The Federal Reserve’s 2% inflation target is long gone, says Economist E.J. Antoni, PhD. He joins Wealthion’s Andrew Brill and breaks down what this means for the economy, your investments, and your economic future:
– Why inflation remains sticky and rising, defying the Fed’s projections.
– The real impact of rate cuts on small businesses, the housing market, and ordinary Americans.
– How government spending and monetary policy have caused the dollar to lose 20% of its value.
– Whether America will face a short 1920-style depression—or a prolonged 1929-style collapse
From frozen housing markets to the challenges small businesses face, this interview explores the hidden costs of the Fed’s monetary policies and government overspending.
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E.J. Antoni 0:00
More and more market participants don’t believe the Fed anymore. Increasingly, people are realizing that the 2% target is long gone. We’re looking at 3% basically as the implicit target. Now we’re in for a lot of pain. So the question is just, is this going to be 1920 or is it going to be 1929
Andrew Brill 0:22
on the heels of another rate cut, what is next? I’m your host. Andrew brill, if you need help with your financial portfolio, go to wealthion.com forward, slash, free for a free, no obligation portfolio review. We’ll talk about the rate cut and where we are headed fiscally. Coming up right now, you
Andrew Brill 0:44
I’d like to welcome back. EJ, Anthony to wealthion. EJ, is a public finance economist, a research fellow, and the one I love is the most is a monetary scientist. EJ, I know you will help us diagnose where the economy is headed. Welcome back, and glad to have you on this particular day,
E.J. Antoni 1:03
my pleasure. Thank you for having me again. What a what a day it has been, that’s for sure.
Andrew Brill 1:07
So talk to me. EJ, the Fed cuts a quarter point and all hell breaks loose because of what they envision for next year. So I know that usually I ask about the economy, but the economy seems to be strong, doesn’t it?
E.J. Antoni 1:23
Well, what’s really amazing is that none of the underlying data have actually changed over the last several meeting, except the the tone of the of the minutes, the tone of Powell, has completely changed at this point. It’s it’s gone 360 right? We’re right back to where we were several months ago. So essentially, they’re talking about how interest rates are going to have to be higher for longer, how inflation is sticky. We continue to see these different price pressures. Both the Treasury and the Fed are back to saying, Oh no, these deficits are not sustainable. Blah, blah, blah, all this bad news that, frankly, we had half a year ago. I mean, the private sector, I think knew about it long before that, but our government officials were actually openly admitting it. However, then the polls started swinging wildly in Trump’s favor in all the swing states, Kamala was fall, was falling very far behind. And then all of a sudden, everyone’s tone shifted in terms of the Fed and the Treasury, and it was, you know, brighter days are right around the corner, and interest rate cuts are here and and not just a slow start to those cuts of a quarter percentage point like we had today. No, they came out swinging with half a percent, and now we’ve had another half a percent cumulative thereafter, so a whole percentage point down compared to where we were literally just a few months ago. And this was happening despite the fact that inflation was re accelerating, despite the fact that the jobs numbers that the Fed says they look at still looked pretty strong. So there really was no empirical reason to cut rates other than I mean, I guess you could say the empirical reason was that Kamala was down in the polls. That’s empirical, but now that Trump has won, all of a sudden, not only are we looking at fewer rate cuts, slowing the pace of rate cuts, but now we’re back to talking about higher for longer. We’re talking about persistently high inflation. We’re talking about reduced forecasts in terms of economic growth. It really is amazing how everyone’s tone, terms of the so called economists at the Fed, has completely changed based on the election cycle. I think it’s appalling.
Andrew Brill 3:34
So really, what you’re saying is that the numbers haven’t changed at all. Inflation is still there. I bring maybe right around 3% maybe slightly lower. It’s been that way for more than half a year, well before this rate cutting cycle started, because they wanted to get inflation down to 2% so if you want to do that, and the rates are where they are, and you’re talking about higher for longer, were they just pressured into lowering rates, and they said, Okay, let’s try this and see what happens. Then they kind of back themselves into a corner saying, Okay, we’ll have to go a point here. It won’t be all at once, but we’re going to have to go a point. And now they’re at a point where, oh my god, inflation might rear its ugly head again, and we’re going to slow down and possibly not cut anymore. It’s
E.J. Antoni 4:23
a great question. Is the pressure that they’re feeling coming from without or within? The reason I say that is because the vast majority of Fed officials are Democrats, and look, there’s nothing wrong with that, except for the fact that it seems to be influencing their policy decisions, and that is problematic, because the Fed is supposedly independent. In reality, I think they’ve shown themselves. That’s clearly not the case, right? But they’re supposed to be politically independent, and yet over 90% of political donations from the Fed go to the Democrat Party. Again, it’s pretty. Clear whose side they’re on, and it hasn’t been Trump’s. People. Forget that. Before COVID, the Fed spent the entirety of Trump’s terms so the first three years, increasing interest rates and selling off the balance sheet. That’s one of the reasons why the economic growth that we had in the first Trump administration, those first three years of it, at