“Federal Reserve Chairman Jerome Powell said on Tuesday that the economy is both healthy enough and in need of tighter monetary policy.”

— Somebody on CNN this afternoon

Dear Reader,

Today’s missive seems like a public service announcement. If you are in a mortgage, speculating in the stock market, trying to buy a car or put kids through unnecessarily expensive schools, this PSA is for you.

In 1962, physicist and philosopher Thomas Kuhn introduced the term “paradigm shift” — referring to advances in science that completely changed the way researchers viewed the world.

These shifts all follow a set pattern. First, there is accepted truth. For instance, people saw the sun, moon and stars cross the sky and assumed it meant everything revolved around the Earth.

Then along comes a technology that allows you to study something in a new way — say, for instance, a telescope. Researchers start seeing things that don’t fit the established paradigm, inspiring some brave souls to declare the current thinking is wrong. And while there will be some pushback, further research may indeed prove the radical conclusion is correct… which establishes a new paradigm.

Hedge fund manager Ray Dalio has applied this concept to the financial markets. He says investors have a tendency to get locked into established paradigms — believing, for instance, that stocks always go up. Or that companies — even countries — can thrive while going deeper and deeper into debt.

Then something happens to shatter that paradigm… like a globe-spanning hedge fund declaring bankruptcy. It leads to a period of market chaos as investors struggle to identify and understand the new paradigm.

And we could soon be witnessing one in real time.

For the past 12 years, Americans have enjoyed some of the lowest interest rates in decades.

Now the Fed is telegraphing they are going to raise rates going forward. Maybe in March. Maybe a couple of times more in 2022.

What most people don’t seem to appreciate is the tidal waves this new initiative will create.

They’ll tell you to look at the last time the Fed decided to raise rates, in 2018. Those hikes didn’t lead to disaster, they’ll say with a smug grin. When do the Fed governors earn their bona fides?

One wonders, did the Fed act too late?

Either way, the policymakers had to abort their spree due to the pandemic. But more importantly, the last round of rate hikes was in response to growing asset bubbles and the threat of inflation.

This time, however, the Fed is facing a monetary inflation crisis. A real one. Call it supply chain issues. Call it inflated government spending. Call it what you want.

“Don’t let inflation get started,” former Fed Chair Paul Volcker warned us once, “because once it gets some momentum, it’s very difficult to deal with.”

Longtime readers will recall that his “brave” rate hikes were simply his only choice. He had to chase the rate up to where investors would actually buy in. You can see his spike in 1980. We don’t want that mess again, do we?

There might not be any choice. The Fed must try to restrain, contain, explain the purchasing power of the dollar in the face of emergency spending because of the pandemic or other crises, yada, yada. Today’s investors have forgotten what these kinds of last-ditch efforts mean… but they’re about to find out in the hardest way possible.

What can you do? Hold your stocks, and do any financing you want to do — house, car, second property, business property, tuition, health insurance — now.

Because once the paradigm shift starts, it will be too late.

We could just say, too, that this is a hunch… a trader’s call… a black cat in the road. I don’t believe we can run interest rates at 0 forever and not worry about inflation or miscues in the market.

Follow your bliss,

Addison Wiggin
Founder, The Financial Reserve