Why You Shouldn’t Worry About Fed Rate Hikes

Chris: You’re a prolific writer. You speak at conferences. You’ve spoken at the Fed. What messages have you been delivering since you left Wall Street?

Nomi Prins: I’ve been delivering messages in two parts.

One was through the financial crisis. When I first left Wall Street I wrote a book called Other People’s Money: The Corporate Mugging of America.

That’s about what was going on in Wall Street when I left… how it connected to some of the biggest scandals at the time – Enron in the energy sector, Wilcom in the communications sector – and how these things connected and what they meant.

It was also about the mechanics of Wall Street… how they rejiggered things and made them look better than they were. This impacted real people and the real economy.

I wrote about all the elements of that as they unfolded – as certain regulations were put out – which didn’t necessarily get at the heart of the matter.

Certain people went to jail, but not the Wall Street CEOs. I talked a lot about that in Other People’s Money.

I continued to write a couple of other books until I got to the financial crisis, at which point all hell broke loose.

We saw all the bailouts. We saw the Federal Reserve go into overdrive with what I call their subsidies of these major banks, which still exist today.

A lot of the stories people were telling about what really happened were just so far from the truth. People thought, “Oh, it’s because a bunch of people took out subprime mortgages and couldn’t pay them.”

That’s why I wrote a book at the time, called It Takes a Pillage. That pillage was the government-enabled transfer of wealth due to Wall Street and the Federal Reserve and how that impacted people.

And that has still gone on. The second phase started with what the Fed and other central banks did in the wake of the financial crisis.

That happened for years in different ways then came to a head as the pandemic hit in 2020. This was also something that I’d written about in a book called All The President’s Bankers.

I went back to see how, historically, the relationships of bankers’ and politicians’ families have impacted our lives in ways that we don’t think about.

It really started in the late 1800s and evolved through the Obama administration and beyond.

And central banks are still doing this. The Fed was created that way. Now they’re all together.

I call it collusion. And its impact is even greater.

So I wrote a book called Collusion: How Central Bankers Raid The World.

Central Bankers began to rig the markets. Before that, it was just Wall Street’s domain.

Then we had the pandemic. And it indicated that all this is not only still going on – but it’s getting a booster shot.

In terms of how much money central banks can fabricate… where it flows… and how it flows, retail investors don’t necessarily see the big picture.

They tend to look at what’s in the media headlines, and only see mini explanations of what’s going on at any given moment.

I like to step back and look at the big picture – as well as what’s going on in the individual moments.

I like to go around the world as I’ve always done to see what the trends are… how people are being impacted… where there’s value for retail in terms of investment opportunities.

Chris: That’s why we’re all very happy to have you at Legacy, because you offer a perspective that very few people have.

You’ve been inside Wall Street. You’ve been writing about how Wall Street and central banks relate to each other. But we’re in a moment now where everyone is really thinking about central bank policy.

I’ve been following markets for about 20 years. In my experience, central banks were always a big deal… at least since days of Alan Greenspan, the superstar of central bankers. But today it seems like they’re the only game in town.

There was the 2008 crisis where they really stepped in and provided a lot of liquidity. But that was dwarfed by the pandemic response, as you mentioned.

When central bankers now start to talk about withdrawing that liquidity, we get big panics in the market like we’re seeing right now – there’s the sell-off in the Nasdaq, the sell-off in stocks in general, cryptos going down…

And it all seems to be tied to what Jay Powell and the Fed are talking about.

How do you understand where we are right now, and the role that central banks play across markets and economies?

Nomi: That’s an excellent question. That history is important.

You experienced what I did. Twenty years ago, when Alan Greenspan was king, it was like Wall Street was looking at what he was going to say.

Some business news outlets wrote about it. But you didn’t have this instantaneous proliferation of chatter about what’s going to happen.

To an extent, what we’re seeing right now is the anxiety that comes from thinking all this cheap money might be withdrawn.

This will only be a minor adjustment to what central banks have now been doing to create money for liquidity.

