A Dangerous Game

Given that the markets will be closed tomorrow due to Good Friday, we’re publishing our weekly AMA today.

It may sound odd, but I’m finding it hard not to think about interest rates right now.  What Jerome Powell and the Federal Reserve are doing right now makes no sense at all.

The European Central Bank (ECB) just cut its deposit facility rate for the seventh time in the last year down to 2.25%.  That represents a decline of 175 basis points from the 2023/2024 highs of 4%.

That stands in stark contrast with the U.S. Federal Reserve and its Fed Funds rate, which remains elevated at 4.5%.  Chairman Powell’s comments yesterday implying he doesn’t intend to reduce rates at the next FOMC meeting on May 6–7 were wildly ridiculous.

The Fed Funds rate now stands at 225 basis points above the ECB deposit facility rate, despite what is clearly the lowest rate of inflation that we’ve seen in four years (shown below).

Not only does the Fed have the “cover” and the data to significantly reduce interest rates, but the government really needs to.  The U.S. government is facing a wall of $9.2 trillion of U.S. Treasuries that mature or need to be refinanced this year.

Some of it has happened already, but $8.55 trillion still needs to be dealt with.  And lower interest rates result in lower yields for the Treasuries, which means less interest expense for the U.S. government.

This is a dangerous political game that Powell is playing right now to the detriment of the entire country.  The U.S. is now paying more than $1 trillion in interest payments a year on its debt.  It cannot continue.

Inflation is finally back under control.  Rates need to come down… not just for the U.S. debt, but for the housing market, the automotive market, and of course the stock markets.

We won’t see a broad-based shift of institutional capital into high-growth small-cap stocks until this happens.  That’s why we have so many attractive small-cap stocks right now to choose from.

The same goes for the early-stage biotech sector, which suffers for the same reason.  We explored this dynamic yesterday in The Bleeding Edge – Beam Us Up, Biotech.

Enough with the political games.  It’s time to bring rates down.

Over the long term, the tariff game will not have any material impact on inflation, the trade negotiations will resolve themselves, and in the absence of an inflationary environment, lower interest rates will support investment and economic growth.

National Debt Subsidized by Stablecoins

The e-mail I [recently] read regarding stablecoins being backed by U.S. treasuries seems to indicate that there will be a new market for the government to subsidize more national debt.

I am an 80-year-old retiree who has used debt sparingly my whole adult life because I was taught as a young adult that debt is a wonderful thing when used in a manner consistent with the ability to pay the debt off responsibly with past, present, and future assets.

The national debt does not, as of this moment in time, appear to meet the requirements of responsible borrowing. I am pessimistic about the government having an additional market to tap into to further increase the debt.

– John A.

Hello John,

Thanks for writing in with your thoughts.  I couldn’t agree with you more.

One of the most important life lessons that my grandfather taught me was to “always live within your means.”  And they weren’t just words, he showed me through how he lived.  He eventually paid off the mortgage on the house that my grandparents retired in and became debt-free.

And then, when money got tight, we ended up taking out a home equity loan to help pay for health care.  When he passed at 100 and the house was sold, there was a modest five-figure amount passed down to my father.  He couldn’t have planned it much better than that.

When I think about using debt as an individual, there are three ways using debt can be a smart financial strategy:

• When we can lock in a 30-year fixed mortgage on our primary residence at a low interest rate, it makes perfect sense to use debt in this way. For example, back in 2020 – 2021, in the U.S., we could get a 30-year fixed-rate mortgage around 3%.  Mine is actually less than 3%.  It’s impossible to pass up a deal like that.  Why?  Because as long as we can put our capital to work and generate returns higher than 3%, it’s smart to use debt for a mortgage.  And 3% is a very low bar.
• Using debt for liquidity and to avoid capital gains. This has long been one of the most widely used secrets of the wealthy.  Transactions with long-term, valuable holdings like real estate, art, or event equities and digital assets can be expensive. They can also trigger long-term capital gains taxes.  Assuming the value of those long-term holdings is expected to increase, taking out debt (loans) against those assets avoids the capital gains tax and provides important liquidity for either life’s expenses or other productivity activity/investments.
• Raising debt to fund a promising business is also a smart use of capital. Just look at what Elon Musk has done.  Despite having the net worth to acquire Twitter outright or to start a new business like xAI, he raised debt and took in outside investors.  Doing so reduced his risk and capital outlay for the Twitter acquisition.  It also helped Musk avoid large capital gains taxes from the sale of equity in companies like Tesla or SpaceX.  Of course, ideally, whatever business we raise capital for will hopefully generate enough free cash flow to pay back the debt.

As for U.S. Treasuries…

We recently wrote about one of the largest emerging buyers of U.S. debt – the stablecoin market.  For anyone who missed it, you can find that in The Bleeding Edge – The Debt Buyer No One is Talking About.

This is such an interesting facet of the financial system.  It’s also why the current U.S. administration is so supportive of U.S. dollar stablecoins from a regulatory standpoint. They deeply understand how valuable this market will become in terms of acquiring U.S. Treasuries.

