Joe Withrow's Blog

Welcome to Part 8 of this running thread on America’s Great Reorganization. And thank you for sticking with me through it all. 

Yesterday we talked about the collectivist approach to investing. That’s the “conventional” retirement planning model. 

Retirement Inc. has pushed the collectivist approach for forty years now. It says we should all funnel our savings into various kinds of funds (mutual funds/index funds/exchange-traded funds) and then hold them inside of retirement accounts – 401(k)s and IRAs.

As we discussed, this model created distortions within our society… because it enabled a quasi-political agenda. Worse, the conventional approach strapped humanity to the hamster wheel. Here’s what I mean…

There are a plethora of rules that come attached to retirement accounts. Those rules work together to effectively put our money in jail. Once we lock our savings away in these accounts, we can’t touch it again until we retire without incurring heavy-handed penalties.

Of course, Retirement Inc. pitches its funds as “diversified” – because they own stocks in a wide range of industries. They say their diversification equals safety.

But notice how they only focus on one asset class. And it just happens to be the asset class that pays them fees year after year. Even when they recommend bonds – usually it’s through some bond fund trading in the stock market.

So Retirement Inc. wants us to give them total control over our money. We are to lock it away and trust them with our investments… and hope they “go up”.

I see this approach as incredibly fragile. The self-directed investor can do much better.

My philosophy is simple… Financial security first. Then financial independence.

I define financial security as the ability to weather any sudden change or emergency for an extended period of time… in relative comfort.

That way if you were to lose your primary source of income or have an emergency of some kind – you’re good. You’ll have the resources you need to handle the issue – without it disrupting your life.

For financial security, all we need to do is acquire high-quality assets across a range of asset classes.

We want to have a foundation of reserve assets. We also want to have assets that will generate compound returns for us, year after year. Then we want to invest in some alternative assets that provide us with resiliency in difficult times.

That’s true diversification.

Then for financial independence, all we need to do is acquire assets that produce their own income. We call this passive income.

This is how we put assets and income on the same team. Your assets provide you with income. When you want more income, you just acquire more assets. Then you have more of both.

So now it’s a balanced approach…

If you consistently buy assets that produce extra income, at some point your passive income will exceed your expenses. At that point you are financially independent.

Do you see how this is the direct path to “retirement”?

With Retirement Inc’s plan, we funnel our savings into funds inside of retirement accounts and we hope they go up in value. Then, when we retire, we sell those funds to produce income for ourselves.

So to get income with their approach, we have to sell our assets. Once they are gone, we are poorer. Keep at it and we’ll have to worry about running out of money.

I have to ask – if our goal is to have income in retirement… why don’t we simply create extra income streams in the first place?

That way we can retire sooner if we want to. We don’t have to wait until conventional retirement age.

Plus, we never have to sell anything if our assets are providing us with income. Which means we don’t have to get poorer in retirement.

I firmly believe this dynamic is the secret to true wealth and independence…

It has nothing to do with hitting it big on any one investment. It’s not about gambling or speculating. It’s not about the latest hot trend.

No, it’s about an intentional, comprehensive, well-designed system for creating financial security first… and then financial independence – by creating extra income streams.

And guess what?

We’re no longer talking about traditional retirement here. If you can work up to having passive monthly income that supports all your needs and wants…

Well, you can retire any time you want to. It doesn’t matter if you are 65 or 45. All you have to do is build up the income.

That’s the path to true financial independence. It’s the ticket off the hamster wheel.

And guess what?

This approach is more accessible than ever before today. The Great Reorganization is creating a golden path for the self-directed investor right now – as we speak.

We’re going to spend an hour talking about this dynamic at our webinar on Friday.

We’ll talk about each part of the process in detail. Financial security first… then financial independence.

And then, after we’ve covered the process, I’ll lay out an approach that anyone can use to create extra $3,450 in passive monthly income within just three years or less. Then you’ll be off to the races from there.

I’ve also committed to doing an unlimited Q&A session after our core presentation on Friday. Attendees will be able to submit questions anonymously, and I promise to answer all of them. No question is off limits.

So I invite you to take some time to join us on Friday afternoon. We’ll get started at 3:00 pm Eastern sharp. Please register in advance at: https://phoenician-league.lpages.co/webinar-oct24-int/.

See you there!

-Joe Withrow

P.S. We’re calling Friday’s event The New Rules of Money Webinar – the 4.5 Things You Need For Financial Freedom. 

If you can join us, please register in advance as bandwidth is limited. You can do so right here.

The post The Great Reorganization – Part 8 appeared first on Zenconomics.

Over the past week I’ve submitted to you my running macroeconomic thesis: America’s Great Reorganization…

They say that there are only two guarantees in life – death and taxes. I don’t care much for that statement though. So I’d like to propose a modification.

