Jerome Powell and the Federal Reserve are finally poised to make their first interest rate cuts of the year later today. Now, are they behind the curve? Of course they are. Have people lost confidence in the Fed? Obviously. Just go look on the internet. But we have finally arrived at the big day for the central bank to capitulate.

1:42They're going to wave their little white flag. They have been gaslighting the American people for months. They've been predicting sky-high inflation. That was their main reason for not cutting rates. But that prediction, it never came true. Inflation is much lower than they thought, But shelves are not empty and there was no recession, nor was there a Great Depression. The bears are crying. Unfortunately, the labor market, though, has deteriorated in the meantime. We've seen sluggish payroll growth and it's been coupled with recent downward revisions to employment data. So now the Fed has no choice.

2:14They have to cut rates. They can't abandon one of their core mandates. That mandate is to ensure maximum employment. So let's unpack the horrible, no good labor data right now. July and August, those at employment data, they came in under expectations. The recent job revisions removed 900 ,000 jobs. Those were previously thought to have been created over the past year. Whoops. Unemployment has been slowly ticking higher. And June's data showed that there's been an outright job loss for the first time since 2020. So the picture right now in the economy is very clear. The labor market is screaming at the Fed to cut rates immediately.

2:50This now brings us to the Fed's second mandate of maintaining stable prices. Remember that concern that they had about inflation? It was dumb. We never saw the runaway inflation that they were worried about, and we are not going to see it from the tariff policies moving forward. Inflation, which is basically at 2 % according to trueflation, is telling the Fed that they have the green light to cut interest rates. I don't know if the Fed's going to listen, but that's what inflation data is telling us. So here's the thing. there are people who are still worried that a rate cut would drive inflation to concerning levels.

3:21But these people don't realize how deflationary tariffs and artificial intelligence have been to the U.S. economy. The Fed can cut aggressively right now and not have to worry about inflation spiking. So this brings me to how aggressive the Fed should be in the rate cut today. The market's pricing in a 25 basis point cut. That's an interest rate cut for ants, in my opinion. Let's not play little kid games here. The Federal Reserve should get out the super soaker and they should cut 50 basis points and show the market they are serious about stimulating the economy. This larger cut would immediately surprise the market into a bullish position and it would actually use their rate cut to stimulate the job market, which is really important.

4:01Companies would increase their spending on R &D, GDP would accelerate and inflation would not increase because of the deflationary nature of tariffs and AI. You don't get the intended impact of interest rate cuts if you simply do what the market is expecting. 25 basis point cut is already priced in. The Fed needs to run a shock and awe campaign. You gotta shake every nerd on Wall Street into believing that the central bank is here to stimulate activity. Cut 50 basis points. Make the press conference a firework show. Make people remember it forever. And send the stock market shorts crying and get the US labor market running hot again.

4:38Jerome, it is time to bring liquidity back to the market. Don't let us down, my friend. Speaking of the Federal Reserve, one of the dark horse developments worth paying attention to right now, it's a change in Fed leadership that's gonna happen next year. Jerome Powell, the Fed chairman, his term ends in May of 2026. President Trump is expected to announce a successor in late 2025, this year. And that's gonna create a shadow Fed chair effect as markets front-run expectations of a dovish nominee. Now, Binance Research, they do great work and they did a deep dive into what happens in the market when a new Fed chair is announced.

5:13Historically, Fed transitions have shown a similar sequence. The market rallied when Janet Yellen was nominated in late 2013, and then the market surged higher again in 2017 when Jerome Powell was nominated. But in both cases, the market corrected and cooled off once each individual took office, first in early 2014 for Yellen and early 2018 for Powell. Now, obviously, history doesn't always repeat, but I personally wouldn't bet against it rhyming. Now, if a similar pattern holds, Trump's nominee could extend momentum into 2026. That's bullish. But May and June next year, the handover period as it's known, that may serve as a likely catalyst to the downside.

