Postcards: We're Living a Lie... (Why It's Time to Return to Fundamentals... Fast).

The VIX is back to 16, NVDA is stalling, and inflation data returns this week. The fantasy of the first quarter is coming to an end. Funds are selling, and retail may be left holding a bag very soon. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ 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: We're Living a Lie... (Why It's Time to Return to Fundamentals... Fast).]( The VIX is back to 16, NVDA is stalling, and inflation data returns this week. The fantasy of the first quarter is coming to an end. Funds are selling, and retail may be left holding a bag very soon. [Garrett {NAME}]( Mar 11   [READ IN APP](   Dear Fellow Expat: The S&P 500 is retreating to 5,100, and some investors are freaking out. The S&P 500 has declined by a horrifying… mind-numbing… panic-inducing 1% from all-time highs. Here’s an important reminder: the S&P 500 is up more than 45% since October 2022. That month was one of the worst periods of finance in decades. While Hurricane Ian ravaged the Florida Republic, the S&P 500 bounced off the 3,500 level and rose progressively higher. What happened? Well… the global economy didn’t get “better.” It was the aftermath of a remarkable pivot by central banks around the world.  Official inflation levels have dropped, but inflation is still well above Fed targets. Unofficial inflation numbers put price growth rates in double digits in cities across America]( - a fact of life completely ignored by mainstream media. So… what drove these markets up from October 2022 to March 2024? You get three guesses, but the first two don’t count. Liquidity, Central Banks, and Fiscal Support In October 2022, the British economy nearly collapsed into dust. The country’s safest asset - a bond His Majesty’s government calls the gilt - had become a weapon of economic destruction. Gilts offered meager yields in the previous years as the Bank of England kept interest rates artificially low for a decade. (Does that sound familiar?) Pensions and other institutions were desperate for a return, so they bought all of these very liquid bonds at low yields. When interest rates surged due to inflation, the value of these bonds collapsed. As these pension systems grew desperate for cash in the summer of 2022, they dumped these bonds in a fire sale. This created a negative feedback loop, where the value of the bonds continued to drop—rates spiked—and firms holding these assets were now on the brink of insolvency on paper and in real life. The Bank of England threw in the towel. Rather than let assets crash, they did something that defied logic in modern finance. They announced plans to keep raising interest rates… all while buying up bonds to provide liquidity to the system. This would do two things: It would keep the easy-money firehose open while giving up on fighting inflation through policy. The general hope was that inflation would eventually burn out. But at the same time, it was effectively a “soft default” on the economy. The United Kingdom is now in a recession, and the Bank of England is stuck; it can’t start engaging in more cheap money policy without spurring another big round of inflation.  Blimey… Good luck… Here in the United States, we faced similar challenges with our bonds and mortgage-backed securities (MBS). In October 2022, the Fed stopped dumping its mortgage bonds. This was important because the Fed had a vital role in tightening the bid-ask spread on mortgage bonds, which prevented mortgage rates from getting out of hand. Since the Fed pivoted on MBS (in a quiet, one-sentence explanation from Fed Chair Powell that month) housing stocks have more than doubled. Meritage Homes (MTH) shares have climbed from $67.00 to more than $157.00 since October 2022. This is another example of how central planners pick winners and losers and how policy shapes the markets. We see plenty of similar returns in names like DR Horton (DHI), Cavco (CVCO), Toll Brothers (TOL), and more. We also saw easing in late 2022 from the Bank of Japan and the People’s Bank of China. The Fed would also provide ample support to banks in March 2023.  But that’s not all. We saw global liquidity - a measure of all capital and credit - swell. This included trillions of dollars of liquidity from hedge funds, business development corporations (BDCs), sovereign funds, and other players in the “Shadow Banking” world.  [Author Michael Howell notes]( that global liquidity (the sum of all available credit and capital from many different sources) has increased by more than 8% since October 2022. That uptick has helped propel the S&P 500 and global markets higher. Of course, the U.S. has now overtaken 70% of the MSCI Global Index, meaning that [the]( equity market relies on America’s stability](. That’s about to get very choppy after this huge bounce in the last 18 months. America’s cracks are forming. There Are Problems at the Center The U.S. government increased its money supply by more than 30% during COVID-19 crisis, while official inflation levels still haven’t reflected this phenomenon. Private data adequately shows the impact of the Fed and Congressional meddling in the economy over the last three years. However, we should see data reflect the actions of the banks since March 2020. The Fed has not been engaging in balance sheet reductions as planned, mainly because they don’t want to go the route of the Bank of England. The Fed has provided ample support to the equity markets and economy over the last 12 months, all while Congress has run up remarkable deficits that will only rise over the next ten years. We’re looking at a deficit of 5% of GDP, which is expected to surge to 10% over the next decade. And we’ve been spending more money in the last few years—on an inflation-based level—than in both World Wars and all pre-Clinton modern years combined. Simply put, this rally has largely been driven by an illusion of growth and reckless fiscal spending. There are serious problems on the horizon. First, the cost of debt isn’t going away. We’ve surpassed $1 trillion in interest payments, and the debt is rising. This is a spiral. And we’ll be facing rising debt-to-GDP ratios over the next decade.  Let’s put it this way: Our deficit to GDP is larger than GDP itself. The federal budget deficit is just the gap between government spending and revenues. It increased from 5.4% of GDP in FY 2022 to 6.3% of GDP in FY 2023.  Great work, everyone. This is the Illusion of Growth on full display. We’re borrowing $2.50 for every $1 of growth, all while mandatory spending is exploding due to our aging demographics.  This is one reason politicians desire migration, mainly on the part of younger working-age men who can help replenish the coffers through taxation.. Next, Fed Governor Christopher Waller wants to dump mortgage bonds and turn our attention to artificially controlling the front of the yield curve. If they proceed, this will nuke the mortgage market in 2025, and the long-term bonds will likely push above 5% or higher.  There’s no reason to own a bond over ten years. None. Third, we’re still facing a commercial real estate (CRE) problem over the next 18 months while the Treasury Department also attempts to refinance trillions in loans. Long-term debt costs are about to rise… all at the expense of keeping short-term debt levels lower to kick the can of national debt interest down the road. And yet, the U.S. dollar and its markets continue to attract all of the attention—a nod to Johnson’s Dollar Milkshake Theory]( that the greenback will still hold against other currencies. In this global market, money continues to flow into large- and mega-cap stocks. If you’re going to be long equities - while hedging against this madness - the logic remains in solid companies with excellent management, great capital efficiency, and a history of making things people need. As I noted over the weekend, Nvidia (NVDA) now has a greater market capitalization than… …Nike (NKE), Diageo (DEO), UPS (UPS), Shell (SHEL), McDonald’s (MCD), Nestle (NSRGY), and Costco (COST)... combined. Syz Group, Quartr If we made an ETF of these stocks on the right, I’d buy and hold it forever. They remain [a great hedge against what is coming]( more monetary inflation, uncertainty, and a bumpy road through the rest of the year. Pay very close attention to our Equity Strength Signals above. You'll be the first to know if and when it’s time to move to safety. Stay positive, Garrett {NAME} PS: For entertainment purposes… we have now moved through the of 64 - The 5s against the 12s and the 6s against the 11s]( big upsets on Monday. 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]()