I think there’s only one guarantee in life… Change. That’s it.

Everything changes over time. We know this to be true by experience.

One day we look in the mirror and see a young, vibrant face. But we don’t think too much about it. We have too many places to go and people to see. Our energy is boundless. We just assume it will always be this way.

Then some years go by and we don’t see that same face in the mirror anymore. Somehow it’s not quite so vibrant. And now it has some lines on it. We might sit and ponder this for a little while… because we don’t have other plans. We lack the energy to do all the things we once did.

Well, it’s the same with the economy and thus our society. Change is guaranteed.

As it stands, the cheap money era that reshaped our society over the past five decades is coming to an end. That which was sustained by printed money and artificially low interest rates will come to an end with it.

We’ve spent the past week discussing what this means at the macro level. Now let’s talk about what it means for us personally.

When we left off yesterday I suggested that the new economic era will be a boon for self-directed investors. The key here is self-directed.

Mainstream finance has preached a form of collectivist investing for the last forty years or so. By that I mean “Retirement Inc.” encouraged everybody to put their money into funds of various kinds held in 401(k) and Individual Retirement Accounts (IRAs).

At first it was mutual funds. They were all the rage in the 1980s and most of the 90s. Then Retirement Inc. created variations. We got closed end funds… then index funds… and finally exchange-traded funds (ETFs).

The common denominator is that all of these funds are managed by a massive asset management firm. That firm decides exactly what each fund invests in… when it invests… how much it invests… and then when it sells. And of course it collects a nice little fee from each investor regardless of its performance.

What’s more, the asset managers vote each shareholder proxy on behalf of all their investors. That means they could get their own people on corporate boards to direct company policy.

Nobody cared one bit about this for years. Most investors didn’t even know they had voting rights as a shareholder.

But then corporate America went woke.

Suddenly companies were sacrificing productivity in favor of wokeism’s favorite acronyms – ESG and DEI. And the same companies donated millions of dollars to various organizations supporting the woke agenda.

This surprised many of us. Why would these companies willingly harm themselves to promote a quasi-political agenda bent on destruction?

That’s when the light bulb went on.

The asset management firms (think Blackrock/Vanguard) gained massive influence over corporate America by voting everybody’s proxy. Then they helped push the woke agenda.

They had a good run for a few years… but those days are over now. Blackrock CEO Larry Fink even had to swear off using the term “ESG” forever.

Destructive political agendas can only fund themselves in a world of cheap money and artificially low interest rates. And the Great Reorganization has moved us out of that world.

So it stands to reason that collectivist investing has peaked. Inertia will keep it popular for years to come… but the rise of the self-directed investor is upon us.

More on what that means tomorrow…

-Joe Withrow

P.S. We’re going to dive into this topic in much more detail at our webinar on Friday.

First we’ll discuss the flaws inherent in “conventional” retirement planning. Then we will lay out exactly how we can each become self-directed investors to grow both our assets and our income at the same time. And I promise – we have a step by step process that anyone can use.

We’re calling our event The New Rules of Money Webinar – the 4.5 Things You Need For Financial Freedom. Please register ahead of time right here if you can join us.

The event will start at 3:00 pm on Friday, October 25th. The core presentation will run for about an hour. Then we’ll open it up to unlimited Q&A.

You can secure your spot by going to: https://phoenician-league.lpages.co/webinar-oct24-int/. I hope to see you there!

The post The Great Reorganization – Part 7 appeared first on Zenconomics.

Time waits for no man.

We find some variation of this proverb in literature scattered across the centuries. The earliest variation is attributed to St. Marher in 1225. “And te tide and te time þat tu iboren were, schal beon iblescet“, he wrote.

And it’s unquestioningly true.

We celebrated my daughter’s tenth birthday over the weekend. Here she is crafting decorations for her party:

Two of her friends came over to celebrate with her. Madison called it a “sleepover’. But I think that’s a misnomer. I’m not sure those girls did much sleeping. I think they sat up talking about 10-year old girl stuff into the wee hours of the night.

To her, that’s just what you do when you turn 10 years old. But to her father… it’s not so normal.

Because I remember when this young lady first arrived. Indeed, I delivered her myself in the room adjacent to where she is sitting in the image above.

Alas, time waits for no man.

But like a DEI-approved hire, I suppose time doesn’t discriminate. In just the same way, it waits for no economic era. And that brings us back to our running thesis: America’s Great Reorganization…

The thesis is simple. The cheap money era that reshaped our society over the past five decades is coming to an end.

That which was sustained by cheap money and artificially low interest rates will come to an end with it. And this will lead to a comprehensive reorganization – one that will fundamentally alter the landscape of our society.