5:53So if you're an investor, stop paying attention to the soap opera of who it's gonna be. Instead, pay attention to what the impact in the market is going to be. And what history is telling us is that the next couple of months should be bullish. But it's next year that you're gonna have to worry about all the volatility that could hurt you. I told you earlier that it is Fed Day here on this show. And so I've got a very special treat for you. Darius Dale, the founder and CEO of 42 Macro, he believes that the Fed is going through a massive regime change. And he sat down with me at the Independent Investor Summit in New York City to explain exactly what's happening, how it should affect your portfolio.

6:29Here's my conversation with Darius Dale. Darius, there's a regime change happening at the Fed. What the heck's going on? Oh boy. How long do you guys got? Yeah. So it's in our, can I set the stage for this? That's a big question. We are in a fiscal dominance regime. And what that ultimately means in layman's terms is the government is growing too fast for the economy to handle it. And so ultimately there's a set of choices that the government has to make in order for that to, that risk to be mitigated. And so you can either cut your way out of the problem, which we tried and failed at spectacularly.

7:05You can try to grow your way out of the problem and you can try to print your way out of the problem. We believe that the Trump administration has chosen, has elected to grow their way out of the problem as many governments in history have done. And part of the reason, one of the strategies, one of the levers they're going to pull to try to grow their way out of the problem is to facilitate a private sector credit cycle. And one of the ways in which you can facilitate a private sector credit cycle is by obviously lowering interest rates and borrowing costs. And so it's our belief that the administration is going to do whatever they can, and they're going to make some stuff up, have you already seen it, to essentially take over the Fed and force down the term structure of interest rates in the economy.

7:47Now, when you say take over the Fed, in a third world country, that'd be like, show up with guns. I just saw, I don't know if anyone's been paying attention, Nepal, there's like some kids on a Discord server just took over the government. So like, you know, it's just getting real out there. I don't think that's what they're talking about, taking over the Fed. It looks like it's more of use the process to get their Fed governors in place and start to influence policy. What exactly would that look like? Yeah. So that's a great question. So this is not we're not a third world country. We're not going to become a third world country.

8:15We all again, let's take a step back because I think we have these big conversations about these very esoteric, you know, complicated subject matters. And at the end of the day, this is still the United States of America. There is still going to be a rule of law. What this is ultimately about is a Federal Reserve, an organization that is operating monetary policy with old legacy models, legacy frameworks, and ultimately some politicized views. We can make the case that the Fed was quite politicized in 2020 and 2021. And so this is, you know, the red team or the blue team, it's the red team's turn to essentially try to change the way the institution operates.

8:52You know, our models have consistently called for, and I've been on your program, obviously, for almost three, four years now, saying that the equilibrium core PC inflation rate in this economy is around 3 percent, which means. Unpack this. This is really important. So the Fed says that their inflation target is 2 percent. Yep. You just said 3. That's a 50 percent increase. What's going on there? Yeah, well, there's a lot of structural change in the economy since COVID. we exited a prior regime, a very disinflationary regime that was driven by, in large part, demographics and the deleveraging of the private sector from the previous housing bubble.

9:25And that deleveraging process essentially is concluded. And there's a lot of other factors that are sort of moving around in that model that essentially saying that the equilibrium level, the level which we cycle around in core PC inflation terms has risen quite, quite, quite meaningfully. So structurally, we're now at 3%. It may go structurally lower if we're, if Jeff is right, Jordy's right on the AI productivity boom, but in our opinion, that's over a multi-year time horizon. Over the next one to two, perhaps three years, it's likely that we still have this lingering, sticky inflation dynamic.

9:57And what that ultimately means is an institution that is legislating a 2 % inflation target upon the U.S. and global economy is going to run monetary policy too tight. And here's the number one reason why this is a problem. So because we're in a fiscal dominance regime, the growth of borrowing that the United States government does in terms of its debt rollovers, I want to say we're rolling over about$9.5 trillion of debt in the next calendar year in terms of the annualized budget deficits at about$1.9,$2 trillion. And then obviously the Fed is still shedding its summa portfolio to the tune of about$60 billion a year.