least, why it was considered by some to be so miraculous. It happened during a time when the Fed was trying to prevent it, and they were really pulling out all the stops again, both increasing interest rates and selling off the balance sheet. And now it looks like, it looks like they’re poised to probably do the exact same thing, where we may not get those interest rate hikes, but we’re certainly not going to get going to get the cuts that everyone was anticipating. The one exception to that might be within the banking system, though you could make the argument, I think that the reason for the recent cuts, maybe even the cut today, perhaps, did not have so much to do with politics as it did with the banking system, which is still in serious trouble. People forget that there are hundreds of billions of dollars in unrealized losses on the books of banks right now in the United States, and the reason for that is because they loaded themselves up with assets at very low interest rates. So they sold 30 year mortgages, let’s say, at two or 3% and now they’re stuck paying deposits at four and a half percent. Well, that means that you have more money going out than coming in. You have negative cash flow. That’s what caused SVB to collapse so quickly. And several other regional banks, First Republic, and several others, the banks are greatly helped by the reduction in interest rates, if and only if it means they can get down there like the interest rate on their liabilities, chiefly deposits. The problem is it’s not it’s not helping a whole lot, because the bond vigilantes are starting to see that things are really getting out of hand. And despite the Fed cutting interest rates, the bond vigilantes are driving up the yield on treasuries. Well, in a world where the Treasury is issuing so many T bills, which hopefully Scott Besant, the incoming Treasury Secretary, will change that, but in today’s world, it’s still Janet Yellen in charge. She’s flooding the market with T bills. Those are getting gobbled up by money market accounts, which are drawing cash out of deposits because somebody’s sitting there saying, Why am I getting nothing on my on my deposit at a bank when I could get 5% in a money market? I mean, it makes sense. And so the banks are forced now to compete with treasuries in terms of depositors money, in order to keep their assets and their liabilities in a, you know, in a good ratio there. And so the banks are still not being helped by these interest rate cuts. So, you know, I’m not sure that that’s really what the Fed is doing, but I think it’s a legit theory. It deserves some consideration. Unfortunately, though, again, at the end of the day, the Fed cutting interest rates is still not helping those banks that it might be trying to rescue. Yeah,
Andrew Brill 7:59
that scary proposition when you’re considered that there’s, there’s a lot of those low interest mortgages out there and low interest loans, and they have to pay out, like you said, so much more on, you know, money that’s in their bank, just whether it’s, look, if you’re having money sit in your savings account, you’re not the brightest individual. You put it into a high interest savings account. Obviously there’s a there’s a drawdown of that excess cash that banks have. But my question is, what does this mean now for our economy, for the middle class, for people who even for small business? I mean, you see the Russell 2000 when, when Trump got elected, everybody was like, oh my god, this is the best thing ever. But now, with interest rates kind of gonna they’re gonna get stuck. Small business is gonna have to pay more money to borrow money, and that’s gonna be a big problem for small business manufacturing, and it’s good, just gonna trickle down
E.J. Antoni 9:00
absolutely. And, you know, small business really needs that access to capital in a way that large businesses don’t, I should say outside capital, excuse me, in a way that large businesses don’t. The reason being that so many large businesses have sufficient retained earnings that they can self finance a lot of these projects. And even if, even if they don’t, a lot of these larger corporations right now are sitting on loans that they got in 2020 when rates were essentially nothing. People were wondering, why did these big corporations? Apple is a good example. Apple, at the time in 2020 was actually better capitalized than several major banks. That’s how much liquidity Apple had, and yet they went and they took out billions upon billions of dollars in loans. Why? It’s because the interest rate was near zero. They used the money to buy back their own stock, and then they were paying themselves a dividend that exceeded the interest cost on the loans they used to buy their own stock. So they basically used the. The money markets they use the Fed and therefore the American taxpayer, in order to enrich themselves and boost their own stock price. That’s the kind of crazy world we get to when we have such severe manipulations of interest rates and such malfeasance and monetary policy. But all that to say you’re right that small business is disproportionately affected by these higher costs of capital. And you know, we still have, it’s to a much lesser extent than it was two years ago, but we still have a fed and a Treasury who are really working hand in glove, I would say, to manipulate money out of private capital and into public capital. In other words, reduce borrowing costs for the Treasury, but the cost to that is a higher cost of capital for private markets. And I think this is a key reason why. When we look at a lot of survey data, what we’re finding is despite a huge spike in optimism, the small business optimism index, for example, just shot up at the fastest pace since Trump was elected. The first time, that’s a really, really good indicator. But despite all of these increases in Outlook, in forecasts, despite all of these future numbers being very, very good, these expectations soaring, current conditions continue deteriorating, and that is especially true for those small businesses that you mentioned. And so in the long term, we may be very, very bullish, but in the short term, I think you have to be a lot more bearish, especially when it comes to that, you know, the small caps that you’re talking about. And
