Maximum Employment Takes Precedence

Chairman Jerome Powell yesterday issued a statement that stated which of the US Federal Reserve Bank’s objectives would be more important to them going forward. Hereafter, its “Maximum Employment” objective will be more important than will its “Price Stability” objective.

What It Means

For one thing, Powell’s statement means we can look forward to a low Fed Funds Rate from the Fed for the foreseeable future. The Fed Funds Rate is a short-term rate and the Federal Reserve does not have a direct way to set long-term rates, so long-term rates could very well rise, but short-term rates will stay low. This means that we can also look forward to an upward-sloping yield curve, which is normal and good for bond traders.

Powell’s statement also could mean the Fed could continue to backstop the corporate bond market in an effort to keep workers at those corporations employed. This is good for the workers who might otherwise claim unemployment, but not necessarily good for innovation in this country. There are companies that are on ice temporarily due to Covid (think about anything related to travel or entertainment) and there are companies that were already on the downside and Covid was perhaps the knockout punch. Perhaps these are companies that were in the process of being disrupted by new technologies. While it is nice to keep workers employed, it is not good to stop or hinder the disruption from taking place. Disruption is bad for those who get disrupted but good for the disrupters who replace the obsolescence.

Phillips Curve

Another implication of Powell’s statement yesterday is that he is throwing his (and the Fed’s) lot in with those economists who believe that the Phillips Curve is wrong. The Phillips Curve is the notion in macroeconomics that economic growth causes inflation, and that the Fed must act as the bulwark against higher inflation by raising rates in order to keep the macroeconomy from becoming too overheated and thus too inflationary. With his statement yesterday, Powell is not necessarily saying, “Inflation Be Damned!”, but he is saying he is willing to live with an inflation rate higher than 2% if the trade-off is that more people will remain employed or that more new jobs will be created. The Fed thus is taking even more of a pro-growth stance and is also saying it will remain pro-growth even if inflation ticks up above 2%. Workers and jobs matter more that some metric of inflation that is significant only in a theory that is under dispute.

Fiscal Policy

This also could pave the way for additional fiscal spending. If the Fed isn’t worried about the inflationary ramifications of a growth in government spending, then why should Congress be worried about it? Look for a really large infrastructure bill, likely after the Presidential Election since the Democrats in the House wouldn’t want to give President Trump a win before the election.


Powell’s and the Fed’s statement are pro-growth. That is bullish for the US economy and bullish for stocks. We are still in the midst of Covid and so growth will be difficult to come by until Covid subsides and/or we have a vaccine. But if you are a long-term buy and hold investor, the Fed is pro-growth and a bit more inflation won’t cause the Fed to put on the brakes.

Back To School

The kids are starting to head back to school. Whether online, in person, or a combination of both, the process of children learning is coming back to life. Some parents are lamenting the “end of Summer” even though there are technically 4 more weeks of Summer, and even though the kids have been out of school for the most part since March. Perhaps such lamentation is a sign that things are starting to get back to normal.

Get A Move On

“Back to School” is part of the process of moving forward with life. Not just for the kids, but for parents as well. School is not just a place to go and learn, or at least be taught. For parents, it is also a place where their children go during the day so that the parents can go to work. This is especially true for young families. “Back to School” has the double benefit of increasing economic output because working parents are able to work more if their children are actively engaged in school. The lives of children and parents alike have been on hold since the onset of Covid. Let’s hope both can start to get a move on with their lives if the children can get back to school and stay back at school, meaning schools aren’t forced to re-shut back down due to a relapse of Covid.

Lagging Indicator

If all goes well, which is a big If, look for economic output, as measured by GDP, to improve at a steeper lever during the remainder of this year and the beginning of next. Perhaps this could also lead to the reopening of some businesses that have been shuttered not so much due to the threat of getting Covid at those businesses but more because sales had dried up due to the pandemic. Drycleaners, for instance: Who needs starched shirts if they are not going into the office and meeting clients? However, if people are able to go back to work in person, perhaps the need for dressing up will perk up again, which in turn will put more people in the drycleaning industry back to work. That’s just one example. Even if Covid remains with us, it is important that schools remain operative so that the general economy can get back to a relatively normal footing.

Perception vs. Reality

Despite what you read about or see in the media, I think most people are on board that Back to School is very important and should move forward. The media will always give air time to the loudest voices, but I am keeping my fingers crossed that cooler heads will prevail. Evidence is showing that children are less likely to get sick from Covid than will olders, and that teachers are no more likely to get Covid than are the general population. If so, there is minimal or no marginal Covid risk from having schools open. Let’s hope that the media doesn’t take the poor people who unfortunately do come down with Covid through school and blow the situation out of proportion and lead to widespread shutdowns in the school system.