SOFR replacing LIBOR as the benchmark interest rate for dollar-denominated debt is the catalyst driving this reorganization. For those who missed our discussion on this esoteric dynamic, you can catch up right here: https://www.zenconomics.com/the-great-reorganization-part-2

To summarize it succinctly, SOFR liberated US monetary policy from European influences. It’s what allowed Federal Reserve (Fed) Chairman Jerome Powell to normalize interest rates – breaking ranks with the global central bank cartel in the process.

History may paint that move to normalize rates as the second American Revolution. That’s how significant it was. 

To illustrate why, let’s peer into the future and examine how normalized interest rates could force change across various sectors of our economy.

It all starts with Congress and fiscal policy…

For decades, the U.S. Congress has operated under the assumption that it could spend without consequence. Low interest rates enabled by cheap money policies allowed for ever-increasing deficits with no immediate repercussions.

As it stands, Congress is set to add over $2 trillion to the national debt each year going forward. But as interest rates normalize, this fiscal recklessness will become unmanageable. Because normalized rates will dramatically increase the cost of servicing the national debt. 

The Congressional Budget Office (CBO) projects that total interest payments on the national debt will exceed $1 trillion next year. As interest payments consume a larger portion of the federal budget, Congress will face mounting pressure from the financial sector to cut spending and implement fiscal reforms. The days of kicking the can down the road will come to an abrupt end. 

We’ll see this pressure come from the bond market. As America’s debt balloons, at some point the biggest buyers of Treasury bonds will say “no mas”. That would force fiscal discipline on federal spending. 

Of course, such a scenario would be quite chaotic… if it gets to that point. The fact that Elon Musk is floating the idea of a “government efficiency commission” suggests that some powerful influences already recognize the need to cut federal spending aggressively now – so that dislocations in the Treasury market might be avoided.

Regardless of how it plays out, fiscal discipline is coming back to the federal budget. And that will force discipline throughout the rest of the economy. 

Zombie companies will face a reckoning… private investment capital will contract – which will limit startup funding to only the best companies… and consumer credit will dry up.

At that point American households will be forced to value financial stability, self-reliance, and long-term planning once again. The “keeping up with the Joneses” mentality that has driven so much wasteful consumption will give way to a more sustainable and fulfilling approach to personal finance.

Perhaps ironically, such a mentality will be a boon for self-directed investors. We’ll talk about what it all looks like tomorrow…

-Joe Withrow

P.S. Ready to put this analysis to work and unlock the secrets of true financial freedom? Join me this Friday, October 25th for our live webinar: The 4.5 Things You Need for Financial Freedom: How to Create True Financial Security in Today’s Economic Climate

We’ll get started at 3:00 PM Eastern on the dot. The core presentation will run for about an hour or so. Then we’ll open it up to Q&A. And I’m an open book – no question is off limits.

You can secure your spot by going to: https://phoenician-league.lpages.co/webinar-oct24-int/.

See you Friday!

The post The Great Reorganization – Part 6 appeared first on Zenconomics.

We’ve talked all week about what I’m calling the Great Reorganization.

To bring new readers up to speed, the thesis is rather simple. Virtually every aspect of our economy has been “financialized” over the past 50 years. This caused some major distortions that threaten to sink the entire dollar-based financial system.

As we discussed yesterday, the mass financialization of our economy was itself a fundamental reorganization of American society. Painting with a broad brush, we went from being focused on quality of life to being obsessed with maximization.

That is to say, the rat race became our reality… and family-owned shops on quaint Main Streets became our past. The case of Downer’s Hardware we talked about yesterday is a microcosm of that massive trend.

However, a major sea-change at the heart of the global financial system signals that we’re in a new era now. We’re at the cusp of another major reorganization of American society. It will resemble some of the better features of our past… as well as new aspects we can’t possibly envision yet thanks to technological innovations.

The vision for this Great Reorganization began to take shape in my mind when SOFR replaced LIBOR as the interest rate benchmark for dollar-denominated loans. The seeds have been sown for several years now. But something caught my attention last week that seemingly confirms it for me.

On October 12th, the Wall Street Journal ran an article titled: America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs. The article went on to detail how private equity (PE) firms are now rushing to buy skilled trade businesses.

The PE guys plan to “rollup” the skilled trade industry by purchasing locally-owned plumbing and HVAC businesses that can be integrated into a larger company. That way the revenue and profits from a range of small businesses accrue to the larger company… to make it look good.

From there they intend to aggressively cut costs in each local business so as to drive the larger company’s profitability metrics higher. Then in a few years they plan to sell the larger company for a profit and walk away with their pockets fattened.

But here’s the thing – the PE guys aren’t smart. They know very little about the businesses they acquire… and they care about them even less. They only know one game and that’s the financialization game.

What’s more, the PE guys are always three years too late.

I say that with confidence because one of my old colleagues from the investment research world knows them very well. He was the top salesman at a company they acquired around 20 years ago. He saw first-hand how they operate.