Andrew Brill 11:33
let’s be real, it’s a lot of those small businesses that keep our country afloat. And look, yeah, big businesses, big business. But those small business, they employ a lot of people, and they keep things, keeps moving, keep things moving along, and especially contributing to the GDP,
E.J. Antoni 11:48
right? Absolutely, that’s such a key point. You know, most job creation is at those small businesses. And you know, I would say, you know, people were, some people really knock large businesses like, let’s say retail. Look at retailers for a second, Walmart, Amazon, companies like that. People forget that Walmart and Amazon, they make almost nothing. They have their own in house brands, but the vast majority of their sales are things that they buy. Now, in terms of a lot of the stuff they buy from China, you know, unfortunately, that’s a big, you know, conglomerates, but both of those retailers, actually, a lot of their product that they sell comes from small business. Amazon, specifically, more than half of the things that Amazon sells are from small business. And so the problem that we that we have right now is the fact that the Amazons and the Walmarts have such incredible purchasing power, and I should say pricing power, market power, which the small businesses don’t when the Small Business face they the higher cost of capital, they do not get to pass all of that on to the Walmarts and to the Amazons of the world. You know, unfortunately, the Small Business ends up having to eat a lot of that. Now, that’s good on the consumer end, right? Because the consumer is not going to get stuck paying those higher prices. But it’s only true in the short run that that’s good for the consumer. In the long run, what happens? A lot of those small businesses are going to go out of business, and that means less production, that means less competition, and all of those things lead to higher prices in the long run. You know, again, this is not an attack on on walmart or amazon or anything like that. It’s just, I think, an important aspect of the dynamic that small businesses are facing today, where they do not necessarily have the same ability to pass on costs to the consumer that other corporations do. So all of this is within the context that we were just talking about with these higher interest rates, higher cost of capital, disproportionately affecting the same businesses that can’t pass all of those costs on to consumers. And
Andrew Brill 13:54
I saw a great tweet of yours where you were talking about earnings, and how, you know, we were looking at, you know, oh, record earnings, or earnings are up, but margins are way down because of the cost of goods. So yeah, it what looked like, you know, last year we made 100 bucks, just to for an example, this year, we made 150 bucks, but our margin went from 40% to 30% because the cost of goods is so high. That’s what we’re faced with in this economy is that, yeah, it looks great because earnings look so good, or we’re beating our dollar figures, but the bottom line is a lot lower than what we’re used to. Exactly.
E.J. Antoni 14:33
It’s exactly right? And this is where, you know, there are all these talking points right now around inflation, a lot of which is politically charged, where you hear things like inflation is caused by greedy corporations or price gouging, whatever the case may be, and the proof for that is supposedly the fact that corporate profits are at a record high. You know what else is at a record high, the average American’s weekly paycheck. But guess what? It buys 3% Less today than it did four years ago. So in the same way that corporate profits are at a record high, your income as an individual is at a record high. In other words, that’s a meaningless statistic. What matters is what your profits. What matters is what your personal income can actually buy. And buy that metric you’re looking at negative negative values for most Americans and for most American corporations. Now, of course, there are some exceptions to that rule, the mag seven, which have basically been carrying the market right. You know, there are certain corporations whose earnings have outpaced inflation, okay, fine. There are certain individuals whose incomes have outpaced inflation. But for most businesses, their earnings have not. For most individuals, their earnings have not. And so this is why, when we look at margins, for example, that you that you mentioned a lot of businesses, margins have actually fallen. And as businesses try to replace sold inventory, they’re finding that the new stuff coming in is so expensive that it’s eating into those profits, eating in to those margins, and and again, the whole idea that businesses that somehow, all of a sudden, magically became greedy at the fastest rate in 40 years and, and that’s why consumer prices have gone up. I mean, it just doesn’t even pass the smell test, even before we get into any kind of empirical analysis, like we can do with grocery stores, for example, and we can see their but their margins haven’t even budged at all at all in the last four years, and yet, the prices that they’re charging consumers are up 30% more. Why? Well, you’re paying 30% more for 2% milk, a gallon of milk off the shelf because the grocer has is paying exactly that much more that they’re buying from the dairy farmer. Yeah. It’s,
Andrew Brill 16:46
uh, you know, and you know, as an economic scientist, as you are. EJ, how do we fix this? It’s, it seems like price of goods just keep going up or creeping up. But how do, how can we fix this? I know that you don’t have the magic bullet and you know your crystal ball, but you have that somebody has to have some idea how to fix this, and it has nothing to do with interest rates.
