The Civil War Between Wall Street And Main Street

At the December 2023 Federal Reserve meeting, the chairman J. Powell, suggested that there could be rate cuts in 2024. The dot-plot projections reveal three rate cuts for 2024. But the financial market is pricing in as many as six. Some even say that rates will be cut by 150 basis points.

Now, if you don't understand anything I have just said, you likely belong to Main Street. Any Wall Street player would understand what I just said. In fact, it is already old news to them.

Main Street VS Wall Street

The revelation in that Fed meeting confirms what I will term a civil war between Wall Street and Main Street. Let me define the terms.

Wall Street players are people who primarily make money by movements (that is, the ups and downs) of the financial market.

Main Street players are people who produce economically tangible products and services on which the financial markets are based.

Without Main Street, Wall Street is just a casino with nothing tangible behind it. Without Wall Street, Main Street players have no path to getting super rich.

But you must understand something. 89% of the US stock market is owned by 3 companies - BlackRock, Vanguard, and State Street. So, while the financial market is a path to get rewarded for Main Street players, they first make the rich richer.

So, the average Main Street person who breaks in and gets 1% richer, the establishment elites get 10% richer. This is the game.

You must understand this game if you play on Main Street. Many don't and this is why money is a mystery to them. It is why they can't get rich. The more money they get, the more money they lose.

Wall Street is Not as Powerful as You Think

Knowledge of the system is ownership of the system. Don't let anyone tell you that some people are the overlords of the economic system and everyone has to be subject to them. That is not true.

BlackRock, Vanguard, State Street, Berkshire Hathaway, etc., all those companies were not born as giants of the financial market. They all started very little. In fact, they started as underdogs.

Larry Fink, founder of BlackRock, started the company to bounce back from a low point he reached working with his former employer - Blackstone. Jack Bogle, founder of Vanguard, was phased out of leadership in his firm after merging with the wrong people. This was when he started building the Vanguard that we know of today.

You have probably heard the story of Warren Buffett, founder of Berkshire Hathaway. The giants of the financial markets today are not giants by happenstance. It didn't fall on their laps. They certainly had a lot of ups and downs.

I am telling you this to show you that the game is winnable. Wall Street is not as powerful as you think. Things can change so fast that in 10 years, the biggest winners can be nowhere to be found.

So, let's understand what the civil war is about.

The Civil War

After the lockdowns, money got printed that everybody had some but the supply chain had issues. This led to a surge in inflation. There are two ways to bring inflation down...

The first is to fix supply and flood the market so that there are a lot of goods and services chasing after unchanged demand. From a national economic standpoint, this can only be done by government and government agencies. What they can do is give producers and entrepreneurs what they need to supply better.

The second is to kill demand. This is to make people capable of buying less. Demand is lower and supply remains unchanged. The government cannot do this. However, since the money supply is created by the central bank, they can. And they do this in two ways - rate hikes and quantitative tightening.

In 2022, the Fed started doing both. Or at least, they said they started doing both. In 2023 however, evidence points to the fact that the Fed was net QE. Meaning that the Fed added to their balance sheet more than they subtracted from it.

This means that money was added to the total money supply, which would make things worse in the fight against inflation. However high interest rates meant that businesses and individuals could only access credit at a very high rate. This makes profitability difficult for a lot of businesses.

So, here is the disconnect. Inflation is raging. The government doesn't think it can do anything about supply. The Fed is focused on killing demand to bring inflation down (even at the risk of having a recession). The Fed increased the cost of borrowing money which kills demand. But they are still increasing the supply of money which fuels (and surges) demand.

Where is the increased money supply going? Well, it takes a few turns but eventually ends up in Wall Street. However, Main Street keeps seeing high inflation and their demand power weakens.

Now, the Fed has been insistent that bringing inflation down is their primary concern. And they will do all that is necessary to bring inflation down. And their decisions will be based on what they see from the data.

Well, here is what the data says thus far - consumer demand is strong. People are holding up. Unemployment is low. Main Street is holding it together. There is no sign of weakness or recession.

Month-to-month inflation data came down for a bit for 2 months. It remained unchanged in December. And the Fed is already talking about cutting rates and easing financial conditions next year - which happens to be an election year.

Here is the civil war situation. Inflation hurts Main Street and the central bank punished (or tried to punish) the Main Street to deal with inflation. Now, the punishment to Main Street is about to hit Wall Street and they start backing off.

It felt like a betrayal story. Lots of commercial real estate is going to be refinanced in 2024. And with interest rates where they are, there will be issues. I think it could trigger a recession in the financial markets. It is when Wall Street is in big trouble that they threaten to take Main Street with them. That gets everybody's attention and they get bailed out.

But who is going to stand up for the Main Street? The average player on Main Street doesn't know what is happening. And I write these things to make Main Street wake up to the game.

In fairness to the Fed, if I were the chairman, I would raise rates to 3.5% and stop. Then, I will dump the entire Fed balance sheet on the market. That is what was supposed to truly curb inflation. But there is no will to do it.

Raising rates was the punishment of Main Street. Quantitative tightening (that is, emptying the Fed's balance sheet) is the punishment of Wall Street.

The Fed punished Main Street and didn't punish Wall Street. And when the punishment of Main Street is starting to touch Wall Street, the Fed says they are retreating.

I know they say inflation is subsiding. But it is not. Inflation is stabilizing at the 3-4% range. It may not mean much to Wall Street players, but Main Street players feel the pain.

Conclusion

The central banks got played by the government and printed an untold amount of money during the lockdowns. That created inflation. Inflation is bad and leads to the death of a currency.

The central bank decided to increase the cost of borrowing money (that is, raise interest rates) and reduce its balance sheet to combat inflation. Turns out they didn't really reduce their balance sheet (no punishment for Wall Street), but they did raise rates (punishment for Main Street).

Main Street (which is made up of working people and businesses) took the hit of rate hikes well. But when it was about to hit Wall Street hard, the Fed started to reverse course.

The moral of the story - this is not a fair fight. And Wall Street doesn't mind Main Street losing as long as they are fine. Regardless of what anyone says, actions show that inflation will continue in 2024. And also, the wealth inequality gap will expand further.

I am rooting for Main Street to win this one (because they never win, because they are oblivious to all of these things). But there is a high chance that they end up with the short end of the stick again. So, position yourself wisely and let no one prey on you.

It seems central banks are in the business of making Wall Street richer. Don't be played. Be wise.

Stay rich

P.S. Read this piece about the options available if you want to diversify away from bonds in 2024.