Blain’s Morning Porridge Dec 11th, 2025 – The US economy, Potemkin Markets and QE
“The IQ of a mob is the IQ of the dumbest member divided by the number of the crowd.”
Y’day we had yet another Judder Moment for markets as the Fed surrendered to Trump and prepares to juice the markets with renewed QE. Have we learnt nothing? No, I guess we have not. Pretend and keep pretending as we enter the Potemkin Economy era. This will not end well.
What should we make of yesterday’s Fed Meeting? A cut in Fed Funds to 3.50-3.75%. Huzzah! Ah, the madness of crowds… “Oh no, here we go again” said the bowl of petunias.
What we witnessed at yesterday’s Fed meeting was extraordinary. A bunch of academics debating angels on a pinhead while under the presidential cosh? Were they thinking about their role as the guardians of price stability and job security.. or were they focused on the political trend. Lots of talk about elevated risks to inflation and jobs.. but lots of what looked like dither and analysis paralysis.
In the ongoing absence of tangible and real data, and current politics.… lots to argue about. It’s clear what the president wants – lower rates to keep juicing the stock market into the Mid-Terms in 11 months time.. A strong stock market looks like a strong America. Simple As.
Welcome to the Potemkin Political Economy…
(For the unversed in politics, Potemkin villages were constructed by Catherine the Great’s lover to make her believe the dirt-poor Russian serfs lived in comfort.. in fact the buildings were empty shells. If you believed they were real, you will probably believe the US economy is in great shape, there is nothing to worry about in bonds, and the stock market is strong!)
Yesterday the Fed made some bearish noises to sound in touch and competent, but went with the political narrative – as we knew they would. We all expected they would ease – and we all know they probably should not have. Inflation remains too high and uncertain and the jobs data too mixed… but Trump needs the markets to be strong and stable. (Remind me… “Strong and stable”? Strong and stable – which ninny used that as her catch phrase…?)
Yet easing rates by announcing it does not mean a market will accept it and buy bonds – especially when they perceive limited further eases to come next year. If bond yields remain stubbornly high despite the cosmetic noise of an ease, it means the market is worried about inflation and is fixated by the soaring US debt burden. (Let me remind you of the most horrifying page on the internet, the US Debt Clock!)
Hence the Fed is going to support rates by intervening in the markets…. And Reserve Management Purchases is Quantitative Easing by another name. The programme starts tomorrow when the Fed will buy $40bln T-Bills to pull down yields to its target yields. Powell says it is not QE, its just smoothing repo markets. Nope. Its QE.
Oh dear. Never mind. We’ve been here before. Let me remind you of the consequences of QE.
From 2010-2023 we learnt that pitching interest rates low does not boost the economy or create jobs. It pushes more money into financial assets. If you have money and you can lever it, you should buy. QE fuels speculation and bubbles – which is why the economy doubled in size over the QE era, but the stock market’s value quadrupled! The only explanation why that mismatch between an ecstatic market and a lethargic economy occurred is mispriced money. QE creates leverage, and the liquidity it releases is financialised rather than invested into the real economy.
Of course it’s been welcomed by the market! What’s not to like… The Fed will buy bonds to keep rates low… buy, buy, buy and buy some more!
Is it good for the economy? Yes – it will weaken the dollar making US exports cheaper… ah, but who buys US goods these days? You will search a long-time to find a bottle of US plonk on the shelves of Canadian stores these days. Europe would rather drown in Borsch (and we may well do) than eat chlorinated chicken. And the Chinese will be delighted – all these soyabeans Trump need desperately to sell them get cheaper by the day….
Pumping money into the economy through QE is not immediately inflationary – if it is spent on financial assets. If that money was to be spent on all the new factories Trump has promised, then it would be inflationary – it would push up commodity prices for construction and inflate wages… after all, every US construction worker is already fully employed building all these datacentres the US LLM AIs require…
The issue here is the USA is not a manufacturing nation – so the only thing boards can really find to do with cheap money is borrow more to buy-back their own stock, which pushed up the stock prices, giving them bigger bonuses, which they invest in stocks… which are being pushed up by companies buying back stock, and retail pile in to buy index trackers… you get the picture.
The end result is rising wealth inequality between the haves and have-nots. To avoid a revolution, the next stage is therefore to persuade the have-nots that lower rates and a stronger stock market is good for them, thus making the haves even richer. At this point let me remind you of one my favourite Terry Prachett quote: “The trick is to persuade those carrying the torches that its the fault of those carrying the pitchforks.”
Do you see where this is going? I spent the entire QE era warning markets that the fundamentals looked terrible, that Bitcoin and Tesla were shams, that speculation was not value. Guess what? Markets kept going up. (I have literally lost millions shorting Tesla because although it valuations make zero sense, the market can remain euphoric longer than I can remain solvent…)
It’s all about to happen again… I should say this will end badly… but who would listen… but I’m going to stick with my Long Gold in the meantime…
I was sent a great line this morning from a client (from a financial blog I didn’t know called “Quoth the Raven”): “Markets now price the reliability of liquidity, not the reliability of fundamentals.”
Tomorrow… what do I expect in 2026…
Out of time, and back to the day job…
Bill Blain
CEO – Windshift Capital
Author – The Morning Porridge
Partner – Shard Capital
Special Advisor – Spitfire Strategic Capital
