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Market Lab Report - High rates and inflation to persist?

Market Lab Report

by Dr. Chris Kacher

The Web3 Evolution Will Not Be Centralized™

Fed and rate hikes

3-month Treasurys are suggesting the Fed will be forced to keep rates elevated for a prolonged period.

30-year Treasurys suggest elevated or even higher rates ahead. Yields rose at a fast clip for most of 2022 and have been once again rising at an accelerated pace since July 2023.  

(The dotted lines are alerts I track for each.)

But while bonds have been in a horrendous bear market since the start of 2022, the bond bear market may be over once the economy appreciably weakens which will force the Fed to quickly lower rates as they have done in past cycles as shown over many decades. In the meantime, rates may stay elevated or move even higher depending on economic strength motivated in part by exponentially growing companies. Exponential growth has typically been observed in those companies with cutting edge technologies that are somewhere on the steeper part of their respective S-curves. AI, blockchain, and web3 are all areas enjoying such growth thus explains their often ludicrously high valuations which include the MMANGA stocks (Meta, Microsoft, Amazon, Nvidia, Google, Apple). The market is always forward looking. The dot-com boom in the late 1990s soared for nearly 4 years, well past Greenspan's "irrational exuberance" speech he gave in 1997, before its bubble burst in Mar-2000. That said, today's market is nothing like the late 1990s when the Fed created easy money policies due to Y2K fears. Instead, the Fed has been tightening at record levels since early 2022, and may tighten again or at least keep rates at elevated levels for a prolonged period which will eventually induce a recession. 
The real bond yield is the yield on US treasuries minus inflation, so if inflation continues to fall, the Fed is still likely to keep rates at current levels for a prolonged period as their 2% mandate is still a ways off. In such a case, the real yield would rise which would be another reason to be bearish for stocks. A stock market that corrects due to a weakened economy leads to recession. This is why when the Fed starts to lower rates in a hurry, the economy is showing deep weakness, thus the stock market follows lower.

Recessions since 1990 have resulted in negative returns in the US stock market except for 2020 which was a black swan due to record levels of QE from the Covid pandemic. The year after recession typically results in double digit returns for the stock market with the exception of 2001 which was the dot-com bust where the NASDAQ Composite lost -78% from 2000-2002.

High rates and inflation to persist?

The Fed is nearing the end of its hiking cycle but where inflation heads is less certain. As we know, the reported CPI is well below the actual numbers. The fake CPLIE has tumbled in the US and UK on an annualized basis but long bond yields, instead of falling, have risen because real inflation persists. Inflation may persist for a prolonged period due to a myriad of issues I've discussed in prior reports. For example, ESG (environment, social, governance) is leftist evil as it allegedly stands for helping the planet but its higher order effects are hugely damaging to progress, so have contributed largely to global inflation by crippling innovation.

The old guard knows this so sits with immense power high up the scale of Maslow’s hierarchy. They possess both wealth and power. They support movements that on the surface sound good such as ESG and DEI (Diversity, Equity, and Inclusion) but such movements have dire second order effects which cripple innovation thus spur inflation via bad economic policy. They invoke the movement of woke postmodernism which is even more radical than Marxism because they want to make changes to the core tenets of modernity. The postmodernists believe that science and math are tools of oppression and were created to serve the powerful at the expense of the oppressed. The wokeness movement has hijacked institutions all across the country from Harvard to Stanford to Google to Facebook to IMF to WTO. ESG and DEI are two of the many such manifestations.

The old guard represents the Blackrocks, Apples, and Amazons of the world vs. decentralized Web3 and crypto whose use case is freedom to transact value which results in the freedom to communicate without being censored or cancelled. Without the freedom to transact, all other freedoms collapse. The right to transact underpins all other rights. You don’t have free speech if you can’t buy a stamp or a net connection. You can’t assemble if you can’t buy gas or a ticket.

Enacting uneconomic laws due to mainstream FUD hamper or even cripple economies as uneconomic regulations and mandates lower GDP while inflating the cost of goods and services. This is what has happened by way of ESG, DEI, and powerful companies that support such agendas such as Blackrock who gain state favors in China by forcing companies to adopt ESG practices in the United States which then weakens the US because the Chinese companies are not forced into the same uneconomic ESG standards.

ESG punishes companies such as Chevron to take responsibility. As one example, if Amazon’s trucks dont conform to ESG’s standards, Chevron gets penalized. That’s like telling McDonald’s to take responsibility for anyone who eats a Big Mac. This is all spurred from ESG’s wave of “woke morality”.

At any rate, keep a close eye on long term Treasurys, the dollar, inflation, and economic data. Strong economic data will force the Fed to keep rates elevated which will ultimately lead to further strain on the economy, record level delinquencies, and further banking issues. Weak economic data will eventually force the Fed to start lowering rates as things start to unravel leading to recession. For the Fed to get its soft landing, exponentially growing technologies will have to continue to add value which could postpone recession beyond expectations, but given the unprecedented pace of rate hikes, this seems unlikely. It is a question of when, not if, the next black swan hits. Stay tuned.
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