Guideposts: No, the Fed Can’t Save Us but the Israelis Can

You are receiving this email because you signed up to receive our free e-letter Gilder's Guideposts, or you purchased a product or service from its publisher, Eagle Financial Publications. [Gilder Guideposts] [Technology Report]( [Tech Report PRO]( [Moonshots]( [Private Reserve]( Guideposts: No, the Fed Can’t Save Us but the Israelis Can 03/01/2023 SPONSORED CONTENT [Learn how to predict the future of technology with our “paradigms”]( Technology is always evolving. Nobody knows what direction it might go until it’s already here. But what if you had a roadmap that has accurately predicted the future of technology for more than 40 years? My flagship service Technology Report has been guiding my subscribers through the technology market for years now. If you want to learn more about investing in technology companies, [click here now.]( Why does anyone believe the Fed can control inflation via changes in the Fed Funds “policy rate,” the overnight lending rate that the Fed can control the most. If this constantly repeated claim were true, it would show up in the data in the form of a close correlation between inflation and the Fed Funds rate. Look at the first graph below. Graph 1: Low correlation between Fed Funds Rate and CPI since 1983 We do see some co-movement from 1975 until about 1983, and then it stops. It is very difficult to detect even a correlation, never mind causation for the next 40 years. Inflation stays in a range first from roughly 1-5%, then well below 5% all the way from 1990 to 2021, spanning 31 years. Meanwhile the Fed Funds rate hopped up and down with no discernible impact on inflation. Amazingly, from 2009 through most of 2017, the Fed rate was below 1% and for much of the time near 0%. There was virtually no inflation. Graph 2 paints an even more dramatic picture, albeit using an inflation statistic the Fed started only in the early 1980s. Graph 2: Low correlation between median CPI and Fed Funds Rate Since origin of series The general idea behind the claim that the Fed can control inflation via its policy rate seems to be that the Fed raising the policy rate will cause other, more economically meaningful rates, to rise as well. That, in turn, will contract credit and stifle business activity, bringing down inflation because then we will all be poor. As graphs 3 and 4 show, there is not much evidence for this either. Graph 3 shows the yields on the one-year and 10-year treasuries against the Fed Funds rate. Unsurprisingly the one-year rate tracks the “policy” rate pretty closely, but the more market sensitive 10-year rate does not. From about 1983, the 10-year rate goes into a long-term steady decline with none of the bumpiness of the overnight rate. What this really looks like is the market slowly gaining confidence that inflation has subsided and, therefore, the premium on long-term money could fall as well. Graph 3: The one-year rate tracks the overnight rate, but the 10-year rate does not. Graph 4 below gives further confirmation. Both corporate bond yields and the CPI ignore the bumpy blue line of the Fed Funds rate. Instead, the bonds -- far more responsive to the market and business conditions -- cautiously follow inflation downward. The longer inflation stays within the 0-3% range it established in the early 1990s, the more corporate rates fall, a measure of the markets’ confidence that inflation had pretty much gone away. Graph 4. Neither Corporate Bonds nor the CPI Care What the Fed Does. [The 5 Stages You Need to Know in Order to Invest in Technology Companies]( Investing in technology companies can be somewhat difficult. It always seems like you learn about these companies after they take off. But what if you knew about the 5 stages that every technology company goes through so that you, too, can invest in them before the stock price soars. Our Gilder’s Moonshots publication might be the perfect fit for you. We take a deep dive into all of these companies and use our methods to know when to invest in them. We recommend not only small and micro-cap stocks, but also Reg-A (Pre-IPO) opportunities. [Click here to learn more now.