Let’s make a deal…Tariffs fueling the media hype and fooling nearly every economic expert on Wall Street. According to Goldman, Morgan Stanley, UBS, Merril Lynch, etc., etc., “America was headed for a recession.”

What does it mean – General George Patton once said, “If everybody is thinking alike, then somebody isn’t thinking.” The markets are always looking for a reason to move. It could be valuations, earning reports, shift in policy, and often sentiment driven by fear of missing out (FOMO) or plain old fashion fear mongering are just a few examples. It was just over a month ago we saw the media report a false story sending the markets skyrocketing one minute and collapsing the next. After a month of media backfires and lack of basic economic understanding, we are right back where we started. The traditional media like CNN, MSNBC, ABC, CBS, NBC and others have still not figured it out.

Winston Churchill famously said, “Success is not final, failure is not fatal: it is the courage to continue that counts.” “The courage to continue that counts.” Don’t give up on your future because fear mongers scare you out of the markets or stomp on your dreams. Remember you are either a doer or a thinker. And while there will be mistakes it is the lessons learned from doing that fuel the fire of innovation and determination. Sallie Krawcheck once said, “If you’re not making some notable mistakes along the way, you’re certainly not taking enough business and career chances.”

Budget impasse…Republicans are at an impasse as many are hooked on crack just like their Democratic colleagues. Several deficit hawks are holding up the budget as spending has skyrocketed under previous administrations and justified by the Fed artificially keeping rates low, “fear of too big to fail”, and most recently the “pandemic”.

What does it mean – In 2020 we saw the Federal Budget explode due to the Chinese Wuhan Virus also known as COVID.

Congress allocated additional funds that increased the spending in 2020 from roughly $5.3 trillion to over $7.1 trillion. Yet now that we have recovered from the Wuhan virus for nearly three years according to almost all economic data, like Biden, Congress has been missing at the switch for the last three years and allowed the unelected bureaucrats to run wild with the American Taxpayers check book.

In Ecclesiastes (1:9) King Saul said it best, “there is nothing new under the sun”. He pointed out human nature has not changed for over 5,000 years. Today is no exception. As for the American experience, the last 50 years is no different. Take any two-, three-, five- or ten-year period and America continues to expand and grow revenues to the treasury through taxes as consistently as our leaders find more reasons to increase government dependency. As revenue continues to go up, spending on social programs continues to increase at an unsustainable rate, far faster than revenues are growing.

Like a heroin addict, giving an elected or unelected official more supply of the drug they are addicted to, the worse they get. It is why giving needles to drug addicts is destroying California, specifically San Francisco, LA, and other drug sanctuary states and cities. The difference in State capitals and Washington DC the drug of choice is the American Taxpayers ability to put up with their nonsense. Or better said, our willingness to trade our individual liberties and economic and personal freedom for a perceived promise that government will make your life better and cost you nothing. Reality check, your elected officials cannot legislate your happiness or economic security without wealth redistribution. But they can protect the constitution that does protect those rights and your opportunity to pursue your dreams.

While we have let Congress and Presidential administration after Presidential administration circumvent our constitution and Congress through executive orders in the name of expediency and fear mongering, we have allowed them to turn the federal government into a mega charity dolling out the evil of indebted servitude, further tying our children, grandchildren and their grandchildren to the yoke of government. If the taxpayer wanted to donate to a charity or cause that they care about, they can. Yet, somehow Congress has seen fit to fund massive social programs and NGOs turning America into the world’s largest charity without your consent through a budget process that allows most elected leaders to never be held accountable to their actions. It is high time we demand single issue bills for every budget and law. If Congress can name a post office as a single-issue bill, they can certainly write a single bill funding an issue at the taxpayers’ expense. Instead, we take the easy way out by concealing waste, fraud and abuse in bills that are 1,000 pages long that no one is capable of reading or comprehending hours before being forced to vote on it.