Let’s say the Federal Reserve raises rates – like they’ve recently indicated – three or four times this year, by probably 25 basis points each time… then a bit in 2023 and 2024… to get to 2% on the front end of the Federal Reserve’s funds rate.

That’s a minor adjustment in the scheme of global money.

Even if they do that – I’ll get to the “if” in a second – global money is not ready to raise rates by anything like that.

Big players like the European Central Bank and the Bank of Japan won’t do that. In fact, the Bank of Japan signaled they’re going to do more quantitative easing, as the Fed said they might reign it back.

The People’s Bank of China just reduced the cost of money, in the wake of the Fed saying they might increase it.

If we look again at this global picture, it’s not that much change.

What the markets are panicking about is the fact that change is coming – as opposed to what that change will actually entail.

We have inflated markets because this money was manufactured.

That’s a fact. And it’s not going away.

There are also companies that are way overvalued. And there are companies that are undervalued relative to their fundamental metrics.

It’s because of the distortion caused by so much money having flushed into the markets. That’s also a condition that’s not going away even though there’s so much uncertainty right now.

So the net is that the markets aren’t a perfect reflection today. And they won’t be until they have corrected to real values again.

They’re a reflection of so many other things: cheap money, the expectation of cheap money, and the knowledge that if things really go haywire it’ll come back in more abundance.

We have seen that repeatedly, and now with supply chain disruptions and inflation going up.

I think the uncertainty will continue, to an extent.

That’s until the Fed really does what it says it’s going to do… or does less in terms of rate hikes than what it has projected. Which is what I think will happen in the next year or so.

Whatever the case, we will see choppiness because of it. But we’re also going to see periods of more calm and consolidation.

There will be continuing uptrends, particularly in the sectors that have been beaten down the most, and in the names that have the most potential for future rises in their share prices.

Chris: I remember Jay Powell trying to raise rates toward the end of 2018. There was a drop of roughly 20% on the S&P 500. Suddenly he had a quick change of mind.

So I’m with you on that. I think the Fed is less likely to follow through than a lot of people are thinking.

But the bears may say, “In 2018, you didn’t have 7% inflation in the U.S. Now the Fed is cornered. It’s trying to fight on two flanks. It’s got to fight against inflation – while trying to keep markets buoyant.”

How do you reflect on that? What’s your opinion of the big debate over inflation? Some people say it’s driven by demand and money. Some people say it’s down to the supply chain crisis.

Where do you come down on that? How do you think it influences what the Fed does?

Nomi: I’ve always said we’ve had asset price inflation – since the Fed opened the floodgates, along with other central banks.

And we’ve seen this uptrend, even with those wobbles in 2018. There was another one in 2016. The Fed raised rates by 25 basis points at the end of 2015. They forecast three or four to come in 2016.

They did one – because the markets completely lost it in January 2016.

You’re right, though. It is different right now, because there’s a backdrop of higher price inflation… in commodities, in building materials, in food.

All those figures are at historic highs. That’s a reality as well. And there are multiple reasons for that.

We talk about supply-side disruptions. It’s a nice economic term. But the reality is, things have slowed down. Orders were lower.

And now companies are trying to decide not only how to catch up… but if this extra demand based on that reduced supply is going to stick around.

So we might have a supply side disruption due to companies not wanting to go all out to meet the demand. They might have concerns, and that might cause the rollout to be a little choppier.

I think that will continue. I don’t think that has anything to do with what the Fed does or doesn’t do. There are different kinds of inflation, and we tend to lump them all together.

For example, I expect that prices and commodities will be inflated, because we are going to be building things.

That’s a trend that has come out of this distortion – in sustainable energy… in new energy… in communication technology… in infrastructure building… technologically, physically, and in the blend of both.

These things are going to continue to increase demand, which will increase prices.

The inflation bump – from the lows in the wake of the pandemic to about a year later – is still working its way through the market.

This April, for example, we’re going to get a different indicator in terms of how things have changed year-on-year, relative to March 2021’s prices.

