Lyn Alden: Navigating the Conundrum – When Both of the Fed’s Paths Lead to Inflation

Tom welcomes back Lyn Alden, Founder of Lyn Alden Investment Strategy, to the show.



Lyn discusses abundant and scarce things in investing, focusing on the era of fiscal dominance that has led to bonds becoming abundant. This is due to large budget deficits and private debt being transferred to the public sector. The implications include higher average fiscal-driven inflation and potential impact on asset prices and tax receipts.



The Federal Reserve's ability to perfectly tune the economy to avoid recession for the next decade is questioned. In emerging markets, stocks may rise in local currency but decrease in hard money terms during recessions. The U.S., however, is experiencing fiscal dominance where public debt exceeds GDP, making it harder to fight inflation and slow down borrowing. While interest rates can help make a country's currency attractive or reduce borrowing demand, raising interest rates results in ballooning expenses, offsetting disinflationary forces. The commercial real estate sector is heavily impacted, but travel companies, seniors, and wealthy individuals may benefit from higher interest rates.



Lyn discusses the SVB bank crisis in 2023, suggesting that the Fed might prioritize saving banks or the Treasury market over controlling inflation, limiting monetary policy flexibility. The potential outcomes of interest rate cuts include growth and demand for commodities but less effectiveness due to fiscal dominance. She emphasizes energy exposure as a hedge against inflationary pressures.



Investment strategies include owning assets related to dense forms of energy in the energy sector, focusing on demographics, aging workforces, and understanding China's labor supply and demand. Alternative investment portfolios like the permanent portfolio and IV portfolio deviate from the traditional 60-40 stock-bond split by including gold and commodities for diversification.



The development of Bitcoin ETFs is seen as inevitable due to its size and liquidity, but risks include hacks and confiscations. Developed countries generally accept Bitcoin as a store of value while regulating its use as a medium of exchange. The importance of building tools to make Bitcoin more efficient for users is emphasized.



Lyn's book, "Broken Money," discusses global financial system issues, with countries relying on the US dollar facing negative consequences if it devalues or if the US manipulates currencies. Running large structural trade deficits is necessary but comes with negative effects such as decreased export competitiveness and de-industrialization. The shift towards more neutral assets like gold and Bitcoin in response to unreliable US dollars is emphasized, along with considering multiple variables and being data-dependent.



Time Stamp References:0:00 - Introduction0:33 - Bonds, Rates, & Inflation8:42 - Fed and Recessions13:30 - Fiscal Dominance & Stability19:28 - Contrasting the 1940s23:06 - Feds Blinks at Bank Crisis25:54 - Deficits & Debt Rollover29:54 - Rate Cuts & Outcomes31:52 - Easing and Hard Assets33:14 - Energy Exposure?37:40 - Demographics & Demand41:26 - China & Manufacturing44:42 - Labor & Underinvestment47:20 - Skills & Semiconductors50:00 - Portfolio & Reallocating53:20 - Bitcoin ETFs & Impacts?56:06 - Capital Controls & Walls59:23 - Dollar & Broken Money1:03:57 - Wrap Up



Talking Points From This Episode




Fiscal dominance, inflation, and importance of shifting to neutral assets.



Understanding multiple forces in macroeconomics and being data-dependent.



A Shift to Neutral Assets in a World of Fiscal Dominance and Unreliable Currencies




Guest Links:Twitter: https://twitter.com/LynAldenContactWebsite: https://www.lynalden.com/



Lyn Alden is editor and publisher of LynAlden.com, where she has both a subscription and a free financial newsletter. She says, "Her background lies at the intersection of engineering and finance." Her site provides investment research and strategy,