This nonsense has led to the massive growth and unbearable burden on taxpayers and massive size of government, while the quality of leadership in government often fails the very people they serve. You get what you vote for. And when you vote for people who pass rules that are for you but not for them, it is a pretty good sign you are going to get hosed. Don’t worry Congress on both sides of the isle will make sure that insider trading for them is legal and justifiable as they “have given up so much to serve.” What BS. They work at the pleasure of the voter.

Fed holds steady…As expected, the Fed held rates steady, but the FOMC meeting marked a notable shift in tone.

What does it mean – Powell underscored the uncertainty surrounding the duration and impact of tariffs, stating, “I don’t think we can say which way this will shake out.” While noting that the labor market remains strong, he pointed to a sharp decline in consumer and business sentiment.

What he really is saying is he is lost, confused, and afraid of the truth. He is frozen, unable to act. Torn between his political leanings and his responsibility to the people. Rudderless at best. He knows he inherited trouble from Ben Bernanke and his term has been a doubling down on stupidity. He is one inch away from his “let them eat cake” moment and does not even realize it.

With nearly $37 trillion in debt and interest payments accounting for nearly 17% of the budget we are now borrowing to just pay the interest alone.

Moody’s downgrades US Debt…What will this cost the American taxpayer as credit risk adds to the cost of borrowing?

What does it mean – We saw an immediate reaction to the mortgage market as the price of loans moved up to 7% immediately following the Moody’s downgrade to U.S. debt. As over $9 trillion is set to come due this year it puts the fed at odds with every American man, woman, child and family that must live within their budget.

This might be the perfect time to doll out a good dose of castor oil and flush out the system. Years of cheap money and lack of oversight and transparency have led to getting exactly what we voted for. A bloated feckless elected legislature.

According to Brian Wesbury of First Trust, over the last 18 years we have created 67% of all dollars in circulation. Meaning that in the prior 230 years, with better understanding of civics and critical thinkers applying a strong adherence to the constitution, Congress was much more responsible creating only 33% of those dollars in circulation during the first 230 years of our nation’s existence.

In an act of desperation, fear and a lack of conviction from Fed Chairman Bernanke and President Bush’s inability to grasp the reaction to the lack of oversight by congress over the Fed and Treasury, we have printed our way to legislative overreach and an out-of-control Federal Reserve.

In 2008 Congress passed and President Bush signed into Law the Emergency Economic Stabilization Act of 2008 that ushered in the ability for the Fed to circumvent Congress and now run deficits and pay out massive amounts of money to banks on their reserves.

Yes, get mad, seek the truth. You are paying the banks over $200 billion a year in interest and will on its way to $300 billion if everything stays the same. All while the banks make record profits. This is not only a bailout but an example of corporate welfare at the expense of free markets, capitalism and you, the taxpayer. This will continue until congress gets some cojones to undo what they passed.

But it even gets better. Due to this program the Federal Reserve that is under the oversight of Congress is losing $billions every year as they are paying out more than they earn on the reserves. Yep. And they won’t even answer questions from Congress on this.  What is even funnier the “smartest people” in the room had to rename what all of us would call loan or IOU. That’s right, when you get caught call it something else or change the definition. The Fed can’t or won’t call it a loan. Yet, when you lose $billions every year who is paying to keep the charade a live and running?

Deferred Asset – Today the Federal Reserve calls the IOU or loan a deferred asset.

What does it mean – The Fed is crazy. And yes, we can all use a great laugh. The word Jujitsu is awesome. I would expect nothing less from the very best bankers who have found a way to legally embezzle nearly 2/3 of their net profits from the American Citizen. Simply put, the Fed creates a “deferred asset,” which is a negative liability whose value is the cumulative value of the shortfall in earnings. Folks, only in government or now in the Fed as Congress has allowed this to happen through lack of oversight and what may be the second worse bill in the history of the American Monetary system to self-regulate and create money from thin air and stick you, the taxpayer with another massive loss so they can fund their pet projects and DEI initiatives throughout the world.