The first thing they do is fire every employee with any kind of independent drive. They only want employees who will do what they are told from corporate headquarters without question. But the people with independent drive are always the ones who get things done… so it usually doesn’t takes long for things to go downhill.

My old colleague also has some friends in the PE space. He goes out to dinner with them a few times each year… and he describes them as robotic in their thinking. They aren’t innovators. They aren’t pioneers. They are always looking backwards by at least three years.

So if the PE guys think that they’re going to buy up small plumbing and HVAC businesses from all across America to consolidate the industry… I’m confident in saying we’re going to see a resurgence in locally owned skilled trade businesses over the next decade.

The PE guys will quickly make a mess of things. And then young folks who learn these trades will have the chance to start their own companies, hire the best talent, and quickly capture a huge slice of the market share in their area.

It’s a fundamental dynamic that life reverses entropy. One could even argue that reversing entropy is the primary purpose of life.

We can think of the situation above as reversing entropy within the American economy. And it’s going to happen in most of our industries as the Great Reorganization plays out.

And that brings us back to where we left off yesterday – there is a time for everything… and a season for every activity under the heavens.

Mass financialization – the only world the PE guys understand – its day has come and gone. Because that world can only exist with cheap money and artificially low interest rates.

As we’ve discussed, normalization is now the order of the day.  And normalization changes everything. We’ll talk about how on Monday…

-Joe Withrow

P.S. We’re now a week out from our live webinar: The 4.5 Things You Need for Financial Freedom: How to Create True Financial Security in Today’s Economic Climate

I know we’ve spent the whole week talking about economics and the big picture. I find this stuff fascinating. But more practically, I firmly believe that we have to understand the big picture if we want to get our personal finances right.

So we’re going to talk about practical, actionable investment strategies at our webinar next week. We’ll go live on Friday, October 25th at 3:00 pm Eastern. The core presentation will run for about an hour or so. Then we’ll open it up to unlimited Q&A.

And I promise, we’ll make sure you walk away with some robust strategies that you can begin to implement immediately. We’ll even send you three financial guides to help you put everything into practice.

You can register for the event at https://phoenician-league.lpages.co/webinar-oct24-int/.  We have some great bonuses prepared for those who register ahead of time – for those who would like to study up on some of our strategies early.

See you next week!

The post The Great Reorganization – Part 5 appeared first on Zenconomics.

Autumn is upon us up here in the mountains of Virginia. The air has cooled… the humidity has evaporated… and the leaves are beginning to make their annual descent back to the Earth.

There’s something magical about this time of year. It’s a reminder that everything is finite. As the book of Ecclesiastes says: There is a time for everything… and a season for every activity under the heavens.

The gravel road pictured above is our driveway. There’s one way in and one way out… like we’re at the end of the world up here. Most days I feel like we are.

We bought this property from the family who owned the old Downer’s Hardware store in the nearby town. They opened the store in 1953 and ran it for just over 50 years.

We were a couple decades into the “cheap money” experiment when Downer’s Hardware closed its doors in 2004… but we hadn’t yet reached the apex.

We talked yesterday about the result of this experiment – cheap money cheapens everything. The case of Downer’s Hardware illustrates this dynamic…

When the family-owned store opened in 1953, it could sell individual screws, nuts, and bolts for a penny each and still make enough money to keep the lights on. That’s $0.01 – the lowest denomination of the dollar. One penny still held purchasing power.

Fast forward to today and you can buy individual screws for around $0.65 at Lowe’s or Home Depot. But nobody does.

Instead, we buy a pack of 200 screws for $5.99. Then we use the one or two screws we need, and we put the rest on the garage shelf.

We’ll have plenty of screws for the next time we need them, we think. Then 20 years goes by and we forget we even have those 198 screws on the shelf. But we don’t care—they only cost $5.99. That can’t even buy us lunch today.

This is how cheap money encourages waste.

We needed two screws… not 200. But we bought 200 because they only cost $5.99.

We got a “deal” and Lowe’s got to add some revenue in its endless quest to meet quarterly earnings forecasts. But 198 screws went to waste. What else could that metal have been used to make?

Meanwhile, Downer’s Hardware wasn’t around to sell us screws in any quantity. Because it couldn’t afford to keep the doors open selling screws for $0.03 each ($5.99 / 200).

Is that a bad thing?

Perhaps not. The Downers found other work and we can still buy screws for $0.03. But only if we buy 200 of them. If we just want one screw it’s $0.65.

But what did we give up?

After all, we used to be able to get one screw for $0.01 – that penny in our pocket held actual purchasing power. And we could buy that screw from the nice family who made their living running a hardware store.

What we’re talking about here was a fundamental reorganization of our society. The same thing that happened to Downer’s Hardware happened to millions of small businesses on Main Streets all across America.