E.J. Antoni 17:14
No, you’re right. It really doesn’t, because at the end of the day, the Fed actually can’t set interest rates. I mean, I know. I know. We talk about them setting interest rates, and really the only interest rate that they actually set primarily is, is the discount window, what a bank has to pay them if they if the bank goes to the Fed for a loan. Now, there are other interest rates that they do set, but, but they’re much smaller markets, things like repurchase agreements or reverse repurchase agreements and a few others like that. But the primary interest rate they set is the discount rate. Outside of that. They try to affect the Fed funds rate by buying and selling securities, and they do a pretty good job of keeping that interest rate in a fair, fairly narrow window, most of the time. And then you get to market rates, and they really can’t have they can’t set those at all, and their influence is actually quite limited. That’s not to say they don’t have influence. They certainly do. But what are we seeing right now? We’re seeing the yields on treasuries. Right the interest rates on those securities are fluctuating pretty violently, despite the Fed trying to keep them under control. And so more and more market participants don’t believe the Fed anymore. Increasingly, people are realizing that the 2% target is long gone. We’re looking at 3% basically as the implicit target now. So all right, what do we do? How on earth do we get out of this mess? Well, we just reverse all the things that got us in, and then we’ll be out of it. So what got us into the mess, trillions of dollars in government spending that we didn’t have when the when the government spent all that money, right? Where did they get it? Well, they borrowed it. Well, from who the private market didn’t have enough money, so the Fed printed it. The Fed literally created the money out of nothing. And we’ve discussed before how this works, right? The Fed has a magical checking account, and when they buy a security, the money’s literally created out of nothing ex nihilo. So the Fed created all that money. They pushed down interest rates to reduce borrowing costs to the government. That’s what devalued the dollar. When something becomes less scarce, it loses value. People forget one of the basic functions of money. Sometimes it’s considered the most basic function, but at least one of them is that money is a yardstick. It’s a measuring tool. Well, if you shrink the size of a yardstick, let’s say from 36 down to 30 inches. Now it doesn’t take 100 yards sticks to cover a football field from one end zone to the other. Now it takes 120 that’s what’s happened to the dollar. The dollars lost 20% of its value in less than four years. Now it’s an appalling rate of decline, but it happened because of the sheer volume of money that the Fed created. On top of that you. Had other, I would say, non monetary phenomena, that have helped contribute to higher prices. This would include higher taxes and more burdensome regulation within energy markets. Energy affects the price of everything we do and everything we buy, because it’s an input in everything. And not only is it an input, from the standpoint of you need energy to produce all products and to provide all services, but things like natural gas, that’s the primary ingredient for all of our chemical blend stocks. Today, people don’t realize even something like the engine oil that’s in your in your car engine that’s not even made from crude oil anymore. It’s synthesized in a lab from natural gas. Because natural gas is so abundant in this country. It’s cheaper to do it that way than to try to distill it and refine it from a barrel of oil. So I mean, natural gas is in literally everything from pharmaceuticals to cosmetics to clothing, all kinds of textiles. It’s in cars, it’s in phones, you name it. So if you can reduce, or if you can increase, the price of so ubiquitous and input in the economy, you will likewise decrease or increase prices throughout the economy. So what we’ve seen over the last several years, through bad federal policy has been a restriction of energy production that has ultimately, ultimately led to higher prices. You know, we can look at rig count, for example, and see that that is way down. Producers are simply energy producers. That is, are simply trying to squeeze every ton of gas and every barrel of oil they can out of wells to make them as profitable as possible. But you have a lot of wells today that are only viable at, let’s say, 80 or $90 a barrel. But if you get rid of the regulation and taxation, they become viable at 40 or even, or, you know, $50 a barrel. So if you reverse the bad energy policy, you’ll get more energy that’ll increase production, that’ll drive down prices. And if you stop the runaway spending, and you stop the bad monetary policy that’s being used to finance that runaway spending, then you stop the monetary phenomenon of inflation, that devaluing of the dollar. You know, Milton Friedman famously said inflation is too much money chasing too few goods. All right, so then the solution to killing inflation would be to reduce the money relative to the goods and services. So you have to grow the economy. Specifically, you have to grow it faster than the money supply at this point, I think we need a long cooling off period where I wouldn’t even grow the money supply at all, keep that sucker stable and let economic growth over time slowly reverse a lot of the inflation that we have seen and return purchasing power back to the American people. But EJ,
Andrew Brill 22:40
doesn’t the debt play into that? Because we have to spend so much money to finance our debt now, over a trillion dollars a year, that it’s hard to bring down spending like you have to finance that debt no matter what. So we’re going to have to cut someplace else to save money Absolutely.
E.J. Antoni 22:58
You know, we’re looking at over $1.2 trillion this year to finance the debt, and that’s a function of two things. One, this is the size of the debt, but two, these higher interest rates, well, the more you borrow, and that that interest expense accounts for more than half of annual borrowing costs. The more you have to borrow, the more you’re increasing the demand for loanable funds, which means you’re going to increase the price of loanable funds, which is the interest rate. So this is where you get into that negative upward spiral. You could say a debt doom loop, where the more you borrow, the more you drive up interest rates, which means the more you borrow, etc, etc. That’s where we are right now. How do you break that cycle? To your point, you need to start by cutting spending elsewhere, and doing so will reduce how much you have to borrow. And now all of a sudden, you’re not putting as much pressure on the loanable funds. Rates. That does help down, that does help bring down interest rates, which in turn reduces the deficit even further. And now the spiral goes the other way. Now your interest costs are spiraling downward, and that’s a very, very positive feedback loop that you then have. If you can keep going with the further cuts in government spending, you eventually get rid of that deficit entirely, like Argentina has done in a very short amount of time. You know, in only a year, they cut the interest rate, or, excuse me, they cut the inflation rate, I should say in that country, the month month over month rate by 90% that’s incredible, absolutely incredible. Now it’s still not done, right? They still have inflation and it’s still too high, but the fact that they’ve been able to do what they’ve done has been an absolute miracle. Malay has delivered a both a Federal Surplus, right where the federal government is running a surplus, but also a trade surplus too. That’s an incredibly important point a lot of people miss, for a country like Argentina, because they’re suffering from such a lack of foreign exchange right now, and now they’re they’re finally starting to build that back up and
Andrew Brill 24:57
explain to us how he did. That I I’ve been reading a lot about Argentina. I know that Malay met with Donald Trump in Mar a Lago, and, you know, Donald Trump was, was amazed at how he did this. And I know that it didn’t come without a lot of pain. And I know that there was a lot of spending that he cut. Is it possible for us to do the same?