These were significantly higher than the figures from March 2020, when economies were completely shut down.

That’s why I think we’ll see a bit of this uncertainty start to die down, even with inflationary acceleration.

Prices can still go up. But the speed they go up will die down, even with all these other factors in play.

Chris: Is that the base effect? Are we just measuring from a very low base, so it seems high?

Nomi: That is a part of it. And the acceleration above that is an example of the distortions I’m talking about.

Think of the extra speed the stock market rose relative to the real economy… Or the extra speed at which the real economy shut down. Because people weren’t getting paid, there was less money at that level.

This meant that the cost of items that are required rose higher. All these distortions have been magnified.

I look at a lot of stuff like a math problem. That’s not to say that I don’t also look on the ground at what’s happening, listen to conversations in bars between Uber drivers, etc.

There’s a lot of information that says more about what’s happening than those bigger CPI (Consumer Price Index) or PPI (Producer Price Index) types of figures.

So yes, there’s a base. There’s also psychology in any of the markets.

There’s also the speed of algorithms that large companies have. When they buy and sell, they get to certain up levels or down levels, and exacerbate either side.

Usually the sell is faster than the buy. So it will trend up and dive down.

That’s another pattern that I examine, because we are people – and people build computer algorithms, and all these things mix in a market, along with the metrics of base math.

Chris: This has been your career. It’s been the area of study that you’ve pursued. But a lot of people are confused.

They do see this distortion. It’s a very good word. They don’t know how to proceed, because a lot of this stuff seems like it’s coming at them from all sides.

I know you’ve laid out some themes and sectors that you think are the ones to focus on.

Maybe we could go through those? A lot of this macro stuff can seem very academic and confusing to some people.

How can folks navigate through this distortion that you’re describing?

Nomi: I look at what’s going to be our future. Where are the areas that money is flowing into? Where will it stick around and grow?

And what areas of the economy are changing as a result of this distortion that aren’t going back… even if share prices in those areas dip periodically with all the uncertainty and volatility in the big picture?

New energy is one of those sectors. That means developing sustainable, renewable energy. It means converting traditional oil and old energy to more renewable and efficient states. And it means doing it in a way that reduces carbon footprints and abides by emissions standards.

I’m not saying that we’re not doing old… only that we’re doing new.

But there’s a migration from even the big oil companies to more renewable, efficient, economic, and sustainable methods of energy.

Whether it’s solar, wind, or hydro… whether it’s making any kind of current fuel activity cleaner… these are areas that are not going to go away.

They’re in motion, and they’re going to continue. And the companies involved will receive money from Wall Street and retail investors, as well as from private companies and governments. That’s one area that I don’t see going away. I only see it growing.

The other area is infrastructure. That’s the catch-all name for all five of my investment areas.

We’re building more efficient power.

We’re building tighter communications.

We’re building better means of transmitting data.

We’re building better virtual means of representing healthcare through engineering and entertainment.

Governments around the world are seeding more now than ever before in anything to do with infrastructure.

Private companies are also jumping. That’ll have an upside for investors. Particularly now, as we recognize that we have been in a distortion.

It’s there, it’s permanent, but we are moving towards something new. And that reaches across all the sectors I look at.

Another sector that I mentioned is the metaverse and the virtual space, and artificial intelligence. That’s not just in gaming and video applications, but in all the technological infrastructure that connects us.

Then there’s new money. New money encompasses blockchain technology. Blockchain won’t just be used in money, but in general decentralized financial payments and loans, as well as the cryptocurrency market.

It will act as a bridge between the metaverse and the real world. It will also act as an alternative to the current monetary system, which has so distorted this world.

Across all those is my fifth investment theme, transformative technology.

Technology will be a piece of all these areas. And where I see blends of these five areas of new energy, transformative technology, infrastructure, meta-reality, and new money is where we’ll see the most upside.

When we look for companies to suggest specifically, we want to see where they are on that spectrum. And if they have a lot of overlap, that’s even better.