Stock investors will be keeping a keen eye of what develops during the course of this Fall semester. While it might be a lagging indicator, stock investors, forward-focused as they are, will interpolate trends in whether or not schools remain open to mean that GDP growth will be greater or less than previously estimated, and buy or sell stocks accordingly. This means that the school year will likely add to the already high volatility in stock prices. Look for the VIX to remain high.

Gold As A Predictor

Through the middle part of 2019, the US Treasury yield curve inverted slightly, meaning that longer-term interest rate yields were lower than shorter-term yields. It’s normally the other way around. Pundits (and some investors) at the time were concerned that the inverted yield curve was a precursor to a coming Recession. The yield curve soon righted itself, but several months later, lo and behold, Covid hit and our economy was sent into a recession. (Some now believe that the recession commenced in February 2020, before the worst of Covid in the US, but Covid was a factor even so). Therefore, once again, the inverted yield curve correctly predicted the current Recession, right?


Not So Fast

I find it difficult to believe that investors in US Treasury Securities collectively or anyone else could have predicted that a global pandemic was about to hit that would cause the forced shutdown of major world economies. There were many other factors involved in the inversion of the yield curve a year ago, not the least of which were supply/demand issues of different maturities along the yield curve. One could say that the economic expansion of a year ago was long in the tooth and a slowdown was bound to happen sooner or later. But I don’t believe that last year’s inversion correctly predicted the Covid shutdown. If it had, then I believe the magnitude of the inversion would have been much greater.

Gold Is Up

Now we have the price of gold up 25% since pre-Covid. The spot price of Silver is up by about 40% over the same period. This is the strongest rally in precious metal prices in years. Precious metals are said to be a predictor of upcoming inflation. Does this rally in their prices mean that inflation is back after having been dormant for many years?

Money Supply Expansion

Investors have been buying gold (and silver) in response to the huge expansion of the US money supply during the Covid period. According to the Federal Reserve Bank of St. Louis, the M2 money supply has increased by about $2.8 Trillion or 18% since pre-Covid and now sits at about $18.4 Trillion at last reading. At the same time, due to supply chain issues with grocery/food and other products, there are shortages which may or may not turn out to have been temporary. More money chasing fewer goods means what? Higher prices for those goods, or so says traditional economic teaching. If you believe there is any permanence to the Covid economy, especially if you believe that supply chain issues economy-wide are more permanent than not, then the stage is indeed set for higher inflation.

Investor Psychology

I read the increase in the price of precious metals including gold and silver not so much as a predictor of things to come but a hedge against inflation if the data materializes as such. It is always a good idea for investors to have a portion of their money invested in alternative asset classes such as precious metals, as such investments balance out returns and help make the portfolio look like what happens in the general economy. Real estate is another such alternative asset class. In addition to the hedge concept, perhaps investors are noticing, as they sit at home while working on Zoom calls, that they have neglected the metals class for may years because its returns have underperformed, and so now they are rebalancing their portfolios to move a small percentage out of stocks and bonds and into the metals. Even a small percentage of rebalancing could result in a relatively large movement of the needle with respect to the price of gold.


I believe that we could see higher inflation but that the economy will recover soon enough such that we will not see Argentine or Venezuela-level inflation. Inflation in the US is below 1% at last report, and the Fed targets 2%, so I am not panicking yet. That said, as time passes and inflation rates do turn out higher, then it’s not so much that the US economy can’t handle slightly higher inflation, it’s that investors may overreact and think the world is about to end. As always, stay calm and don’t panic. If it makes you feel better, go ahead and look to buy some gold in some capacity, whether it is through individual gold coins or through gold mining stocks or through a gold ETF such as GLD. However, don’t bet the farm that inflation will come roaring back. It will take a long time to sort through the Covid and (hopefully) post-Covid economy. Speculating that inflation and gold prices will go up is just that: speculation.

The Almighty Dollar

I recently listened to a portion of The Glen Beck show on AM Radio. During this portion, Beck opined that the days of the US dollar’s status as World Reserve Currency are coming to an end, which will lead to soaring inflation in the US since products (such as oil) will no longer be paid for in Dollars but in some other (unnamed) security or basket of securities. Beck says the reason for the demise of the Dollar is the US Federal Reserve and their policies for the last several years, especially with the explosion in Fed activity since the onset of Covid. Citizens can protect themselves, says Beck, by buying Gold. By the way, Beck is compensated by a Gold brokerage company. Beck is not alone in this belief: it has been out there since the US removed itself from the Gold standard nearly 50 years ago and it gained new traction 12 years ago during the last Financial Crisis.