Another lever that will almost certainly be used… the Federal Reserve could adjust or suspend the Supplemental Leverage Ratio (SLR) that impacts how much U.S. Treasury debt U.S. banks can acquire.  Banks are happy to borrow money from the Federal Reserve and buy U.S. Treasuries because they make money on the spread between the two interest rates.  In effect, it’s free money.

And you are absolutely correct about the lack of responsible borrowing.  Completely irresponsible is how I would put it.  And as we’ve learned in the last few months, hundreds of billions of taxpayer dollars in the U.S. have gone to outright fraud and waste.  And this is what we’re left to deal with:

A $36.7 trillion debt burden resulting in annual interest payments of more than $1 trillion.  Since the first quarter of 2020, the federal debt has increased by $13.5 trillion.  And the government has been running an annual fiscal deficit of over $2 trillion.  It’s just unbelievable.  And it is completely unsustainable.  This is precisely why the efforts of the Department of Government Efficiency (DOGE) are so critically important.

The U.S. government needs to return to responsible borrowing and, preferably, a balanced budget.

It is worth noting that implementing responsible fiscal, monetary, and economic policy will restore the value and importance of U.S. government debt.  Once all of the trade negotiations are completed and result in more fair and balanced trade, the U.S. dollar with strengthen and the most important trading partners of the U.S. will increase their purchases of U.S. Treasuries.

Once we get past these periods of fear and uncertainty, I am confident that there will be a healthy market for U.S. Treasuries.

A Deep Access Free Ride?

Hi Jeff, we’re enjoying a streak of winners in the Deep Access portfolio! As I write, two investments are up over 100%, and one is up 80%.

I’m curious if you (or the Deep Access AI) will ever recommend we take a “free ride” and sell half a position when we’re up 100% on a trade. Or do we wait patiently for the Deep Access AI to signal and then exit the trade all at once?

Thanks for all you do.

– Joshua H.

 Hi Joshua,

Yes, we are. And we just closed out a 210% winner in a matter of days.  And to your point, we have two more big winners in the portfolio right now.

I’m very pleased with our Deep Access AI right now and the consistency of the signals that it is identifying.

The way that we designed the neural network is to identify trading opportunities that have high probabilities for profitable trades built off of a stock that is likely to have a significant move to the downside.

And conversely, the Deep Access AI can “see” when institutional capital is likely closing out their short positions in stocks, giving us the signal that it is time for us to close out the position as well.

In that way, I didn’t design the system to sell half once we hit a 100% profit on a trade.  But with that said, it’s hard to argue against taking some profits off the table.

For model portfolio tracking purposes, we probably won’t be recommending taking free rides in the Deep Access trading service, but this is certainly a smart approach for those subscribers who feel more comfortable recovering the initial investment and letting the rest ride.

This is something we do on occasion in our buy-and-hold investment research services like The Near Future Report and Exponential Tech Investor.  We tend to do this when we feel that one of our portfolio holdings has reached rich valuation levels and it’s smart to take some profits off the table.

We may still be bullish on the stock and believe that it could go even higher despite the rich valuation, but it is prudent to take advantage of the high valuation and take some profits off the table.  This frees up capital to allocate to equities that have more attractive valuations, thus more upside.

In Deep Access, as long as the Deep Access AI maintains a strong short signal on an equity, it is signaling to us that the stock continues to have more downside potential, which means our options have more upside potential.

It’s wonderful to hear that you’re enjoying and profiting from Deep Access.  It has been so satisfying for me to finally bring this product to fruition, and it is such a great investment/trading tool for us to have, especially in volatile market conditions.

The Hardware-Crypto Convergence Point

If, as you had mentioned previously, AR/VR goggles are mass-produced within two years and replace the iPhone as our primary digital interface, what overlooked crypto opportunities could emerge alongside that shift?

The metaverse could see a major resurgence as immersive tech goes mainstream. Are there under-the-radar projects that might 200x or more in the next 2–3 years?

We may be on the verge of a powerful convergence between hardware and crypto—someone’s going to spot it before the rest.

– Dale C.

Hi Dale,

It’s good to hear from you again.

We last checked in on developments in the AR/VR industry back in February in The Bleeding Edge – Will Investment and Reshoring Lead to More Inflation?  And I covered this topic more deeply in a September issue last year called The Bleeding Edge – The Next Computing Interface…

When I think about augmented reality (AR), I view it as a medium through which we will interact throughout our day.  As I’ve long written, for AR to become a mass-market product, the form factor for AR glasses needs to be very close to what consumers are used to today with sunglasses.

Meta / Ray-Ban Wayfarer Smart Glasses | Source:  Meta

And the industry is getting close.  Above are Meta’s smart glasses in a Ray-Ban Wayfarer form factor.  While these aren’t full AR glasses, this is a major step in the right direction.  With more miniaturization in electronic components and advancements in lens technology, AR will become possible in this form factor.

But AR glasses (or contacts) will simply be the interface through which we interact and transact.  So it’s not so much about a cross-section between AR and blockchain technology, but rather about digital assets and cryptocurrencies that intersect with the applications that will be widely used on our phones, PCs, and AR glasses.

