Trump’s Supreme Court saved him, but will his Fed?

Stock markets have been through countless ructions since 2008. All of them eventually turned out to be a storm in a teacup. But how and why?

On the face of it, tariffs are a terrifying prospect. Imagine the cost of living spike if Australians had to manufacture their own goods.

But stocks quickly recovered from their April tariff tantrum plunge.

What could be worse for a global economy than lockdowns?

And yet stocks recovered to hit new highs.

In 2018, Italy was led by a man who called the euro ‘a crime against humanity’.

But he didn’t leave in the end.

In 2015, the Greeks voted against their own bailout in a referendum!

But their government ignored the hint and calmed markets by accepting austerity.

In 2021 and 2022, inflation around the world spiked the most in decades. Adjusted for inflation, it was the worst rout for a balanced portfolio of US stocks and bonds ever. Yes, including the Great Depression.

But far from a sustained bear market, stocks quickly bounced back.

They even ignored the astonishing hike in interest rates required to bring inflation back down.

A major war in Europe barely caused stocks to stumble.

Japanese bond yields blowing out and the crashing yen didn’t cause a meltdown.

AI threatens us with waves of unemployment, but AI stocks continue to rise.

The end of net zero commitments means the planet will wreak havoc and destruction on all of us. But seaside property prices go up.

Electricity shortages are causing chaos for industry, especially in Germany. But the German stock market is soaring this year.

What force could possibly be powerful enough to offset all these threats?

Actually, the question is who…

‘They’ll just print more money’

Many years ago, I predicted that no crisis was big enough to defeat central bankers.

I gave a speech in which I prepared listeners for how things would unfold in coming years…

First I taught the audience to chant, ‘They’ll just print more money!’

And then began hurling terrifying predictions their way…

‘What if the Australian housing bubble burst and our banks fail,’ I yelled at the audience in a panicked voice.

‘They’ll just print more money,’ came the reply.

It was a cautious response, at first. But the listeners soon got the hang of it…

‘What if there’s another tech bubble that bursts,’ I wailed into the microphone.

‘They’ll just print more money!’

‘What if European governments go bust?’

‘They’ll just print more money!’

Admittedly, I didn’t see a pandemic coming. But you get the idea.

The conclusion of this exercise was to buy the dips. Which, admittedly, is a bit vague. Some of the drawdowns in recent years were severe.

But even if you got your timing wrong, it remained the best advice over time. No crisis can offset the money printing machines’ power to make investment prices go up.

Actually, there is one…

Beware of unpopular politicians

While it may be inevitable that central bankers will save us from a crash, how quickly and enthusiastically they do so is very much up for debate.

Sometimes, central bankers respond quickly with overwhelming force.

The pandemic policies were decisive. Nobody was worried the government would go bust. We all knew central banks would create the money needed and buy the bonds required.

And yet, fears of too much debt have since caused bond markets in many countries to wobble…

Are markets making the same mistake once again? Why do they doubt my advice from all those years ago: ‘They’ll just print more money!’

The answer lies in ideology and politics.

You see, central bankers are responsible for financial stability. But they are not supposed to blatantly finance governments by buying their bonds.

And yet, there is no greater threat to financial stability than an overindebted government that continues to spend too much. Which is most of them.

Central bankers thread this needle by backing governments during a crisis such as a pandemic, but not during a bond market crash caused by poor government fiscal policy.

The trouble is that the two are sometimes difficult to distinguish…

Ideology decides our fate

The purpose of politics is to decide which ideology drives government policy.

Should it be left wing, or right wing? Should it be interventionist or free-market? Should it be nationalist or internationalist?

The ideology that governs, controls the political policy decisions we make…

Do tax increases raise or lower tax revenue?

Does prohibition of drugs, alcohol, tobacco and social media work?

Are immigrants a net benefit or cost?

Tariffs or free trade?

We debate these things, make a decision via an election, find out the answer the hard way, forget what we learned, and do it all over again.

The trouble with central bankers is that they are extremely ideological, but rarely subject to this democratic accountability.

Central bankers impose their view of economics onto governments by deciding whether to support or withhold support in the bond market. Is the fiscal crisis of the government’s own “incorrect” ideology, or is it an external crisis?

A politician responding to a crisis in a way that central bankers deem correct will get support in the bond market.

A politician that disagrees with central bank orthodoxy won’t get the support. And, given how much debt governments are in, that’s a death sentence.

In 2022, UK Prime Minister Liz Truss found this out the hard way. But it’s been true of other politicians as well.

How unpopular is Trump?

Right now, the big question is how far Jerome Powell will allow markets to crash under President Trump.

And how far the Bank of Japan will allow bond yields to spike and the yen to crash under the new Prime Minister there.

The two leaders are bringing a new set of policies to the table. But BOTH rely on their central bankers to keep the bond market on life support while we discover if their policies work.

Trump’s appointments to the Supreme Court saved him from Democrat lawfare this year. But will his appointments to the Federal Reserve save him from the AI bubble’s pop? Lachy Tierney said ‘yes’ in yesterday’s edition. I’m less sure.

Trump will be replacing Powell in May. If Powell wants to discredit the President ahead of the mid-terms as the Bank of England did to Liz Truss, now’s his time. All Powell has to do is disappoint the market with his rescue package for the recent market chaos.

That’s why we’re preparing a series of videos about the threat for you right now.

But if you are looking for an investment idea on the back of this theory, you only need to turn to the countries where central bankers and politicians are perfectly aligned. They’ll work together to engineer a bubble you can invest in.