E.J. Antoni 25:19
Oh, it’s, definitely possible. Absolutely. The question is, just, do we have the political will to do it? I, you know, and look, sunlight is the best disinfectant. What’s going on right now with with Elon Musk and Vivek Ramaswamy and Doge the Department of government efficiency, how they are shining light right now on what’s in this absolutely atrocious, so called continuing resolution that they’re trying to force through right before Christmas. This whole thing was a plan. They purposely released this right before the Christmas recess so they could threaten a government shutdown, send everyone into panic mode and say, We have to pass the bill to find out what’s in it, as Nancy Pelosi famously said, and by the way, this is not simply a function of Democrats here wanting to spend more money. This has a lot of Republican fingerprints all over it, what some people might call rhinos, Republican in name only, but whatever, it doesn’t matter. At the end of the day, both people with a D and an R behind their name, both of those groups are behind this atrocity, and it is an atrocity. I mean, my goodness. Why? Why does Congress deserve a pay raise right now, when most Americans have been facing pay cuts and again, this thing is not a continuing resolution. What it is is a new omnibus bill. If it was a continuing resolution, it would just continue current spending. Instead, it adds a ton of a ton of new spending on top of that. So look, if you want to continue inflation, if you want to continue this debt bomb, essentially, that we’ve been broke, that we’ve been building, then go right ahead. If you want to change though, then I think you need to change things. So All right, so going back to your question, though, how on earth do we do it here? I think we do it. We repeat the Argentinian miracle by implementing the same kind of spending cuts, which means you can’t have things like these omnibus bills anymore. You need to start making precision surgical cuts throughout the budget. You need to, for some departments, you need to just get rid of them whole cloth, because they’re not doing anything productive. They’re actually net subtractions to the economy and and again, a big thing here has to be going after waste, fraud and abuse, wherever it is. Doesn’t matter. You can’t have any sacred cows anymore. For Republicans, you got to be willing to look at the defense budget. For Democrats, you got to be willing to look at entitlements. Now that doesn’t mean cutting legitimate payments here, right? It doesn’t mean that Social Security recipients are all of a sudden not going to get their check anymore. No getting rid of illegitimate payments is actually beneficial to legitimate Social Security beneficiaries, because it means that you’re increasing the solvency of that fund by reducing illegitimate money going out the door. So it means that for a long for a longer period of time, those social security recipients are still going to get their check. Now, don’t get me wrong, it’s a Ponzi scheme. It’s eventually going to fall apart. It can’t last forever. It’s going to need fundamental reform at some point, but that’s probably a decade off again. That’s not to say it shouldn’t be tackled. It will need to be tackled eventually, but for right now, it’s not the thing that’s breaking our back. Okay, the legitimate payments certainly aren’t. But look at defense. It’s the exact same thing. The Pentagon has never passed an audit. How many stories do we need of them wasting $10,000 on a screwdriver before we can wake up and admit the fact that there’s a lot of illegitimate payments. There’s a lot of, frankly, money laundering going on in the Pentagon’s budget under the guise of things like foreign aid or whatever other kind of euphemism you want to use, I’m it’s an absolute joke. It’s a travesty. And again, the more you’re willing to to put the Pentagon’s budget under a microscope and get rid of all these these illegitimate payments, the more you are going to increase the amount of money available for tanks and planes for military preparedness and the lethality of our armed forces. You know, might this hurt some some government contractors, sure, but they deserve to be hurt because they’re getting money that they shouldn’t be, and it’s taxpayer money. So
Andrew Brill 29:34
I, and I have seen vividx tweets about this 1500 page bill that they’ve put forward, where he said, This could be a 20 page spending bill. This doesn’t need all this. There’s farmland. There’s aid to farmland. They’re fixing the bridge that got hit by a barge. And why is that on the federal government? Why isn’t the insurance company for that barge paying for that stuff? So these are things that you and I. As taxpayers pay for that we shouldn’t have to. So I get your point completely that, you know, there’s a lot there that we shouldn’t be paying for. Do you think that the incoming administration can be a little bit more fiscally responsible? You know, we’ve all heard the stories. Oh, Trump wants to spend. Trump wants to spend, but then he goes and creates Doge to cut all this spending. So it appears that he trying to either save money someplace so he can spend it someplace else, or bring the deficit down.