Supporting Evidence

There is some evidence to support this thought. Since before Covid, the US Dollar Index has fallen about 6-7% and the price of Gold has risen about 25%. Investors in the Futures of these assets believe that higher inflation as a result of the recent expansion of the US money supply is in the offing and that the US Federal Reserve’s target of 2% expected inflation is too low. A 6% decline in the value of the Dollar is equivalent to 6% inflation of the cost of goods purchased using other currencies. Anecdotally, prices in the grocery stores are up as are prices in restaurants, whether to eat in or to take out. Of course, these are unusual times, which could explain these price increases. Dormant for many years, inflation may be making a comeback, which could cause the Fed to raise interest rates with the thought that a rate increase could address higher inflation. The point is, there may be some supporting evidence to this “End of the Dollar World” theory.

The Problem

My problem with the theory is and always has been, What will replace the US dollar as the Reserve Currency? The Euro is the second most-used currency in the world, but the Euro zone has its own issues with Covid and with lagging economic growth. In addition, the Euro has only been in existence for 21 years, so now is not the time to switch the majority of global payments to such a young currency during such uncertain economic times. What about the Chinese Yuan? No way the Yuan, controlled by the Chinese Communist Party will become the World Reserve Currency, no matter how large the Chinese economy continues to grow. In short, there are no other currencies currently circulating in the world that can come close to matching the value and the stability inherent in the US dollar, even after a 6% decline in the Dollar Index.


One interesting theory is that the Dollar will be replaced by Gold as the Reserve currency. That would mean the the US would have to use Dollars to buy Gold in order to pay for oil, among other products. Alternatively, the US could re-adopt the Gold Standard for its currency that was jettisoned during the Nixon administration. President Trump’s latest nominee to the Federal Reserve Board, Judy Shelton, is an advocate of the return of the Gold Standard, and her nomination is considered controversial as a result. My take: A change from the Dollar to Gold as World Reserve Currency would only widen the gulf between the haves and the have-nots during a time when social engineering thought is heading in the opposite direction. Keeping the Dollar as the reserve currency, with all that it entails, still helps with the issue of wealth and income inequality, at least more so than would a Gold standard. While I believe there are some arguments that have merit with respect to the US returning to the Gold standard, especially that it helps to maintain fiscal and monetary discipline, perhaps at the cost of limiting economic growth, I don’t believe that there is the political consensus here in the US to return to the Gold standard. If Beck and others who fear Weimar- or Argentina-like inflation turn out to be right, then perhaps the consensus will shift. A 6% decline in the Dollar Index is not enough to tip the scale.


Like it or not, I don’t side with Beck and the others who the US economy is about to collapse due to runaway inflation. Perhaps higher than 2%, but not runaway inflation. I see the Dollar remaining as the World Reserve currency because there are no good alternatives out there. Everybody everywhere, not just the US, is affected by Covid and the economic shutdown. Vaccine or not, Covid will be with us for many months or years. Despite its higher case count, the US economy remains the world’s strongest, and the US is best positioned to lead the world to economic recovery. As I believe World Reserve Currency status is a proxy for World Economic leadership, so to do I believe that the crown will continue to remain on the head of the USA. The almighty Dollar will remain almighty.


Someone recently told me that things in their life were discombobulated. That is a common word that means out of sorts. That got me to thinking, what is the opposite of discombobulated? Is there such a word as combobulated, and what does it mean?


I looked it up and it turns out that combobulate is a word, and that its meaning is relevant to how one might build an investment portfolio, particularly during this Covid period. “Combobulate” means to put together in a mysterious manner, or to bring something out of a state of confusion or disarray. Doesn’t it seem that we are constantly in a state of confusion or disarray, perhaps more so right now with Covid, a looming Presidential election, international economic uncertainty, and any number of other issues. Among all of this, we are expected to put together a financial plan and/or to stick to a plan that we previously put together. How do we do that amid all that is uncertain? We combobulate it! Despite the state of confusion and disarray out there, we go to work every day (or perhaps today we log into a video conference); we invest our savings according to some formula that works for us; we carry on with our lives as best as we can.


