The study found that 80% of people will follow the bad order, even when it seems obvious that the order should not be followed. Milgram’s conclusion was that people will follow an authority figure’s commands when that person’s authority is seen as legitimate. This was true even when it meant torturing another human being. Milgram discovered that our culture socializes individuals to obey certain authority figures, such as police officers, teachers, and parents. I believe our financial culture is no different. Instead of following the orders of police officers, teachers, and parents, market participants have virtually all followed the lead of Wall Street investment banks. “Always stay invested,” and “you can’t time the market” are two of the most commonly used phrases in financial advisory. These phrases get applied to their “60-40 model,” Wall Street's prescription on how to keep us all invested. Everyone knows these mantras and despite obvious evidence to the contrary when these orders are wrong, four out of five investors blindly follow, unable to critically think on their own. Why? Because investing is confusing and Wall Street advice has been viewed as “legitimate.” It helps to understand the incentives and the “why” behind Wall Street advice. Once we conclude, as Warren Buffett recently pointed out, that the stock market has become a giant casino, we can then recognize that “staying invested” simply allows the casino operators to keep taking the “vigorish,” the transaction fees they charge for playing the game. The casino operators in this case being Wall Street who earn trading fees and assets under management fees, by keeping us invested and in the game. The more hands we play and the longer we stay in the casino, the more “juice” Wall Street collects. If this sounds cynical, then consider the most well promoted mantra on Wall Street for the last 15 years: “Don’t fight the Fed.” This is good wisdom, and why the stock market casino is a great place to be when the Federal Reserve keeps interest rates low and is supporting the markets with liquidity through their bond purchases. It’s also a good idea to not fight the Fed when they are raising interest rates, since when that happens, stocks and bonds fall. In these times staying “uninvested” is a far better option. The bad news for Wall Street is that getting “uninvested” doesn't fit their narrative. If we all leave the casino and take our chips and go home, then Wall Street will make less fees, and why, despite going against the number one wisdom in all investing of not fighting the Fed, Wall Street gives a bad order and insists that investors should “stay invested.” “Don’t fight the Fed.” That is unless what the central bank is promising doesn’t fit the narrative. When this happens there’s only one thing to do if you are Wall Street, you gotta go against the flow. This is what’s happening in our markets right now. The Federal Reserve is promising to take the overnight lending rate above 5.25% next year. They are also promising to leave it at this level throughout all of ‘23. Wall Street disagrees. The Street has a different terminal rate in mind and predicts a final fed funds rate closer to 4.5%. If the Fed has the courage to follow through, we can expect a much lower S&P 500 at the end of ‘23. Wall Street is telling us that the Fed is wrong, and why they believe equity markets will be higher at the end of next year. Somebody is wrong. Who are you going to listen to is the question? Let’s not forget the Fed has not established a great track record for following through. One year ago, the Federal Reserve was promising that inflation was “transitory.” Our central bankers were so certain that inflation was going away that their forward-looking December ‘21 “dot-plot,” which predicted the likely range of where the fed funds rate will be down the road, called for a median interest rate of less than 1% at the end of ‘22.² Worse still, the Federal Reserve believed that it wouldn't be until 2025 that the fed funds rate would finally rise to the 2.5% level. It was this certainty that kept the Fed money printers brrrrrr’ing throughout all of ‘21 as they kept interest rates pinned at 0%, expanded their balance sheet to $9 trillion, and continued buying hundreds of billions of mortgage backed securities. The Dot-Plot published by the Federal Reserve on December 15, 2021: Instead of being under 1% as the Fed predicted one year ago, the overnight interest rate today stands at 4.5%, the highest it’s stood since 2007.³ This past year has turned out to be a colossal error by the Fed. The mistake has cost most investors dearly. As of now, this year is the worst year for stocks and bonds since the year 1969.⁴ Year to date the S&P 500 is down more than 20%,⁵ the Nasdaq is down over 33%, and the aggregate bond index is down over 13%.⁶ Of course, with these muted inflation expectations came Wall Street predictions. Every year at this time the investment banks come out with their predictions on what is coming over the next twelve months and where the S&P 500 will be one year ahead. It won’t surprise you that these predictions are always bullish. Last year ended with the S&P 500 at 4800 points. Wall Street believed then we would see an average gain of about 7% this past year. The median prediction was that the S&P would end ‘23 at 5100 points. But what is Wall Street saying about this? While Wall Street was certain the Fed was right last year, they are certain the Fed is wrong this year. It’s why virtually every investment bank is predicting that stocks and bonds will have positive returns by the end of ‘23. The reason for investment optimism from Wall Street this year is because they are saying that the Federal Reserve is wrong and they will soon stop hiking interest rates. The Street believes our economy will slow down, and, when that occurs, stocks and bonds will continue their inevitable climb higher as the Fed pauses and ultimately lowers interest rates. Are you paying attention? Wall Street is telling investors, "Forget that whole Don't Fight The Fed stuff, now the move is to fight the Fed and stay invested." Perhaps it's time to stop following the bad orders of Wall Street? Last year, Brentwood Research believed the Fed was 100% wrong. We predicted inflation was about to rage, and why we were quite negative on stocks and bonds for ‘22. We anticipated the war in Ukraine, and that if Putin were to invade it would create havoc for inflation. It wasn’t a stretch of thinking. Putin had amassed 100,000 troops outside of Ukraine as early as September 2021. It seemed pretty obvious he was going in. We laid it all out in our special 2/22/22 report which was published in October ‘21. We consider ourselves among the 20% who have the ability to think critically and not follow the bad orders of Wall Street who were agreeing with the bad projections of the Federal Reserve. So, where do we stand today? We at Brentwood Research are once again pessimistic on financial assets for the coming year. Wall Street, in our opinion, is wrong. So too, we believe, is the Federal Reserve. We believe the Fed is running us into a head-on collision with a recession. We agree with Wall Street that they will not be able to keep interest rates as high as they are promising. However, the Fed pivot, in our opinion, will not reflate financial assets as Wall Street is predicting. We believe when the Fed finally caves it will do the opposite and signal the end of the central bank-created bubble. Milgram’s study suggested that only 20% of people have the ability to think critically. Follow us as we attempt to put on our critical thinking hat. Our economy is already in far worse shape than what anyone will admit. Despite the recent Santa Claus rally in equities, the signs are everywhere. U.S. home sales fell 7.7% in November, for a record 10th month in a row of straight declines.