10:35That sum, which is north of$11 trillion, is about 40 % of global savings, up from about 20 % of global savings prior to COVID. So we are now gobbling up double the amount of global savings. And so what that ultimately means is that there's not enough capital left to go around for people in this country to start small businesses, for people in this country to buy houses. And that's why you see the interest rates on those spread products continue to be much higher than they used to be historically on a spread basis relative to the Treasury bond price. So we have a Fed that's going through this regime change and their structural inflation that's higher than what it previously has been.

11:14Let's talk about portfolios. You guys have been pretty clear now for months that people should have a very specific type of portfolio to prepare for and to benefit from that structurally higher inflation. Talk through the portfolio construction that you guys are talking to your clients on. Yeah, that's a great question. I'll pivot a little bit slightly. It's not that the portfolio is designed to benefit from structurally higher inflation. Our KISS portfolio, which is risk-managed, 60 % stocks, gold and Bitcoin, it's really designed to take advantage of the fact that the, I guess, the traditional ballast of defense and investor portfolios in this kind of 60-40 world we're exiting, the treasury bond is no longer the defensive asset for a variety of reasons.

11:58In our view, it's a melting ice cube of an asset. Now, we're not calling for a meltdown of the treasury bond market or some big financial Armageddon. Don't make any headlines here. This is actually quite boring stuff. But the reality is, from an institutional asset allocator perspective, its correlation to stocks and bonds is no longer favorable from the perspective of playing defense. And so ultimately, and part of the reason for that correlation is because there's just, for all the reasons we talked about in terms of the supply and demand dynamics. And so there are other supply and demand dynamics that we should unpack too.

12:27So for that reason, it's highly unlikely to have the same defensive properties in an investor portfolio as it used to be. So that means you have to find another way to play defense. The way we decided to play defense and that served our clients quite well over the past few years is rotating that bond allocation out of your 60-40 portfolio and replacing it with gold and Bitcoin. Gold is an instrument that essentially allows investors to outrun the financial oppression that we're likely to eventually see as a function of the structural regime change at the Fed. And obviously, Bitcoin is likely to help investors to outrun the monetary debasement that we tend to see in these fiscal dominance regimes.

13:03And again, this is not a U.S. phenomenon. This is something that's been happening for thousands of years around the world. Now, TLT, which is, I think, the iShares 20-year bond fund, over the last five years, is down like 50 percent. When you look at cash, Ray Dalio and many others have been out there saying cash is trash, et cetera. Talk about the conversation in finance has long been the safe asset was cash and cash-like instruments. What I think I hear you saying, what I'm definitely saying is actually those assets are really risky now. And so we have an entire finance complex that is built on convincing people to move assets into something they're being told is safe, but is actually possibly the most risky thing in their portfolio.

13:49What are the ramifications of that for investors? Well, this is why I sound so heretical on your podcast and on my show because I feel very passionate about this, that we're doing a disservice to the investing public. I mean, if you think about this sort of concept of the static pie chart asset allocations that so many investment advisors have their clients stuffed in and target date funds, which is just a rolling series of pie chart asset allocations based on how old you are, all these asset allocations have entirely too much exposure to bonds in an era of persistent monetary debasement and financial repression.

14:22And so it sort of feels like to me that the entire, we've got about$43 trillion of retirement assets in this country. That whole industry is sort of built upon, let's figure out who to convince the retail investor to hold the bag. And right now, the biggest bag out there is the treasury bond market. It's a melting ice cube of an asset class. It is the risk asset in a fiscal dominance regime. Now, when you are looking at this stuff, you guys have very unique models that you've built. You guys have a lot of information. If anyone has ever seen Forty Two Macro and Darius' work, you've got to sit down.