And you know what… it worked out great for a lot of people. Corporate managers got their bonuses and everybody’s retirement accounts went up. Especially after the global central bank cartel pushed interest rates to zero.

But lest we forget – there is a time for everything… and a season for every activity under the heavens.

Like the leaves falling from my hickory tree in the image above, the cheap money era’s days are coming to an end. Tomorrow we’ll talk about why…

-Joe Withrow

P.S. We’re going to distill America’s Great Reorganization into actionable investment insights at our event next week. We’re calling it: The 4.5 Things You Need for Financial Freedom: How to Create True Financial Security in Today’s Economic Climate

We’ll go live on October 25th at 3:00 pm Eastern. The core presentation will run for about an hour or so. Then we’ll open it up to unlimited Q&A.

And I promise, you won’t get any fluff from us. Only actionable insight and specific investments you can make right now. You can register for the event at https://phoenician-league.lpages.co/webinar-oct24-int/.  I hope to see you there!

The post The Great Reorganization – Part 4 appeared first on Zenconomics.

We’re talking about America’s Great Reorganization this week.

For those just joining us – the thesis is rather simple. Virtually every aspect of our economy has been “financialized” over the past 50 years. This caused some major distortions that threaten to sink the entire dollar-based financial system.

Most of the mainstream financial analysis I’ve seen largely ignores this dynamic. It takes the position that nothing has broken yet… therefore nothing big is likely to break going forward.

At the same time, much of the alternative financial commentary out there seems to employ single-variable analysis. It looks at the increase of fiscal debt and deficits and presumes that they will continue apace until the system collapses under its own weight.

But what if that variable isn’t fixed? What if it changes?

As we discussed yesterday, the US Congress has shown no desire to cut spending and get its fiscal house in order. But a major sea-change at the heart of the dollar-based financial system could force the issue.

That sea-change stems from the Secured Overnight Financing Rate (SOFR) replacing the London Interbank Offered Rate (LIBOR) as the interest rate benchmark for dollar-denominated loans and derivatives.

SOFR allowed the Federal Reserve (the Fed) to break ranks with the global central bank cartel. It’s what enabled Fed Chair Jerome Powell to raise interest rates at the most aggressive pace in history.

The financial media covered that story daily. They said it was all about combatting inflation. But that was just part of the story – a small part.

Powell’s not the kind of Fed Chair we’re used to.

If we think back to previous Fed Chairs – Janet Yellen (2014-2018), Ben Bernanke (2006-2014), and Alan Greenspan (1987-2006) – they were all academics. They had no real-world experience in the financial sector.

And they each were prone to what became known as “Fed speak”. They would get up on stage and talk a lot—using a lot of big words. But those words wouldn’t convey much meaning. Those listening were left to wonder what their true intentions were.

That’s not Powell. He’s not an academic. He’s a Wall Street guy. They call him private equity Powell on the Street.

Powell’s been a straight-shooter thus far. He’s said exactly what he planned to do…and then he did it. And even after cutting the fed funds rate last month, Powell said that he still aims for “normalization”. He made it clear that his goals have not changed.

If we take Powell at his word, that means the Fed didn’t really “pivot”. While Powell may announce a few more small rate cuts, he’s not trying to drive rates back down to historically low levels.

Instead, he wants the federal funds rate to be “neutral”. That way we can get back to allowing the market to set interest rates – not central planners.

If we take Powell at his word… and if he can pull it off – everything changes.

Congress will be forced to cut spending. Businesses will be forced to operate efficiently. Individuals will be forced to save before they spend. And then suddenly our value system will go back to what it once was…

The reality we’ve experienced is that “cheap money” cheapens everything. When we push interest rates to zero and print trillions of dollars from nothing, it encourages financialization, speculation, and waste.

That’s how we get cheap McMansions in the suburbs and fancy cars that nobody knows how to fix when something goes wrong.

It’s how we get strip malls and big box stores… and empty Main Streets. It’s how we get legions of sociology and diversity studies majors… and few people who know how anything actually works.

In short, cheap money cheapens our society’s values.

Keep at it long enough and you get to the point where your society has real discussions about who’s a boy, who’s a girl, who’s an it, and who can have babies. That’s when you know you took a wrong turn somewhere along the line.

Normalization is the solution. It will force the Great Reorganization.

Tomorrow we’ll talk about what it all looks like…

-Joe Withrow

P.S. I know some of this macro talk may seem “out there”… but there is a practical application. When we can connect the dots around what’s happening on the economic stage, we can position our finances accordingly.

In fact, I’m confident we can bulletproof our money if we get the big picture right. If you know what’s happening, you’ll know what to do… as the old saying goes.

That’s why I’m hosting a webinar next week. We’re calling it: The 4.5 Things You Need for Financial Freedom: How to Create True Financial Security in Today’s Economic Climate

We’ll go live on October 25th at 3:00 pm Eastern. The core presentation will run for about an hour or so. Then we’ll open it up to unlimited Q&A. And I’m an open book – no question will go unanswered.