E.J. Antoni 30:35
Right? Yeah. So people forget that in the first Trump administration, he only had control of Congress for the first two years, and during those two years, Republicans kept promising him. Congressional Republicans kept promising him. Look, we just have to get this big spending bill through, but then the next one, we promise we’re going to bring down spending. We promise we’re going to reduce the deficit. These were the promises that that were repeatedly made by clowns like Paul Ryan, and what ended up happening was Trump, Trump acquiesced and went along with it, with the understanding that the next bill would see the big reductions that he was, that he was promised, and that he himself had promised, the American people, and Republicans didn’t deliver for him instead, they just kept sending bloated packages his way, many of which he actually fought against. But ultimately, Republicans didn’t have Congress that long. They they got shellacked in the midterms, right? And then, obviously, 2020 was, you know, he wasn’t even in office anymore after the 2020 election, so Trump really never had a chance to implement a lot of the policies that that he had campaigned on. And the other thing to remember is that the first Trump administration had a lot of political neophytes, certainly the first Trump campaign did you, and this is something that you and I have discussed privately, the fact that the Trump transition team, the first go around was virtually nonexistent. They didn’t even know many positions within the government that they could fire the incumbent and appoint someone else. Because, again, it was a group of outsiders. These were not swamp creatures who know how to navigate these waters so well. And this time around, it seems like I think they’ve put together a much better team, as far as I can tell. Now I’m not on the transition team. I know plenty of folks who are, to be clear, I’m not, you know, I’m not affiliated with them or anything like that, but what I can say is they seem to have incorporated many more folks who do know how to navigate DC and who are familiar with more of these government agencies. So, and that’s difficult, right? You’re trying to find a person who hits that trifecta of being actually conservative, which there’s not that many who also know how to navigate the bureaucracy and, on top of that, are loyal to the incoming President’s agenda. That’s that’s a tough sell finding someone who meets all three of those criteria, but it seems like they have found enough of those folks to fix the problem they had the first go around, which was even during those first two years when they had control of Congress. So many people within the federal government at different different branches, or I should say, at different agencies rather, within the executive branch, were essentially fighting the Trump agenda and were stabbing the President in his back because they were a bunch of holdovers from the Obama years, and in fact, some of them were even dated all the way back to Clinton, because George W Bush didn’t remove many folks either. And so they stayed throughout the Obama years, and then stayed for the first Trump administration as well. But I’m really hoping everyone at this point has learned their lesson, and that they also are going to implement Schedule F reform, which will really allow them to just take an absolute chainsaw as well. A did take a chainsaw to the federal government, particularly the executive branch and get rid of all the bureaucrats. Yeah, he Malay
Andrew Brill 34:03
laid off 33,000 government workers so that, there you go. So it worked. But EJ, I want to ask you about the market. Powell cuts quarter of a point. Market drops with the floor. Obviously, it was inflated to begin with, and we were probably due for a correction. I don’t know that this is you can consider it as a correction. This is a pretty bad down day, and the Dow is now down, I think, 10 days in a row now, which is the first time since 1974 that it’s been down 10 days in a row. Why did the market react the way it did, and how far further down can it go? Well,
E.J. Antoni 34:43
I think a lot of it has to do with the hawkish tone of the minutes and the hawkish tone of the press conference and and actually, maybe hawkish isn’t even the right the right term, I would say it’s a more pessimistic outlook where the Fed is reverting to where. Were several months ago before they going back to where we started. You know, the Fed all of a sudden flipped right before the election, and it all became sunshine and rainbows. You know, we’re expecting more rate cuts. We’re expecting inflation to come down in 2025 right? All these positive things, unemployment is going to stay nice and low. Basically, the Goldilocks outcome for 2025 now, all of a sudden, they’re back to where they were, I don’t know about six months ago, where it’s doom and gloom. Again, we’re not expecting as many rate cuts. In fact, the easing cycle may be over at this point, and now instead, we’re looking at higher for longer, both in terms of interest rates and in terms of inflation rates. And even though they’re not forecasting a big jump in unemployment. You still are worried about inflation adjusted figures. In other words, what’s my return on bonds and equities going to be after factoring in those inflation rates? This is why you’re seeing yields jump in on things like treasuries and so market participants, at least on the equity side, are increasingly realizing that what we’ve been sold the last couple of months leading up to the president, presidential election was basically a fiction. It wasn’t real. I mean, look at the data we just got the other day from from the Philadelphia Fed, the Philadelphia branch of the Federal Reserve, right where they do an early benchmarking procedure. In other words, they take different data sets and they compare them to the monthly jobs numbers to try to see all right. In the future, when the Bureau of Labor Statistics goes back and they readjust every single month, up or down, what is that going to look like over a time period for the second quarter of this year, they expect the revision is going to be negative. I don’t mean that jobs numbers are revised down, like from plus 600,000 to plus 500,000 I mean revised down below zero. In other words, they think we might have actually lost jobs in the second quarter of this year. So all of these repeated downward divisions to major macroeconomic data seem to be continuing. The labor market is not as strong as we thought it was. GDP is basically, at this point, kind of just a joke. It’s completely inflated by government spending, which is fueled entirely by debt. Right now, I think people are getting increasingly pessimistic, at least in the near term. Again, we talked a little bit about many of those surveys that following the presidential election have absolutely exploded. People are really optimistic for the future, let’s say 12 months out. But in the near term, I think there’s a lot of pain to come. And again, as market participants increasingly price that in the prices are going down. And,
Andrew Brill 37:43
you know, I have as prices go down, it seems I want to ask you about the housing market, because mortgage rates, as you put it before, banks are paying you now 5% on your money, whereas they they were, you know, borrowing at two and a half percent. But now mortgages are creeping up above 7% they’re gonna have to lend on that money, and the money’s gonna get tighter and tighter, whereas banks are not gonna wanna lend unless the interest rates now creep up more to make up some of that shortfall. So it’s the consumer, the person going out and buying a house, that’s gonna hurt a little more, aren’t they
E.J. Antoni 38:22
