Postcards: American Grift, Negative Momentum, and a Shifting Fed Narrative

We're playing catchup from the weekend, so let's cover a few tales of Washington chaos and problems at the Federal Reserve                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: American Grift, Negative Momentum, and a Shifting Fed Narrative]( We're playing catchup from the weekend, so let's cover a few tales of Washington chaos and problems at the Federal Reserve [Garrett {NAME}]( Feb 5   [READ IN APP](   Dear Fellow Expat: It’s been a long two days dealing with back spasms. My back tends to lock up when I fly, leading to a tough recovery cycle. Today, I wanted to share a few stories with you that are very important. We’ll also return to many of them in the coming weeks. They’re tales of grift, insolvency, and a market under severe pressure. This American Grift We know that Congress' fiscal policy and the Fed's monetary policy are the sources of all our problems. We'll get to the central bank in a moment, but first, I wanted to expose the latest grift in the halls of Congress. The American Water Works Association announced several recommendations for a “sustainable” water future. When you hear the word "sustainable," just be aware that a handful of think tanks “reimagined” the future of water - as if we need people reimagining things that will only make life more expensive. Well, here’s where I scratch my head. Republican Senator Markwayne Mullin just announced the purchase of Badger Meter (BMI) stock. This company manufactures automated water meter technologies. And wouldn’t you know it... Mullin is on the Senate Committee on Environment and Public Works. The Environmental Protection Agency just issued a mandate ordering utility companies to upgrade to these new meters. The local government of Tulsa, Oklahoma, has spent $94 million to install new water meters. And what state does Mullin represent? Oklahoma, of course. Do you see how this works? Everyone is in on it… Is the Fed Completely Insolvent? Imagine having a monopoly on a nation’s currency… and then losing a trillion dollars. That’s where the Federal Reserve is today. [A new, troubling report from the American Enterprise Institute (AEI)]( explains that the Fed has marked $140 billion in cash losses on its balance sheet, “plus another $1 trillion in unrealized losses from its securities portfolio.” The trick is that the Fed hides these losses by using a different accounting system (GAAP accounting) than a public company would. The Fed’s accounting suggests they had $42.85 billion on hand at the end of December 2023. But shift to GAAP accounting, and they’re down about $88 billion. We know that the central bank can print more capital if needed. But if anyone else tried to engage in these shenanigans, they’d been arrested for violating the Sarbanes Oxley Act. The chart below shows the Fed’s total balance sheet and the $1.08 trillion in GAAP liabilities. A billion here, a trillion there, and pretty soon, you're talking real money… Market Update - Storm Clouds Ahead Speaking of the Federal Reserve, the market narrative has shifted yet again. As I noted in the Republic Risk letter this morning, the odds of a rate cut in March 2024 have plunged from 65% last month to about 14% this month. This chart from CME Fedwatch offers a glimpse into this shifting narrative.   Last week, Fed Chair Jerome Powell suggested that the central bank is still fighting inflation. As a result, the markets have again experienced another rug pull after a sharp uptick over the fourth quarter. This isn’t the first time a shift in the narrative has occurred. Markets got well ahead of the Fed in the summer of 2022 before Powell’s infamous speech at Jackson Hole, Wyoming, that August. The same happened in the summer of 2023 as well. Today, we witnessed another drop in the Russell 2000 and sharp downturns in interest-rate-sensitive sectors like finance, energy, utilities, and real estate.  We now have a negative reading on the Russell 2000, and it wouldn’t be too surprising if the S&P 500 continues its downturn.  As I said last week now is a good time to hedge.  February during election years is historically difficult – with an average downturn of 1.1% for the month. It will be an excellent opportunity to put some money to work soon – although we must keep a close eye on the banking sector as the lending programs expire in March. The Fed will likely need additional support in this high interest-rate environment.  Remember that markets don’t tend to go straight down. The most likely pattern will be lower highs and lower lows, with funds using any short-term bounce as a chance to take profits. And Finally  In case you missed it, Jerome Powell visited 60 Minutes last night to discuss U.S. spending.  Simply put – he sounded the alarm on our unsustainable fiscal path.   Powell said: “In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don’t think that’s at all controversial. And I think we know we must get back on a sustainable fiscal path. And I think you’re starting to hear now from people in the elected branches who can make that happen. It’s time that we got back to that focus.” My question is this: Why didn’t he tell Congress this at their bi-annual meeting? He’s had the chance on multiple occasions, and he’s telling Scott Pelley instead.  We are barreling toward a fiscal cliff… and no one wants to take responsibility.  This is how empires end. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()