And I promise – we’re going to talk about actionable investment strategies that you can implement immediately. We’ll even walk through an approach capable of creating an extra $3,450 a month in extra income in three years or less. Once you see how straight-forward it is, you’ll wonder why more people don’t do it this way.

Oh, and we’ll even send everybody three guides to help you implement the solutions we’ll discuss.

So I’m very excited for the event next week. I think we’ll be able to share some strategies that you won’t find anywhere else. You can register now at https://phoenician-league.lpages.co/webinar-oct24-int/.

The post The Great Reorganization – Part 3 appeared first on Zenconomics.

Yesterday we made a bold claim. The second American revolution is currently underway.

Except this revolution isn’t being fought on the battlefield. It’s financial in nature.

It all centers around something called the Secured Overnight Financing Rate (SOFR). SOFR (pronounced “so-fur”) is now the benchmark interest rate for dollar-denominated loans and derivatives. It was created in 2018. And it replaced the London Interbank Offered Rate (LIBOR) in January 2022.

This is an esoteric corner of the global financial system… but it’s critical to understanding what’s playing out today. Especially on the geopolitical and macroeconomic level.

Simply put, SOFR connects the dots.

When LIBOR was the benchmark rate for dollar-denominated loans, the US economy was tied to the agenda established by the power factions controlling the European Union (EU). That’s because 11 panel banks in Europe could manipulate interest rates through LIBOR, as we discussed yesterday.

With SOFR now in place, those European banks have no influence on dollar-denominated interest rates. SOFR liberated US monetary policy… and paved the way for what I’m calling the Great Reorganization.

It’s no coincidence that Federal Reserve (Fed) Chairman Jerome Powell only started raising the federal funds rate in 2022 – four years into his term. He had to wait until SOFR fully replaced LIBOR as our benchmark. Otherwise the financial interests beholden to the EU could have thwarted his efforts to raise rates by manipulating LIBOR lower.

SOFR expelled this European influence and enabled Powell to break ranks with the global central bank cartel. That’s the second American revolution. It’s happening right now.

Of course, the financial media didn’t talk about any of this. I suspect many financial analysts still don’t realize what’s going on.

As for me, it took a little while to process the significance of this dynamic. But when the United Nations (UN) proclaimed that all central banks needed to stop raising rates immediately back in October 2022… that got my attention.

The UN implied in their statement that to continue rate hikes would be imprudent and irresponsible. Their proclamation was directed at the Fed and Jerome Powell. It was a message that the European power structure did not want to see higher interest rates.

A few weeks later Powell hiked rates by another 75 basis points. How’s that for a clear response?

And Powell’s motives appear to be clear. He’s talked a lot about “normalization”. He’s also been critical of the US government’s unsustainable level of fiscal spending.

We saw last week how government spending must be cut dramatically—or else we’ll spiral head-first into a collapse of the entire dollar-based financial system. It appears to me that Powell and other prominent figures within the New York banking scene realize this also.

Obviously Congress has demonstrated no desire to rein in spending willingly. But guess what?

Normalized interest rates could force the issue. More on that tomorrow…

-Joe Withrow

P.S. Understanding this dynamic has been a game-changer for my own investment strategy. SOFR vs. LIBOR helped me connect the dots and “see” what was really happening on the macroeconomic stage. And that directly informs which investments will perform well in the years to come… and which won’t.

That’s going to be the topic of our upcoming webinar: The 4.5 Things You Need for Financial Freedom: How to Create True Financial Security in Today’s Economic Climate

We’ll go live on October 25th at 3:00 pm Eastern. The core presentation will run for about an hour or so. Then we’ll open it up to unlimited Q&A. No question is off limits.

And I promise – we’re going to have fun. You won’t find any stuffy corporate presentations here. We’ll talk about actionable strategies that you can implement immediately. And I’m going to send all attendees three guides to help with implementation.

So I think this event will be well-worth your time. You can register now at https://phoenician-league.lpages.co/webinar-oct24-int/. See you there!

The post The Great Reorganization – Part 2 appeared first on Zenconomics.

We spent the past two weeks talking about what a normal economy looks like… and how it’s all been distorted over the last 50 years or so. Even the US Treasury market – the bedrock underpinning the global financial system – is starting to crack.

As we’ve discussed, the current financial trajectory is not sustainable. But that doesn’t mean the American financial system is doomed.

If you’ll permit me, I’d like to venture into an esoteric corner of the global financial system today… and maybe even peak behind some curtains. What I’ll share with you is my analysis – the conclusions I’ve come to after many hours of careful consideration.

