Ahab's Scar

The Credit Strategist - November 2025

Many of you have probably read about 3I/Atlas, the comet discovered in July after it entered our solar system from another star system. It was given its name because it is the third object known to have entered our solar system and was discovered by the Atlas telescope in Chile. Early in October the comet came within 18 million miles of Mars and in late October was expected to make its closest approach to the sun. In December, it is expected to make its closest approach to the earth – 167 million miles away. Harvard astrophysicist Avi Loeb notes the comet is currently unobservable from earth because it is on the other side of the sun but claims it changed appearance in earlier photographs and may have the characteristics of a technological rather than a naturally-formed object. His speculations have set conspiracy theorists on fire pondering a close encounter from another solar system. Loeb himself notes (with a smile) that such an event could set off a stock market crash or other cataclysmic possibilities. At this point, aliens visiting earth might be the only thing that could derail this stock market rally (and no doubt Jensen Huang, Sam Altman, Elon Musk and Donald Trump would greet the space craft with open arms). I place the odds of 3I/Atlas visiting earth as roughly the same as our government returning to sanity; let’s just hope those odds are much lower than mankind achieving AGI before the technology industry bankrupts itself.

Back here on planet earth, the Fed cut interest rates as expected by another 25 basis points on October 29^th. The only news that emerged from the October Fed meeting was that another December cut was not a certainty which sent stocks down slightly because it contradicted market expectations. With the government closed and limited data to work with, the Fed is flying blind with respect to setting policy. But given the data that is available, it seems set on an easing cycle that has little to do with its dual mandate. Instead, its actions support the argument that we are in a period of “fiscal dominance” where monetary policy is driven by fiscal policy needs which in this case means lowering rates to reduce the cost of servicing the deficit.

Markets celebrated the September inflation report that showed inflation still stuck at 50% above the Federal Reserve’s two-percent target. Not only were markets relieved that inflation wasn’t higher but demonstrated how desperately reliant they are on government support. Markets and the economy look good on the surface because of massive fiscal and monetary stimulus in the form of annual deficits approaching $2.0 trillion (the official numbers are understated) and monetary policy maintaining interest rates barely above the government-calculated rate of inflation (and likely well below the real-world rate). Withdrawal of this support would collapse markets and the economy. At three percent, inflation will reduce the value of a dollar to seventy-four cents in ten years. That’s the best-case scenario. Out in the real world where government statisticians can’t hide and where many prices are rising faster, a dollar will be worth much less in a decade. That is one reason (there are other reasons such as new sources of demand such as Tether) why gold rallied more than 50% this year. As the Fed embarks on another easing cycle (including ending quantitative tightening as funding pressures appear in short-term money markets)[3], the all-clear signal for speculation is flashing red.

Unfortunately, that is also the signal that flashes after a terrible accident as well it should. By lowering rates with inflation fifty percent above its own target and financial markets at record levels of valuation, the Fed is not only abandoning its own target but hammering another nail into the coffin of its credibility. While the Fed retains enormous power over the economy, its claims to political independence and intellectual integrity are discredited by its actions and its track record. It failed to contain inflation, allowing it to hit double-digits a couple of years ago, while currently misinterpreting data from a changing jobs market. Now it is lowering rates without monetary policy justification which will lead to more inflation (dollar depreciation) and more wealth inequality while public and private debt rise and borrowers rely on government support for repayment. Neither the public nor private sectors generate enough money (from taxes in the case of government or revenues/profits in the case of the private sector) to service and repay all the debt being incurred.

Despite all the self-serving justifications offered by Wall Street for lower rates, there is only one compelling reason to lower them – to ease the burden of servicing out-of-control federal deficits. Tariffs are not going to solve the problem (and will contribute to higher inflation). Cost cutting on the DOGE model failed. Higher taxes won’t solve the problem. The deficit will keep rising while several things happen. The federal government will be forced to borrow more money which will force interest rates higher as buyers of government debt demand higher compensation that causes a systemic crisis. It will be forced to cut spending and raise taxes in the form of higher income taxes, use taxes and wealth taxes, but these will be only half-measures and trigger severe political pushback that further water them down. The value of the U.S. dollar will drop further against gold and cryptocurrencies. And wealth inequality will widen further leading to greater social unrest and more populism across the political spectrum (which is problematic because populism feeds racism and other noxious ideas). Such are the wages of “fiscal dominance.”

Since September 2011, public debt increased by 157% from $14.8 trillion to $38 trillion while GDP only increased by 95% from $15.6 billion to $30.5 trillion. Can we reverse this trend? On an intellectual basis, yes. There are ways to slow the rise of the deficit and alter the arc of insolvency. On a political basis, at least for the foreseeable future, the answer is a resounding NO. Currently and for the foreseeable future, there is no sign that the extremists who took over our major political parties are willing to compromise their views; if anything, they are growing more extreme, which means their ideas are becoming less constructive to solving our economic challenges (from which all other challenges flow). Extremists are taking over both political parties. Barry Goldwater famously said “Extremism in the defense of liberty is no vice. And moderation in the pursuit of justice is no virtue.” Today, sadly, we live in an age of extremism in the pursuit of vice and moderation in pursuit of justice and too few are willing to speak truth to power. Like everything in life, this situation will change but it likely will require the system to suffer more damage before that happens. Citizens will have to suffer enough pain to not only demand change but take action to effect change not only at the voting booth but by increasing their political involvement at the local and national level. The process will be difficult, contentious, and potentially violent, but hopefully lead us back to governance by a more moderate, rational, and responsible majority. Until that happens, however, there is virtually no chance that the current budget trajectory will change.

From a long-term investment standpoint, this favors gold and other assets that benefit from inflation but renders it increasingly difficult to generate positive real returns. If you are not earning at least high single digit returns on your portfolio, you are losing ground to inflation (I actually put the bogey in the teens with respect to my own investments). Many years ago, Ben Bernanke took a series of policy steps to encourage risk-taking (having never taken risk himself as an investor). He knew not what he wrought. Now investors have to take enormous risks to maintain their buying power. Hence the bubbles in equity and credit that keep inflating larger and larger.