Right? Exactly, absolutely, and you know, basically, here’s, here’s how this whole dynamic is playing out. If, if I’m going to buy as an investor, I’m going to buy a mortgage backed security, right? I want to make, make sure that the the yield I’m getting on that mortgage backed security is better than inflation. So as I increasingly realize 2% is no longer the target, right? 3% plus is probably the new normal, as I increasingly realize that I’m going to need a higher yield on whatever mortgage backed security I buy. And so now, if you’re somebody who’s packaging mortgage backed securities, you’re buying the mortgages from the back from the bank, putting them into a sellable security, and then getting that out the door to investors. You’re only interested in mortgages that have higher rates attached to them. So now, if you’re the bank, you find that the only mortgages you’re able to get off your books and sell to these firms are ones at higher interest rates. So the banks then realize, okay, I guess we can only sell mortgages at these higher interest rates, and that’s what they’re doing. So the bond vigilantes finally saying, Oh no, we’re not getting burned by inflation yet again, that’s trickling down to you and I and all the all the viewers and listeners having to pay higher mortgage rates. And so even though the Fed has been cutting right, they’ve now cut a whole percentage point during this, I guess, relatively short easing cycle, if you want to call it that, mortgage interest rates haven’t been going down, they’ve been going up, and we’re right back to where we were again several months ago, where there’s this deadly combination of high home prices and high interest rates, which is completely frozen over the housing market because nobody. Can afford these monthly mortgage payments right now. And you know, the other killer is the fact, with with this differential in interest rates, you have people who got their mortgage at two or 3% and now have the golden handcuffs. They can’t sell their home, because if they do, they lose that mortgage. And now they’re looking at today’s higher mortgage rate of seven or 8% honestly, actually, in some markets around the country, it’s still sitting in double digits. It’s at about 10% today, so you’re looking at losing that very low interest rate mortgage getting a much higher one. Historically, it might not be that high, but for the last several years, it’s high. That means that you can afford a much smaller home or much less expensive home, and people just aren’t willing to make that trade. And so unless you can sell your home for an exorbitant price, people just aren’t selling. This is why, you know, we just got home, excuse me not, homeowner, home builder sentiment very, very low. Normally, as as existing home sales tank, it provides a great incentive for home builders to build more, because the homes are going to be more profitable and they can build more and therefore sell more. But we’re not seeing that either, because construction costs are at a record high, and the cost to borrow money, again, going back to something else we said earlier, the cost of private capital is still very high, and so home builders today are basically only building luxury homes. That’s a bit of an exaggeration, but they’re disproportionately building luxury homes because that’s what they can make money off of. You starter the starter home market is all but dead. So with this latest home builder Sentiment Survey, you know, foot traffic remains really, really depressed. The amount of interest that they’re getting from buyers and what buyers are willing to spend. Those numbers remain historically low. It’s not a good situation at all. It all goes back to how you know, the federal government manipulating monetary policy and spending way too much money has completely frozen over this housing market. EJ,
Andrew Brill 41:57
how much pain are we in for this coming year? And I don’t want to ask you how it’s going to end, because nobody really knows. But how much pain Do you think we’re going to encounter going forward, and how do we protect ourselves from some of that pain we’re
E.J. Antoni 42:15
in for a lot of pain. So the question is, just, is this going to be 1920 or is it going to be 1929 people forget that there was actually a depression to start the 1920s everyone knows about the depression at the end of the 1920s but we forget that the 1920s started with its own depression. In fact, the initial drop in employment, the initial drop in stocks, was worse than it was at the end of the decade and in 1929 now, obviously the one day drop that you had in 1929 in October, there were actually two days of crashes a Thursday and then the following Tuesday. You know, those individual days of crashes might have been worse, but if you want to look at over a longer period of time, you saw significant declines that were larger in the early, earlier depression than you did towards the end. The difference was after 1929 it didn’t stop. Things kept getting worse and worse and worse because the government kept intervening. Conversely, in 1920 you had Woodrow Wilson, who was president, but had just suffered a series of strokes and was literally incapacitated. So even though he wanted to intervene, he was physically incapable of doing so. You then in 1921 had Warren Harding, who refused to intervene. And so it for the last time in American history you had a federal government that did absolutely nothing, as the economy entered a depression. And by the end of 1921 when Herbert Hoover, of all people, had finally convinced Warren Harding that something had to be done, they decided not to do anything, because the economy had recovered and things were going so swimmingly, and then we had the Roaring 20s. Now fast forward a decade later, and that Herbert Hoover is no longer a cabinet secretary. Now he’s the president, and he begins massive interventions. And they are, they’re essentially disaster after disaster. You then get FDR in there, who continues the policy of Hoover with intervention after intervention. And it is repeated disaster after disaster. So we are in for a lot of pain. Next year, we’re going to, I think, find out that inflation is much worse than we thought, that the labor market is much worse than we thought, that a lot of these jobs numbers have basically just been a fiction. You’re going to realize that GDP is nowhere near as good as we thought it was, because it’s just been all debt fueled government spending growth. Take that away, GDP is going to come down. So again, we’re in for a lot of pain, I think, however, chemotherapy is how you get rid of the cancer, and if we’re willing to go through the intense but short lived pain of that chemo and radiation treatment, you’ll kill the cancer, and then you’ll have long term growth thereafter. After so it’s just a question of which are we going to do? Are we going to are we going to get government out of the way and allow the free market to right the ship and to get us through these troubled waters and to actually get us back on a profit path to prosperity, or is the government going to continue these massive interventions like we’ve had over the last four years, starting in 2020 and continuing right until today. So that’s the difference, I think, between repeating the 1920 depression and the 1929 depression. And by the way, if just to put in perspective how horrible the last four years of policy mistakes have been, if when Joe Biden came into office, if he had simply allowed all of the one time COVID emergency spending from 2020 to expire, if he had added nothing new, and said, Okay, we’re just going to go right back to what the government was doing before the pandemic and add nothing new. So no ARPA, no chips, Bill, infrastructure bill, you know, Ira, all that junk that we’re all really one time spending bills. Get rid of all of that. Just don’t add anything new. Just keep existing spending where it is. You know, the budget would balance today. There wouldn’t even be a deficit. A lot of that has to do with the fact that Biden has added so much in debt over the last four years with the help of Republicans in Congress. By the way, Biden has added so much in debt that it has increased the debt and increased the borrowing costs. Remember, going back to the upward spiral we talked about, more borrowing, higher interest rates, higher interest expense, more borrowing, etc. So that is that is worth several 100 billion dollars of our multi trillion dollar deficit today. I mean, it’s absolutely astonishing. But, you know, it goes back to this idea that it can be done. You can get rid of the deficit, and you can start repaying the debt. It just takes the political will to do it.