The Federal Reserve (the Fed) began publishing something called the Secured Overnight Financing Rate (SOFR) in April 2018 – two months after Jerome Powell became Fed Chairman. We didn’t realize it then, but the second American revolution was underway.

SOFR (pronounced “so-fur”) is a benchmark interest rate for dollar-denominated loans and derivatives. It’s based exclusively on transactions in the US Treasury repurchase (repo) market—which the Fed is directly involved in.

SOFR gradually grew in importance in the years after its creation. Then it replaced the London Interbank Offered Rate (LIBOR) as the interest rate benchmark for dollar-denominated loans and derivatives in January 2022.

Again, we didn’t realize just how significant this move was at the time. But in hindsight, SOFR replacing LIBOR liberated US monetary policy from international influences. Here’s how…

Financial institutions use interest rate benchmarks to price loans. That means interest rates throughout the economy are directly influenced by the benchmark used. Prior to 2022 it was LIBOR for dollar-denominated loans. Now it’s SOFR.

As we’ve discussed, the Federal Reserve cannot “set interest rates”. All it can do is adjust the federal (fed) funds rate. That’s the rate at which banks lend money to each other overnight.

The fed funds rate does affect the interest rate benchmarks… but it does so differently for each.

With SOFR, the fed funds rate has a direct impact. It sets a floor below which SOFR is unlikely to fall.

However, the fed funds rate did not have a direct impact on LIBOR. It only had an indirect influence.

That’s because LIBOR was calculated based on daily estimates submitted by a panel of 16 banks. That panel consisted of 11 banks headquartered in Europe… three American banks… one Japanese bank… and one Canadian bank.

However you slice it, European interests dominated the benchmark.

For this reason, the fed funds rate could not set a floor under LIBOR. Because the global banking consortium could always submit lower estimates to push rates down. And that’s exactly what they did…

In 2012 the “LIBOR Scandal” broke. We learned that some of the panel banks were submitting artificially low rate estimates to manipulate LIBOR lower.

The big takeaway is this…

When LIBOR was the interest rate benchmark here in the US, it effectively handcuffed American monetary policy to that of the European Union (EU)… because 11 European banks had an outsized influence on setting the benchmark rate.

Notice the difference between SOFR and LIBOR here. It’s critical.

SOFR is based exclusively on transactions in the repo market. These are real transactions that have occurred. Contrast that with LIBOR… which was based on estimates submitted by a panel of banks – not actual transactions.

We’ll talk about why that’s so important tomorrow…

-Joe Withrow

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The post The Great Reorganization – Part 1 appeared first on Zenconomics.

We’ve been talking the past week and a half about the economy, interest rates, and normalization.

Today, let’s delve into the cornerstone of global finance—US Treasuries. Treasuries have been the bedrock of the global financial system in a sense… but the foundation is now cracking.

US Treasuries are government debt securities issued by the United States Treasury Department. They’re considered risk-free assets. And they underpin much of the global financial system. Here’s how they work:

Domestic Role: Treasuries finance the US government’s operations. They’re sold to investors who then receive periodic interest payments at the specified yield for the full duration of the security. Insurance companies, banks, investment funds, and private corporations buy Treasuries to earn a rate of return on their cash reserves.

Global Role: Treasuries have been the world’s reserve currency since the end of World War II. Countries and central banks use them to store value in dollars, settle international transactions, and to manage their own currencies. This allows the US government to borrow money at lower rates and issue financial sanctions with global impact.

Both domestic and foreign institutions have used US Treasuries as a primary reserve asset for over 50 years now. But as we discussed yesterday, every aspect of the economy has been distorted in that time… and the US Treasury market is no different.

Perhaps the biggest culprit was the Federal Reserve’s (the Fed’s) quantitative easing (QE) programs. They were instituted by Fed Chair Ben Bernanke in 2008.

With QE, the Fed began creating new dollars from nothing to buy US Treasuries of various durations. This flooded the market with liquidity… which created second order effects throughout the economy. They are:

Yield Distortion: QE pushed Treasury yields down to nearly zero and kept them there for the better part of 15 years. This inflated bond prices and eliminated the ability for investors to earn a rate of return on their cash.

Savings Disincentive: With interest rates near zero, there was no incentive to save. In fact, saving was a losing proposition due to inflation.

Investment Misallocation: Treasuries yielding next to nothing encouraged rampant speculation as the market had to reach for yield. This caused investors to misallocate capital chasing speculative assets. And this created asset bubbles not tied to real economic growth.

These distortions have set the stage for massive instability in the future. Consider this…

Bank of America owns roughly $600 billion worth of US Treasuries. And the bank bought over 1/3rd of its Treasury stash in 2020 with the 10-year Treasury yielding less than 0.9%.

Keep in mind that the value of a bond moves inverse to interest rates. When rates go up, bond prices go down. And rates have gone up significantly since 2020. As such, Bank of America is sitting on losses of over $100 billion on its bond portfolio.