14:56You've got to look at it, right? This isn't like, hey, we're going to give you a headline and you're going to walk away with the information. And what I think is unique about you is that you talk with what I'll call the retail investor, the sophisticated, self-directed crowd. But you also have clients that I'm not going to name, but are very well-known, very sophisticated institutions and also individual investors, many people that you would see on CNBC, et cetera. Do they have the same investment portfolio? Or do you see a big difference between maybe what people would consider the sophisticated investor versus the self-directed investor?

15:27And should they have the same or different portfolio? Well, don't get me in trouble here. So one of our clients recently got nominated for a job at the Fed, a big job at the Fed. One of our former clients is currently the Treasury Secretary. And so the answer to your question is, by and large, no. And there are some structural reasons why. Obviously, these big funds, they have a lot of assets. They can't go buy 30 % of their portfolio in gold and 10 % of their portfolio in Bitcoin, although I think they should. But obviously, that would trigger a big, broad financial panic because who's going to be buying the$35 trillion treasury bonds market if they don't?

16:13So you're saying that the sophisticated investors, their portfolios are so big that they actually can't go and put the portfolio that you think is best for them because they may trigger some sort of issue if a bunch of them start to do it? A hundred percent. And no one in that world is incentivized to behave in that manner. It's almost like we all have to agree to agree to keep the game going. And so that's our benefit as retail investors. I consider myself an institutional investor when I go to my computer screen in the morning. But when I log into my brokerage account or to my retirement account, I'm a retail investor.

16:47And it's our great benefit as a retail investor that we could take advantage of the institutional constraints that these guys have that force them to only allocate a small amount of their gargantuan portfolios at a time to chasten these asset classes that are most likely to benefit from these macroeconomic dynamics. One thing I'll say on those dynamics that we forgot to unpack, which I think is very important to unpack, to hammer home the point that the treasury bond market is the risk asset in a foreturning regime specifically. You have Europe re-militarizing. So NATO's trying to take its defense spending allocations from 2 % to 5 % over the next decade.

17:25Now, they've been horrible liars for decades. They're not going to get to 5%, but they're going to go up, and it's probably going to go up meaningfully as a share of GDP. So that's one. Europe is the largest foreign capital provider to the treasury bond market at about 8 % to 9%. Number two, the second largest foreign capital provider is Japan. They're normalizing policy after having escaped decades of deflation. They're now having persistent above target inflation for about three or four years now, arguably it's at least talked about big global macro story in the world, which is how far behind the curve the Bank of Japan currently is.

17:59And so that's something that's likely to be a durable headwind from a demand perspective in the treasury bond market. And then obviously it's headline news every day or every other day that U.S. and China are strategically decoupling, and that is the third largest source of treasury bond demand. So you're no longer going to have the foreign exchange reserve recycling into the treasury bond market from China. So that's three incredibly large sources of demand that are now moving in the other direction at the margin, while at the same time we're accelerating the growth rate of our need for capital.

18:26So this problem, this big problem is only going to get bigger over time. And the solutions, the tides of the solutions that are required are only going to get bigger over time, which is why we feel the administration is right to pursue structural regime change at the Fed. Now, housing is a huge crisis. Mortgage rates are elevated. There's this lock-in effect that's happening across the country. We have seen the 10-year come down. You and I, I think, continue to tell people, all you have to do to understand what is going to happen is to listen to the words that they tell you. They continue to tell you what they're going to do.

19:05And whether they're right or not in terms of the impact of their decisions or their actions, the Fed, the Treasury, and the U.S. government continue in this administration to do what they say they're going to do? Now, again, there is debate as to should they do what they say they're going to do, but they seem to continue to do it. And so how does that play into the mortgage market and where you guys think these interest rates, like if they're saying they want to get it down, how low can they get interest rates? Well, you have to apply a variety of different frameworks and new perspectives to this debate.