Andrew Brill 46:52
So we take our money and put it under our mattress for the next few years and say, okay, you know what? Here’s the pain, or or are we going to be able to invest in T bills and say, okay, you know what? I can get my 5% and for the moment, I’m going to be happy with
E.J. Antoni 47:09
that. It’s a great question. Unfortunately, you got to always remember two important things. One, always adjust for inflation. So just because equities went higher or another asset class, whatever the case may be, remember to adjust for inflation, especially when your capital gains are not indexed to inflation. So you have to keep you really, really have to keep that in mind. So don’t, don’t lose sight, you know. Don’t lose the forest for the trees, I suppose. So keep that in mind. The other thing is that inflation is a tax. It’s a hidden tax, but still a tax, and it can often create situations where the winner is whoever loses the least. In other words, just because you lost money over a period of time doesn’t mean you necessarily made a mistake, because the person who just kept their money under the mattress, they might have lost more, depending on what’s going on with inflation. Now, if you’re talking about inflation of 5% equity returns of 2% okay, yeah, then it’s better, obviously, to have your money in equities than have it under the mattress, right? You’re seeing at least a nominal gain. Even if your real return is negative, it’s less negative than if we just stuck it under the mattress. But investors have to look at a lot of alternative strategies. I think today they need to consider gold and other inflation hedges. Another really important thing that people don’t often think about is you need to consider whether you want to be putting money in pre tax or post tax today. And I understand there’s already a very basic calculus there, but it usually doesn’t consider sustained periods of inflation. And so again, because things are not going to be indexed for inflation, you have to wonder, is it worth it more so for me today as an individual investor, to just get the taxes paid now so that much of the gains that I’m going to see over the years, which will just be paper gains, are not then going to be taxed by the income tax after already being taxed by the hidden tax of inflation. So you look a financial advisor is very, very important here, for different legal reasons. I can’t give you know, direct financial advice, but, but I do think it’s important, since we are no longer in normal times, you can’t be doing normal strategies today. I think that’s how you get hosed. I I wrote a, I wrote a paper in in October, which is a, which is something I do every October, looking at how retirement accounts have been performing. And they are deeply, deeply in the red, in part because for the prior two and a half years, it was the worst two and a half year run of the bond market in over a century. I mean, that’s how much bond holders have just gotten absolutely crushed by the rapid change in inflation rates and interest rates. You know, much like how the. Banks got crushed by having all these all these loans at two or 3% bond holders got crushed by having bonds at very low interest rates compared to the higher rates today of both interest and inflation. So again, if you were the typical retiree following the typical savings plan for retirement, you got killed, you’re going to have to work, on average, about seven years longer before you can actually retire because of all the losses you sustained, mostly from your bond portfolio. So not normal times means not normal investing strategies. In my opinion, where can we find
Andrew Brill 50:37
your paper? And I know we can find you on the x, because I follow you on x, it’s great information. So if any of our viewers want information on all of this stuff, follow you on x. What’s your x handle? Twitter handle? And where can we find all your information? Uh,
E.J. Antoni 50:53
best place to find me is going to be on x. The handle there is at real EJ and Tony. Please look for the blue check, because there are now a bunch of crypto scammers who, if you follow them, they’ll just ping you incessantly, DM you trying to get you to, you know, buy into their crypto scams or whatever. So that’s not me. I don’t even own any crypto. I thought that I don’t like it. It’s just a little too volatile for me. But whatever the case, you can find me there on on X that, that paper that I just referenced, I published that through a think tank called unleash prosperity, and so you can find it there, along with the other work that I’ve done for them.
Andrew Brill 51:27
Appreciate it. EJ, I really, really appreciate you coming on and giving us all the insight, and I want to wish you the best for a happy holiday season. Thank you,
E.J. Antoni 51:35
likewise. Same. To you, my friend. Thank you again for having me appreciate it.
Andrew Brill 51:40
Thanks so much for watching our discussion here on wealthion with EJ Anthony, if you would like help being financially resilient, please head over to wealthion.com forward, slash free for a free, no obligation, financial review. And of course, if you could like and subscribe to the channel, we would greatly appreciate it. Don’t forget to hit the notification bell so you know, when we post new videos on the channel, and please do the social media thing with us all, the links are right below in the description. And if you like this content and are looking for more ways to achieve long term wealth, watch this video next. Thanks again for watching until next time. Stay informed. Be empowered, and may your investments flourish.