Yet, the bank’s total equity is less than $300 billion. And it’s Tier One capital is roughly $200 billion. That means Bank of America could become insolvent if interest rates move much higher. Is it any wonder that Warren Buffet has been dumping Bank of America (BAC) stock like there’s no tomorrow?

This is something to keep an eye on. Bank of America is the largest depository institution in the US. Any dislocations at the bank would be seismic.

Now consider this…

The US government has added $2.1 trillion to the national debt just in the last 100 days. US federal debt is now up to nearly $36 trillion. This largely represents total US Treasuries outstanding.

Current projections show that the US government will have to pay $1.1 trillion in interest on this debt next year. That will be one of the government’s greatest expenses, trailing only Medicare and Social Security.

This simply isn’t sustainable.

Either the US government will need to cut spending and pay down the debt so it’s interest payments don’t spiral out of control… or at some point the world will stop buying US Treasuries. Then the entire dollar-based financial system would collapse.

This is why Fed Chair Jerome Powell continues to talk about “normalization”. It’s also why interest rates are not going to fall that much from here.

More to come…

-Joe Withrow

The post The bedrock is cracking… appeared first on Zenconomics.

Yesterday we discussed how a normal economy operates. We can summarize it as follows:

Market-based system & sound money –> savings –> investment –> economic growth –> strong division of labor –> standards of living rise –> increased savings –> increased investment –> stock market rises –> increased entrepreneurship –> more startups –> outsized gains for investors –> good companies scale… bad companies go bust –> recessions clean out the system –> resumed economic growth

The problem is, these days we have interventions at every stage in the process described above.

For starters, arbitrary regulations and an arcane tax code distort activity throughout the economy. Paired together, regulations and taxes create a system of incentives and disincentives that influence economic activity.

Certain incentives may make a particular company or project look worthwhile when it otherwise wouldn’t be. And the reverse is also true. Disincentives can make a particular investment look bad when it otherwise would be productive.

When this happens, it throws a wrench in the free-flowing system we outlined above. It doesn’t take long before market signals are muddled. Then malinvestment sprouts up to cover the wheels of commerce like kudzu on a neglected building.

Meanwhile, we abandoned the last remnant of sound money in 1971. That’s when President Nixon closed the international gold window – removing the dollar’s final link to gold.

This allowed the government to print money year after year to cover ever-growing fiscal deficits. That caused the dollar’s purchasing power to plummet. And it also drove interest rates down to zero.

This sent consumer prices skyrocketing across the board. It also eliminated the ability for households to earn a rate of return in savings accounts. This combination made it hard for regular folks to get ahead… And made it difficult for “Main Street” entrepreneurs and small businesses to thrive.

And that’s not an exaggeration.

The average US savings account paid 0.05% in 2021. Yet, the consumer price index (CPI) rose 7% that year. The CPI is the “mainstream” measurement of inflation… and it understates true price inflation materially.

At the same time, most of the money created from nothing funneled to the country’s power centers – Washington, DC, Wall Street, and Silicon Valley. That’s thanks to the “financialization” of the US economy.

This gave rise to the private equity (PE) and venture capital (VC) industries in the 1980s. Over time those industries became awash in trillions of dollars. They used those dollars to invest heavily in America’s most promising startup companies.

As a result, the best companies refrained from going public for an extended period of time. Over a decade in some cases. Then when they did go public, they did so after the institutions had already milked all the investment gains.

The financial media may have touted some of these companies as “hot” IPOs. But the reality is that retail investors were getting nothing but scraps. The days of regular folks being able to invest in game-changing companies like Amazon.com at their IPO are long gone.

However, this same dynamic also enabled bad companies to attract growth capital.

With trillions of dollars pooled up, the PE firms and the VCs didn’t need to be picky with their investments. So they invested heavily in lower quality startups as well… just in case. After all, a $10 million investment seems immaterial when you’re sitting on hundreds of billions in cash.

Today it’s estimated that roughly 10% of all publicly traded companies in the US are “zombie companies”. These are companies that do not produce enough economic value to pay for themselves. Meaning, there isn’t enough market demand for their goods and services to pay for their expenses.

These zombie companies should have gone bust a long time ago. That would have cleared the way for better companies and better jobs to spring forth. But thanks to the availability of cheap money and historically low interest rates, they’ve managed to suck up just enough investor capital to stay afloat.

None of this is normal. And collectively, all these distortions are a massive drain on economic growth. Especially for those of us on Main Street.

I would suggest that this is why populist ideas have exploded here in America. It’s also why public trust in America’s institutions is at an all-time low.

Simply put, the current trajectory is unsustainable. We’ll quantify that tomorrow…

-Joe Withrow

The post How the normal became abnormal appeared first on Zenconomics.