Darius Dale recently joined our friend Maggie Lake on Maggie Lake Talking Markets for a timely discussion surrounding the Federal Reserve’s recent 25 basis point rate cut and the structural regime change underway at the institution. He highlighted the Fed’s reluctance to firmly commit to their arbitrary 2% inflation target, suggesting a shift toward prioritizing maximum employment over price stability to ease the distributional burden of fiscal dominance upon the US economy.
If you missed the discussion, here are three key takeaways that likely have huge implications for your portfolio:
1) The Fed’s Arbitrary 2% Inflation Target is Fading in Practice
Darius noted how Powell would not plant a flag on the arbitrary 2% target and gave what he called “the most lawyer response ever.” He reads this as a tell that even members philosophically tied to 2% see the probability of actually achieving it on an investable horizon as low. That shifts the balance of risks toward the maximum employment mandate. In Darius’ words, “we are all frogs being boiled alive in a pot of monetary debasement and financial repression,” so investors should work backward from that destination.
Key Takeaway: Expect a continued move away from a hard fixation on achieving 2% inflation and position for monetary debasement and financial repression rather than fight them.
2) Fiscal Dominance Crowds Out Private Capital
Darius characterizes the backdrop as fiscal dominance. On a rolling 12-month basis, he cites marketable Treasury supply in the 11 to 12 trillion range, up from 3 to 4 trillion pre-pandemic, implying the U.S. is “gobbling up essentially almost 40 percent of global savings.” The result is “not enough capital left over” for the bottom of the K-shaped U.S. economy to finance investment and consumption with. He argues the only balance sheet large and flexible enough to even attempt to address these distributional problems is the Federal Reserve.
Key Takeaway: In fiscal dominance, credible easing and balance sheet flexibility are required to avoid an adverse term-premium shock and to keep capital flowing to the real economy.
3) Investors Must Increasingly Outrun Financial Repression Monetary Debasement
Darius reiterated his years-long call that the conditions which perpetuated the stellar performance of the 60/40 portfolio “no longer exist,” which is why the KISS Model Portfolio features Gold and Bitcoin instead of Treasury Bonds.
Key Takeaway: Investors seeking to retire on time and comfortably must gain exposure to productivity growth and outrun financial repression and monetary debasement while mitigating left-tail risk.
Final Thought: Climbing Out of the Pot
The Fed is inching away from a rigid 2% inflation target, fiscal dominance is crowding out private capital, and as a result, monetary policy is likely to migrate toward easing and balance sheet flexibility to address distributional stress. Investors who anchor to yesterday’s framework risk getting “boiled alive” in the very “pot of monetary debasement and financial repression” Darius describes. Investors who wish to retire on time and comfortably must adopt a disciplined process equipped to manage the new macro regime.
If you are not confident your portfolio is positioned correctly for the evolving macro landscape, partner with 42 Macro for data-driven insights and proven risk management overlays—KISS and Dr. Mo—to help you stay on the right side of market risk.
No catch—just real insights to help you stay ahead in the #Team42 community.
Best of luck out there,
— Team 42
