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Written by Chris Marcus for the Miles Franklin blog.

Last Wednesday the Federal Reserve held a meeting and indicated that they plan to go forward with more rate hikes. Yet they left a key question unanswered.

Specifically, if the Fed is going to continue to raise rates while also unwinding its quantitative easing balance sheet, who is going to buy all of the bonds?

While the Fed didn’t raise rates at this past meeting, there were changes in the language of the statement that indicate the central bank is even more committed to hiking than before.

“The statement said the labor market has “continued to strengthen,” language consistent with the June meeting.

However, the committee went on to note that “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth.”

I would personally dispute the notion that the economy and labor market are strengthening. Yet I’m not the Federal Reserve chairman, so what remains relevant is that the Fed does believe that. And that it is likely to act on that belief.

Certainly there are many in the mainstream Wall Street community that see no cause for concern.

“We’re getting to the point where levels are attractive enough where that supply will get absorbed smoothly,” said Dominic Pappalardo, director of taxable portfolio management at McDonnell Investment Management.”

But how attractive is a 3% yield when even the Fed’s inflation estimate is 2.9%? Let alone the 10% inflation figure that John Williams of Shadow Stats calculates by using the original government formula before it was tweaked.

It’s also worth considering just exactly who is going to absorb that supply. Especially with the Fed withdrawing and other countries like Russia selling the majority of their holdings over the past few months.

“Some investors are worried about the increased issuance, pointing out that bigger waves of debt are hitting the market as global central banks begin to wind down the bond-buying programs they put in place after the financial crisis.”

The Fed has already recently mentioned that it’s concerned about inflation. Which is another reason to believe that it will continue to hike.

And if that’s the case, why would you be in a rush to buy bonds now if rates are going to go up (which means that the bond price is going to go down)? While at the same time more supply is hitting the market.

It’s hard to understand how the Fed doesn’t seem to see any of the risks facing the treasury market. Maybe the Fed officials are just so hooked on Keynesian economics that they’re unable to recognize the dilemma they’re facing. Or maybe they really do get it but just don’t care.

Perhaps after the current bubbles burst economic analysts and writers will spend the next few decades trying to figure out which it was. Yet for anyone who thinks it’s impossible that there could be reason for concern when the Fed seems so relaxed need only think back to some of the statements the government and central banking officials made prior to the collapse of the housing bubble.

March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is “going to be painful to some lenders, but it is largely contained.”

March 28th, 2007 – Ben Bernanke: “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,”

April 20th, 2007 – Paulson: “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.” , “All the signs I look at” show “the housing market is at or near the bottom,”

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

June 20th, 2007 – Bernanke: (the subprime fallout) “will not affect the economy overall.”

July 12th, 2007 – Paulson: “This is far and away the strongest global economy I’ve seen in my business lifetime.”

August 1st, 2007 – Paulson: “I see the underlying economy as being very healthy.”

Just because the Fed doesn’t see the canaries dropping all over the coal mine doesn’t mean there isn’t something going on. And while it may be unfortunate that the institution many count on to keep their currency safe has again dropped the ball doesn’t mean that you can’t still do something about it yourself.

The risks to the paper markets remains greater than ever. While the benefits of precious metals as insurance is similarly more valuable than ever.

The Fed may not be able or willing to recognize that. But when you consider the investors who saw the housing bubble in advance advocate precious metals, while the man who created the bubbles even admitted before Congress that he simply, “doesn’t understand gold”, which investment thesis makes more sense to you?

Chris Marcus

August 5, 2018

To buy or sell gold and silver call Miles Franklin today at (1-800-822-8080).