19:38We've been trying to provide thought leadership to our clients and to the general investing public around some of the frameworks that could potentially change in order to allow just a different wave of thinking for the interest rate. One, obviously we believe that the Fed's 2 % inflation target is arbitrary. I mean, we got this 2 % inflation target from the Reserve Bank of New Zealand Act of 1989. Obviously where we should have got it from. Where else would we get it from? I expected more laughs from that. I mean, it's utterly ridiculous. It's 2025. It's utterly ridiculous. So that's obviously one mode of thinking that can potentially change and we believe should change and I believe we've been arguing this for years now, obviously with data.

20:22Another mode of thinking is that the Federal Reserve does not understand the role it has to play in a fiscal dominance regime. And this goes back to your point on housing. One of the metrics that we look at, we track to sort of understand the kind of dynamics in the economy from a distributional perspective, from a sectoral distribution and also from an income distribution perspective is the refinancing risk in various segments of the credit market. And so how we calculate refinancing risk is the spread between the yield and the coupon on the index, like the Bloomberg MBS index. And right now that's somewhere around 150, 200 basis points.

20:56And it's been positive for four years now. It hasn't been durably positive since the late 80s or the mid 80s. And so we've been in this persistent positive refinancing risk mode in the housing market, which ultimately tells you that there's just not enough capital to arbitrage that spread lower in the housing market, irrespective of what the interest rate level is, the general interest rate level is, the spread is too high and it needs to be arbitraged back down. And so ultimately that tells you that, hey, if this is an administration that is now considering this to be a crisis, they're obviously floating the idea of calling a nationwide housing crisis, which will give them more flexibility to kind of throw resources at the problem.

21:39One thing they can do in this sort of, quote unquote, hostile takeover of the Fed, if you listen to certain sources, they can stop this ridiculous policy of selling down the mortgage-backed securities. Right now, if you look at the Fed's share of the MBS market, it's down right around 16 % of total. It was up at 23 % of total. Why can't it go back to 23 %? Why isn't it at 30 %? Why isn't it at whatever number we need so that the Gen Z kids can buy houses? why is the federal I don't understand this whole thing is made up we made up this stuff we made up this institution we made up the fed funds rate we made up the feds balance sheet why can't we make it up to support the American public well because that would require independent thinking and uh one of the things that uh seems to be coming to a head here is uh with politicians who want to be central bankers.

22:37We have central bankers who want to be politicians. We have assets like Bitcoin, which is outside the system. And I think pretty interestingly, the monetary policy does not change based on demand, based on geopolitical events, based on who's in office, et cetera. Do you see that shift being something that individuals themselves can find other opportunities? So for example, we see a lot of central banks around the world buying gold right now. Okay. I would guess at some point they'll buy Bitcoin. I don't know when, but at some point they'll start to do that. Is the dollar just toast? Like, you know, is it just, hey, let's all hope we live for 40 years, and if that happens, then we're all going to see a world where the dollar is not the global reserve currency.

23:24These, you know, multipolar world has occurred. The fourth Turing is true. Like, where does this end up, maybe? So in my view, the dollar is highly unlikely to be toasting on any real investable time horizon. And the reason I say that is because of our incredible, brave military. You tend not to see that kind of regime change in the currency markets globally without a major war. So I would argue we would probably have to lose a war. But that doesn't necessarily mean that the value of the dollar on an exchange rate basis has to be static. It's not static. nor does that mean that the dollar share foreign exchange reserves have to be static.

24:03We were somewhere around 70 % of foreign exchange reserves in 2000, somewhere in the mid-80s. We're at 58 % now and probably headed towards 50 or 35. Gold's going straight up. I think it's about 22 % of total now. Recently surpassed the euro as the number two holding. And so these dynamics are, you know, these are time series that have volatility. They move. You know, if you think about the kind of the starting point with regards to the dollar, I think the U.S. is right around 4 % of global GDP. We're about 26, or no, we're 4 % of global population. We're 26 % of global GDP. We're about 31, 35 % of the global bond market.