Obviously, augmented reality augments our real world.  If we are walking down the street and we near a Starbucks, we might be presented with an NFT that provides us with a free or discounted coffee.

AR glasses will be a great platform upon which we’ll experience commerce, gaming, forms of entertainment, news, and all forms of communication.  And in all of these applications, there will be opportunities for transactions.  And many of these applications will benefit from using blockchain technology.

So as we look ahead, we’ll be looking for those applications likely to drive large amounts of transactions on blockchains.  Utilization is a major contributor to digital asset price appreciation.

These are definitely the kinds of applications and assets that we research and write about in Permissionless Investor, so please keep an eye on what we publish for the cryptocurrencies that we’re most excited about in the months and years ahead.

We still have some time with regards to AR.  Tech investment swung so quickly to artificial intelligence due to how quickly the returns have been coming, that developments in AR have slowed down a bit.

The hardware is going to take a bit more time, but the good news is that generative and agentic AI will only make our experience with AR that much more compelling and frictionless, which will help to accelerate adoption.

 Increased Congestion From Tesla’s Robotaxis?

Hello Brownstone Research team.

I love Tesla the company and everything it’s doing (TSLA the stock is another story. It’s quite painful right now)

[In The Bleeding Edge – The “Killer App” for the Automotive Industry], you wrote:

Unsupervised autonomous transportation will result in an entire shift in public transportation. It will draw riders away from public buses, trains, and subways as it will be cheaper, cleaner, and safer.

Two crucial things about the transition from public transportation to having exponentially more unsupervised autonomous vehicles on the road that you didn’t mention: more traffic, more congestion (and a whole lot more frustration). Not to mention increased transit time. Or the decrease in public transportation quality (for those who can’t afford robotaxis) when inevitable budget cutbacks happen due to decreases in ridership.

Sure, those with FSD can kick back and relax or be productive…but what about the poor plebs driving their own non-FSD vehicles who must sit behind the wheel and endure increased congestion and transit time? Not to mention loss of productivity and reduced quality of life (due to sitting in traffic for x more hours).

How can technology address and solve the increased traffic/congestion issue?

– David C.

Hi David,

This is an interesting question as quite a few factors can impact traffic congestion.

For example, population growth in a metropolitan area will increase congestion regardless of technology.  Cities seeing a large net population increase in recent years, like those in Texas and Florida, are experiencing worsening traffic conditions.

There is also the impact of working from home and how it reduces traffic in some areas. But let’s put these two factors aside and just focus on the technology.

I actually believe we’ll see a decrease in traffic congestion as a result of unsupervised autonomous technology and robotaxi services.  Here’s why:

• Widely available robotaxi services will ultimately result in a reduction in car ownership. These services will become so cheap that it will be far less expensive to use robotaxis than it is to own a car.  All the convenience at a fraction of the cost of ownership.  And the largest impact of the reduction in car ownership will be felt in the denser urban areas where car ownership is not only expensive, but a hassle due to parking.
• Autonomous vehicles drive more smoothly than humans do. They don’t engage in erratic or dangerous driving behavior.  They don’t slam on the brakes unless a human has done so in front of the car.  Because of this ability to drive more efficiently, autonomous vehicles will minimize traffic flow disruptions.  Some interesting research out of the University of Illinois demonstrated that with as little as 5% of the automotive population being autonomous, there would be dramatic improvements in traffic flow and a reduction in fuel consumption as high as 40%.  I believe that the efficiency of autonomous vehicles will result in a 20–30% improvement (reduction) in traffic congestion in due time.
• Autonomous vehicles will also have the ability to access real-time traffic information, re-routing as conditions change, resulting in more distributed traffic patterns rather than major traffic congestion. And the next evolution of that will be when major metropolitan areas link their own traffic management systems into robotaxi networks.  This will be an additional lever that can be used to optimize traffic management and reduce traffic congestion.

I hope these technological reasons give you reason to be optimistic about traffic conditions.  I know that I am.  But it won’t happen overnight.  There will certainly be an inflection point at some time in the future, a few years down the road, when the positive impact of the technology will be something that we experience firsthand.

I don’t know if that’s 5% as the research at the University of Illinois suggests, or something like 10%.  As I suggested at the beginning, there are other variables, and penetration rates will likely vary city to city.

But in time, a fully autonomous transportation system will be remarkably more efficient than the complex, chaotic, and oftentimes erratic transportation system that we navigate today.

I hope everyone has a wonderful holiday weekend.

Jeff

P.S. As a reminder, don’t forget to go here to instantly add your name to the list for Larry’s Countdown to Chaos next Wednesday, April 23, at 11 a.m. ET.

As long as this volatility continues to slam the markets, we’re going to bring you our best insights and strategies to weather the storm. Fortunately, Larry has seen – and profited through – his fair share of chaotic markets in his more than four decades as a trader.

In fact, Larry thrives in market chaos like this. His strategy lets you take advantage of all these wild swings. That’s why, next week, he’ll share his strategy for navigating choppy markets… as well as what to do before the next chaos catalyst strikes.

Just go here to automatically sign up.