Central Bank Independence

I would prefer that we not have a central bank. End the Fed. The dollar has lost about 98% of its value since the inception of the Federal Reserve. Central banks are terrible.

But you know what’s worse than a central bank? Having the president set interest rates!

I’m sure everyone here is aware of what Trump has been doing to the Fed:

• Haranguing Powell

• Digging up dirt on governors and threatening to fire them

• Explicitly commenting on interest rates

• Threatening to sue Powell over the Fed building renovations

• Accusing the Fed of political motivations (which actually might be true)

I mean, don’t get me wrong, it’s high time the Fed felt a little stress for its poor performance, but Trump simply wants to install his own people and set rates to practically zero.

The consequences of this?

• Maybe a lot of inflation

• Maybe higher stocks

• Definitely higher gold

• Maybe higher commodity prices

• Maybe a steeper yield curve

All these trades make a lot of sense and are easy to put on. Years ago, during Trump’s first term, I wrote an article in The 10^th Man about how Trump trades are easy and fun. Trump creates a lot of opportunities.

But This Is Bad

Studies have shown that there is a direct inverse correlation between central bank independence and inflation. Inflation is likely to go up. There is even talk about abandoning the 2% target. Not a great time to hold bonds with long maturities! Though the bond market seems to be sleepwalking through all these headlines.

How much culpability does Powell have? Probably a lot. The dude cut rates 100 basis points right before an election into a boiling-hot economy and then refuses to cut them when there are clear signs of weakness. If you read Powell’s Jackson Hole speech, you know that he has his reasons, which mainly center around tariffs, but I don’t think those rate cuts were a coincidence. And from what I hear, it’s kind of an open secret in DC that Powell’s motivations were purely political. Trump is on a 96-city revenge tour, Powell hates him, he hates Powell, and he is not going to stop until he gets seven Trump appointees on the Board of Governors. I’ve been joking for a while now in The Daily Dirtnap that we’re going to get Caligula’s horse in charge of the Fed. We’re getting Caligula’s horse in charge of the BLS!

For a little background, there is no precedent for Trump to fire the head of an independent agency like the Fed. The head of an independent agency can only be removed for cause, and this doesn’t rise to the level of cause. Lisa Cook can be fired for cause, if it can be proven that she engaged in mortgage fraud. Trust me, Team Trump has investigated Powell’s background at this point, and if they had found something, they would have fired him by now. There is a court case called Humphrey’s Executor working its way through the courts that will determine Trump’s ability to remove the head of an independent agency without cause. If the courts rule in Trump’s favor, it’s going to be the Valentine’s Day Massacre at the Fed.

The good news: Gold and stocks will go up. The bad news: so much for the yields on those money market mutual funds. My opinion on all this? Rates are restrictive, slightly, but the economy seems to be doing just fine on restrictive rates. The labor market is weakening a little, but it is important not to panic when the unemployment rate is only freaking 4.2%. The economy can tolerate high rates, and you should always err on the side of higher rates because we have seen the consequences of what happens when you don’t.

And I Feel Fine

Pretend the year is 2000 and gold is trading at $265/ounce. What if I told you back then that we had a president who was:

• Haranguing the Fed Chairman

• Digging up dirt on governors and threatening to fire them

• Explicitly commenting on interest rates

• Threatening to sue the Fed chairman over Fed building renovations

• Accusing the Fed of political motivations

How much gold would you buy?

All roads lead back to gold. It is about $3,400/ounce. It was $1,600/ounce in 2022. It was $1,150/ounce in 2013. It was $700/ounce in 2008. Has there been a bad time to buy? Maybe at the highs in 2011. If you have dollar-cost averaged gold since 2000, you are happier than if you dollar-cost averaged stocks. And yet people turn into panicans if you suggest that they have more than 2% gold in their portfolios.

Well, you know my feeling on this. I think a 20% allocation to gold is entirely appropriate (and not overdoing it). I think a 60% allocation to stocks is way overdoing it. If you’ve read my report on the Awesome Portfolio, we are aligned. By the way, my next book is called The Awesome Portfolio and will be coming out in the fall of 2026.

One last thing: My music career has really taken off lately, and I spent some time two weekends ago crafting the perfect mix. It actually went a bit viral. Go here to listen to “Languorous,” one of the best pieces of music I have ever recorded. Follow me, and leave some likes and comments!

Jared Dillian, MFA