Chris: It sounds like you are quite bullish. Even though you’ve come through the financial crisis… You’ve seen how Wall Street can rig the game in its favor… You’ve seen how central banks can distort economies…

But coming through all that, you seem to have quite a bullish roadmap. You’re not telling me that you think people should buy a lot of gold or stock up on canned goods.

You seem to be looking through these distortions into the future, to find out where all that cheap money is going to flow. Is that a good way of representing it?

Nomi: Yes. In the past, I’ve looked at periods of time when we were going to have an acute financial crisis.

For example, I mapped out how and why the 2008 crisis would happen. Unfortunately, that’s what occurred.

In Other People’s Money, I talked about the credit markets and toxic assets several years before they became a problem.

So I recognize that there can be crisis periods.

But what I’ve also seen – what we’ve all seen – is the immensity of subsidies to the markets that central banks collectively can and will do when there’s a necessity.

And that’s something that the bigger investors, the bigger companies, Wall Street, the hedge funds… that whole community recognizes.

Yes, they will sell when there’s a market dip. They will look at corrections. And they will figure out timing, based on their individual models.

But when we collectively come into the markets and look at the availability of this cheap money and the progress in certain areas – not the whole market, but the progress in certain new sectors that have emerged out of this period – I do feel that there’s a lot to be bullish about.

That is not to say there won’t be volatility. Like I mentioned before, we’re in a choppy period.

There’s a lot of noise in the media. Everybody has a different opinion. And that’s going to create wobbles and accelerated down movements.

Ultimately, we have these erratic, uncertain periods. What’s going on, and the parameters that affect what’s going on, really haven’t changed that much.

Even if some of the prices in the market have been inflated because of central bank policy, we are where we are.

And Wall Street doesn’t like to lose money. It can make money out of shorting the market.

Asset managers don’t like to lose money.

Jerome Powell – who has millions of dollars of his own money tied up with Black Rock and Goldman Sachs – doesn’t want to lose money.

You put all of that together, and I do think there’s a lot of potential there.

We’re focused on the names and sectors that’ll benefit from that overall trend – regardless of the parameters affecting it, right or wrong, good or bad.

Chris: It’s a good way of looking at it. Often it’s a lot easier to be bearish than bullish. It’s a bit of a trap sometimes.

You can easily get bearish and never come out of that bear cave.

I know you’re going to be writing a lot about these themes in Inside Wall Street with Nomi Prins, your new e-letter. And you have a new paid advisory called The Distortion Report.

For folks who haven’t subscribed yet, do you have a basic recommendation that you might be able to pass along?

It doesn’t even have to be a stock. It could be an ETF or even just an idea about how people should position themselves for the future.

Nomi: I do cover that in Inside Wall Street. In the paid subscription we take deeper dives on specific trade ideas, with a core model portfolio that represents the best possible upside in all these sectors.

Going back to the big idea, one thing that we should be looking at is copper.

It’s an underappreciated metal, relative to gold and silver – which I also think should be part of portfolios as an anchor, no matter what happens. I think that’s important.

But I also look at the use value of copper. Copper will be used in a lot of development in those sectors I was talking about… in the new energy sector, the communications sector, and infrastructure.

These three sectors merge with the metaverse and the speed and efficiency of electronics. And that merges with crypto.

It’s something that I think will have upside value for all these reasons.

Copper is a way to put five fingers into these five sectors through one type of investment.

It’s the kind of thing we look at. I have a fantastic team here working on all the analytics and charts. I do believe in pictures as well as words.

Even though I love writing, I love math and charts as well. They show how distortion has pushed us to where we are today, and where we can go from here.

Chris: Nomi, thanks for that. It’s been a fascinating introduction to you, and how you’re thinking about markets and building wealth.

Copper has certainly had a strong run. I know it’s integral to a range of technology, and as you say, infrastructure. That’s a very interesting way to look at it. So thanks for that.

I hope we can catch up again soon and hear more from you when you have more big ideas over at The Distortion Report.

Nomi: Thank you so much. I look forward to it.