Another perfect example of why we need to audit the Fed and support Clinton’s Reinventing Government (RIGO), continue Obama’s campaign “to cut wasteful spending”, and Trumps DOGE. Three iconic leaders committed to transparency and making our government more accountable, efficient, and committed to rooting out waste, fraud and abuse at every level of our Federal Government.

Prior to passing the Emergency Economic Stabilization Act of 2008, political contributions from Commercial banks totaled just over $20 million to politicians during the 2006 election cycle according to Open Secrets. In the 2008 election cycle those very same banks contributed over $40 million. Today it is over $60 million per election cycle split almost equally between democrats and republicans. Congress, the optics are terrible. For just over $112,000 per member of Congress, it is no wonder this will never get removed from the budget. And the worst thing about this is you are funding the donations that are destroying capital creation and adding to the regulations that create a “moat” around the very largest and most profitable banks. The architect behind many of Obama’s policies was spot on when he famously said, “Never let a good crisis go to waste.” It is one heck of a cozy relationship both Congress and “Too Big to Fail Banks” are enjoying.

Here are the two charts that tell a picture that will bring every American together to end this fiasco.

Above you can clearly see that Fed reserves were a bit less than $1 trillion prior to the passing of the 2008 Emergency Economic Stabilization Act allowing the Federal Reserve to pay its member banks.

As rates went up the amount of reserves to the Fed went up and peaked in 2022/23 when rates peaked at 5.4%. As rates started to come down bank reserves also started to fall off.

A nail in the coffin for Small Banks…The massive printing and bail outs during the “too big to fail” housing crisis resulted in exactly what every free-market economist said was going to happen. What they never saw or refused to believe is that this legislation would shrink the banking sector by nearly 50% and effectively legislate small banks out of existence as the barrier to entry and cost of maintaining compliance, and regulations became too expensive. It forced consolidation and outright closures to many small banks.

What DC forgot was that nearly 70% of real estate development loans are done at the local level through local small and mid-size banks. As for small business loans, small banks originate the majority of small business loans.

It makes sense. The local small bank knows the community and what the actual community can handle and what the borrowers are capable of. For most of us we are just a number as large banks shy away from business lending as it requires work and local knowledge that large banks do not possess.

Since the late 80’s as the Federal Government and lending has seen massive increase in regulations and costs associated with those regulations the big got bigger and we have seen over 72% of the nearly 15,000 plus banking institutions disappear as of the end of 2023. While many are due to mergers, bankers and entrepreneurs face massive expenses and costs when they go to charter a new bank. The increase in regulations, costs to cross borrow from large banks and meeting federal lending requirements put small communities at risk as banks are priced out by regulations. See the below chart.

This has resulted in the true cost of capital going up for businesses and borrowers, suffocating entrepreneurism, less competition and less access to lending and a huge void in lending that has been filled by private credit-cost borrowers much more than it should. All a cost to the economy due to the lack of trust or fear of market corrections.

Let’s say what it is. The Emergency Economic Stabilization Act of 2008 is corporate welfare that has resulted in a slow move towards fewer banks much like what has happened in Europe. Due to Congress and the last few administrations, we are moving our banking system top one that will one day soon resemble the chaos, lack of choice, and the reality of debanking that Europe and Canada are currently experiencing.

This bill may have settled the markets during the 2008 housing correction, but its good short-term intentions have gutted main street, suffocated the creation of capital, increased the cost of borrowing for small businesses, and put another nail in coffin of the small banking sector. It is destroying competition and significantly reducing the much needed capital for the very engine of our economy that hires and creates over 70% of the jobs in America. Regional and small banking is small businesses that leads to big business and economic freedom and the pursuit of every Americans dream.

Let’s roll America!!

Doug De Groote, CFP®, MBA, CTC

Managing Director

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