Â]( Even more confirmation comes in graph 5. High-yield bonds are much more volatile than AAA bonds, reacting strongly to business conditions. The high-yield bonds don’t appear to be affected much by the Federal Funds rate at all. Graph 5: And High Yield Bonds Really Couldn’t Care Less Even mortgage rates, which, being relatively more influenced by bankers, might be expected to follow a policy rate closely, don’t seem affected much by the Fed Funds rate, even though they tend to share a correlation with inflation. Graph 6: What about Mortgage Rates? Nope. If the Fed is far less relevant than it wants us to think, what is going on? Why did we get rising prices in 2021-2022? Why did they stop rising, and why have they started again? The answer, which we have known since Reagan, is that inflation is not driven by monetary policy or by the Fed, but by the health of the productive economy. Extraordinarily destructive restraints were place on that economy, especially the bizarre policy of paying people not to work or produce anything. Unproductive economies yield weak currencies. Just ask the ghosts of Lenin and Stalin. They were obsessed with monetary policy -- Stalin was a monetarist before Milton Friedman -- but the new ruble after new ruble collapsed because they destroyed the Russian economy, previously one of the fastest growing in Europe. As the economy went back towards normal in 2022, prices moderated quickly. [How the Ultra Rich Pick Their Stocks]( There’s one tool that can scan and help you pick the best stocks… so you can find the consistency you need in your trading… No matter what happens in the market. Revealed here: [the trader’s secret weapon and a #1 stock.]( What about now? For the most part, U.S. economic policy remains far superior to most of our competitors. President Reagan’s core policies remain in place and President Trump’s corporate tax cut continues to pay huge dividends. On the other hand, the Democrats are in power and regulating for all they are worth. According to the American Action Forum, quoted in the Wall Street Journal, in two years the Biden administration has imposed 517 “regulatory actions,” with some $318 billion in total costs, worse even than the Obama administration’s $208 billion in costs in its first two years.  In his entire term, Trump’s additional regulatory burden came to just $64.7 billion. Federal regulations are gouging at least $2 trillion a year from the U.S. economy, some 8% of U.S. GDP, according to the Competitive Enterprise Institute (CEE). That comes to some $14,684 per family more than is extracted by the federal income tax, the CEE reported. In truth the cost is probably much greater. The centerpiece of Biden regulation and Biden economic policy is the “green” drive to “electrify” the economy, forcing massive misallocations of capital from productive to destructive activities. The $7,500 or so tax in subsidies for each electric car sold is, all by itself, one of the most self-destructive policies ever undertaken by a nation. We have no prospect of generating enough electricity to support 300 million electric cars; the grid is degenerating not improving. We don’t have an adequate supply of rare earth metals to make 300 million car batteries. And, if we did, the Biden administration won’t let them be mined. Congress is handing the U.S. semiconductor industry $50 billion it does not need to build new chip fabs. But where will they be built, given the pervasive hostility of the federal and most state governments to the energy and chemically intensive manufacturing chips require? Is all lost? No. Human ingenuity conquers if we allow it. Israel, at least, still spurs innovation. From the more than a dozen simply astonishing start-ups we saw on our recent visit come solutions to just about every burden the Democrats can create, from turning electronic waste into the world’s most productive rare earth “mines” in the world, to hyper-conducting new materials that will massively improve energy efficiency, to cures for cancer so we can all work longer and harder to pay Biden’s bills. Those are the kind of breakthrough innovations we write about in the [Gilder Technology Report]( -- and show you how to invest in as well. It is a new world baby and the left can’t stop it from coming. Sincerely, [The Editors] George Gilder, Richard Vigilante, Steve Waite, and John Schroeter Editors, Gilder's Guideposts, Technology Report, Technology Report Pro, Moonshots, and Private Reserve About George Gilder: [George Gilder]George Gilder is the most knowledgeable man in America when it comes to the future of technology and its impact on our lives. He’s an established investor, bestselling author, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance. George and his team are the editors of Gilder Technology Report, Gilder Technology Report Pro, Moonshots and Private Reserve. To ensure future delivery of Eagle Financial Publications emails please add financial@info2.eaglefinancialpublications.com to your address book or contact list. View this email in your [web browser](. This email was sent to {EMAIL} because you are subscribed to George Gilder's Guideposts. To unsubscribe please click [here](. If you have questions, please send them to [Customer Service](mailto:customerservice@eaglefinancialpublications.com). Legal Disclaimer: Any and all communications from Eagle Products, LLC. employees should not be considered advice on finances. 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