⁸ This has occurred because high mortgage rates have pushed buyers out of the market. We’ve also witnessed a dramatic slowdown in the used car markets for the same reasons. Then, of course, there is the issue of the inverted yield curve to consider. Yields across the entire curve are inverted and a warning that a recession is imminent. The 3-month Treasury now pays more than the 2-year treasury, an ominous sign. As we see it, there are only two reasons for the Fed to believe that our economy is doing well. Consumers are still spending, and the jobs market remains “very tight.” What if we were to learn that consumer spending is high because we’re maxing out our credit cards? What if we were to learn that the “tight” labor market was based on a lie? Both, it appears, are true. Credit card balances hit a record $866 billion in November as consumers attempt to battle inflation.⁹ According to TransUnion’s Quarterly Credit Industry Insights Report, bankcard balances rose 19% during the third quarter from a year ago, reaching a record $866 billion. This was driven heavily by a growth in Gen Z and Millennial borrowers whose balances increased 72% and 32%, respectively, according to the report. At the same time, private label total and average credit lines have reached record highs as well. This doesn’t bode well for the consumer in a rising interest rate environment. Far more concerning than credit card balances are the revised jobs numbers that came out of the Philadelphia Federal Reserve this past week.¹⁰ The Philadelphia Fed's report estimated that from March to June of this year, the U.S. only added 10,500 jobs, a glaring difference from the 1,121,500 formerly reported by the Bureau of Labor Statistics (BLS). Or as we like to call them, the "BS" Agency. It turns out the job numbers were completely fabricated. According to Florida Senator, Rick Scott, this was so the Biden administration would look far better than the truth and would win the midterms. He wrote the following in a letter to BLS Commissioner William Beach: For the last two years, we have argued that the Federal Reserve has acted “politically” in an effort to help the progressive agenda of the democratic party. First, we argued they wanted Donald Trump out. Then, once that mission was accomplished, they pumped the economy full of monopoly money to help Biden’s policies appear like they were working. Then, when it became clear how disastrous Biden’s policies were on inflation, the Fed flipped a U-turn to help Biden and squash inflation by raising interest rates at the greatest pace in history so that inflation would be lower heading into midterms. However, it appears the entire charade has been built on a lie by the BLS. Our economy isn’t strong. We didn’t create over 1 million jobs in the second quarter. We only created 10,000! Here’s where we are going with this. If we are correct and the Federal Reserve has manipulated interest rates for the benefit of the Biden administration and based on fake job numbers, our economy is actually in far worse shape than anyone is admitting. It’s why we believe, just as they were a year ago, the Fed is lying to us once again. It’s hard to believe that the Fed sees a strong economy. But the real question is not whether or not the economy will worsen in the coming year. We see that as a fait accompli. The real question is what incentive does the Fed have to pivot when the numbers roll over hard? If you believe they are politically motivated, none. How would pivoting help the Democrats? Keep in mind that the next election is not until ‘24. There’s a good argument that the best strategy for the Democrats would be to let the economy suffer throughout all of ‘23. The Fed could then regain credibility for staying strong, and then position itself to lift the economy out of the doldrums by pivoting in early ‘24. This would occur just in time to help the Dems win the presidential election. Now consider that stocks historically do not bottom until the Federal Reserve has finished hiking rates. We also know that the Fed has never stopped hiking rates until the fed funds rate is higher than CPI. Therefore, the Fed will hike until something breaks. Once that occurs, it won’t be so easy to put humpty dumpty back together again. Now consider the fiscal situation for the coming year. Congress today passed a $1.7 trillion omnibus bill that is over 4000 pages long. It passed because our politicians don’t have the backbone to reign in spending. They wanted to go home early for the holidays. So they passed a bill at the last minute that nobody had read and nobody really knew what was in it, except that it would drive our fiscal deficits even higher. Keep in mind as well that at 5% interest rates, we will be adding hundreds of billions of dollars in debt service payments to our ‘23 budget. Monetary hawkishness, coupled with fiscal pressures, coupled with our declining jobs and housing markets, coupled with lower profit margins for corporations as costs for servicing debt increase into a recession, all spell more pain ahead. Of course, we will not hear much of that from Wall Street. Like the subjects in Milgram’s experiment, 80% of the people will follow the recommendations of Wall Street and "stay invested", even when it seems obvious that it may not be healthy to follow this order. We must point out that while the paper markets got hammered by Wall Street’s bad advice and the Fed’s policy error this year, gold and silver prices have fared much better. One year ago, on December 22nd, the price of silver was $22.78, and the price of gold was $1803 per ounce. Today, silver closed at $23.57, and gold prices at $1792 per ounce. It’s why we offer a different opinion than Wall Street once again. Of course, we are not financial advisors, but for what it's worth, we are getting long-hard assets and staying there. | 