While I am making the practice of Financial Planning sound like wizardry or alchemy, it really isn’t, or at least it doesn’t have to be. We are not mysteriously creating gold out of common elements. Instead, it is the “Planning” aspect that is important. We design a financial plan that will sail despite the roughness of the seas. In order to do this, we set objectives that should be at least somewhat long-term. We believe that the periods of rough seas will likely be followed by calmer periods because they have in the past. If we have a goal or objective and a plan that we believe should get us there, we can rise above the confusion and disarray (especially that which is propagated by the financial and general news media) and achieve our goal. This especially if we believe the future will be anything like the past.


If you want to feel like a wizard, if not actually become a wizard, just think of yourself as such as you combobulate your financial life plan and your investment portfolio. Even if you do something simple like go to work, store your extra scraps into a retirement account, and allocate those scraps according to some stocks vs. bonds formula that works for you, then you should feel like you have achieved some sort of wizard status because you have done so out of a state of confusion and disarray. Or, if you don’t feel too wizard-like and unable to combobulate yourself, please contact me for some help!

Saratoga As Never Before

Saratoga Race Track opened on July 16 to thoroughbred horse racing with no fans in attendance. Only a limited number of horse trainers and owners are permitted to be at The Spa to watch their horses. The verdict so far: A huge success!

Big Fan

I am a big fan of the Saratoga thoroughbred meet, which this year spans 8 weeks, and I have written something about it in past blog posts. My past posts have been about the mathematics of odds and gambling and how investing in the stock market is different than gambling at the horse track. The horse track should be viewed as entertainment, as opposed to a place to earn a living, and the money you gamble should be a part of your entertainment budget that you are willing to lose. Unless you work in the horse racing industry, if you view horse racing as something more than just entertainment, then perhaps you have a problem.

Handle Up

That said, I am interested in the meet’s economics, and the news here is very good despite the “no fans” policy. The New York Racing Association (NYRA), which operates Saratoga, Belmont and Aqueduct, reports that the Week 1 handle was up about 9% this year over last year. More recently, last Saturday August 1’s handle was up about 13% over last year’s record handle, Saturday having been Whitney day with several graded-stakes races. It’s good for the horse racing industry when the handle is up, even though it may not be so good for those who have a gambling problem, so a rising handle is good news on the whole.

More Accessible

How is it that the handle (the total amount of money that people bet on a given race or a given day) can be up when nobody can go to the track? The answer is increased accessibility. As the in-person experience has become unaccessible, other ways to experience the Saratoga meet have become more accessible. First is online betting. As the array of online stock trading platforms have transformed the investment business, so too has online horse betting transformed its own industry. Online betting on horses now seems to be hitting a critical mass as people seek an entertainment outlet as they work at home.

Increased TV Coverage

The second factor that is spurring growth is increased live TV coverage. Specifically, Fox Sports is now airing the entire Saratoga card every day live, with its coverage devoted exclusively to Saratoga. Coverage in prior years was either not live or not of the complete card or not exclusively Saratoga, and its objective was to cause people to want to go to the track in person rather than to bet on the races online. The exclusive live full-card TV coverage of each Saratoga race makes the entire meet more accessible to the betting public, which results in a higher handle.

Not Everybody Wins

Just because the handle is larger doesn’t mean that everybody wins in this newly-emerging economic model for the Saratoga meet. For instance, people are not buying food, drinks, or souvenirs while at the track, and hotels and those who typically rent out their houses to horse people during the meet aren’t doing so this year. But Covid is still with us now and we hope it won’t be next year or the year after. Let’s hope that the beneficiaries of the in-person racing experience will bounce back when (not if) fans are allowed back to the track.

Good News Among Bad

The good news about increased handle comes at a time when the industry can really use it. Headlines in the past few years pre-Covid in the industry have been about the deaths of horses and the closing of tracks amid fewer horses racing. These issues are also still with us. Though they look big and strong, thoroughbred horses have some very fragile parts, and they are inbred. Trainers who bend the rules by using performance-enhancing substances also don’t help the image of the sport. But the horses themselves are beautiful and watching them race has aesthetic appeal. Let’s hope the increased handle will somehow be used to address some of the problems that have beset the horse racing industry in recent years.


I believe the cat is out of the bag with respect to more accessible online betting and more complete and exclusive coverage of the Saratoga meet. Fans will eventually return in person to the track. When they do, let’s hope that they add to the track handle and the overall track economics without cannibalizing any of the handle through online sources. And let’s hope that this all spurs improvements in horse (and jockey) safety and more money invested in the beautiful thoroughbred horses!