Dear Reader,
I had dinner with my daughter this week.
She asked how my day was.
Big mistake.
I told her the Fed had raised rates and the markets sold off as a result.
Then she made an even bigger mistake.
She asked why.
I explained it to her, and she actually seemed to get it.
So I figured I'd share it with you — because it's one of the questions I get most often on this channel.
Why Do Stocks Go Down When Interest Rates Go Up?
Think of interest rates as the price of money.
Let's say you're a business.
You go to the bank and borrow $1,000 to buy products from a supplier.
At a low interest rate, you get to spend most of that $1,000 on your business.
But when rates go up, a bigger slice of that $1,000 goes to paying the bank.
Now you've only got $975 to spend on your business.
The Fed raises again — now it's $950.
Keep going and it's $900. $850. $800.
The same dynamic plays out everywhere.
An investor buying stocks on margin can buy less when rates go up.
A homebuyer qualifies for a smaller mortgage.
A business has less to spend on suppliers.
And when businesses spend less, their suppliers make less.
Which means profits start to fall.
That's how the Fed tamps down economic growth.
That's the seesaw.
Don't Fight the Fed — But Understand What That Really Means
A lot of people have thrown that phrase around since the '90s.
Don't fight the Fed.
But here's what I actually see right now.
It's a tennis match.
On one side of the net: higher interest rates pushing stocks down.
On the other side: the strongest corporate earnings boom in years pushing stocks up.
Higher rates. Stronger earnings. Higher rates. Stronger earnings.
Back and forth.
That's why the market hasn't sold off dramatically.
Every time rates push stocks lower, the earnings come roaring back and provide support.
The question is how long that balance holds.
If the Fed overshoots — raises too much, for too long — profits eventually start to feel it.
That business that started with $1,000 now has $800.
Its suppliers feel it.
Its employees feel it.
Earnings start to compress.
And that's when the market really has a problem.
The Goldilocks Problem
The good news is we seem to have a Fed chairman who understands this.
Warsh appears focused on finding the Goldilocks zone — restrictive enough to bring inflation down, but not so restrictive that he suffocates the profit boom we're in the middle of.
That's the right approach.
Because inflation is genuinely dangerous.
Not just economically.
Politically.
I've said this many times here.
When people can't buy what they could afford six months ago, they get angry.
They look for someone to blame.
They listen to bad ideas.
That's how socialism gets traction again in this country.
Not because people are stupid.
Because they're in pain.
The perpetual bubble cycle we've been living through — the dot-com bubble, the housing bubble, the crypto nonsense — these are symptoms of monetary policy that punishes labor and rewards asset owners.
If you own stocks and real estate, low rates made you rich.
If you're a retiree living on fixed income, low rates destroyed you.
If you're a worker who doesn't own assets, low rates made everything less affordable while doing nothing for your paycheck.
That's the imbalance we need to fix.
And it's not just an economic issue.
We have never competed with a country three times our size whose explicit goal is to knock us out of the center of the world order.
To compete with China the way we need to, we have to get our house in order.
A stable currency, a normalized interest rate environment, and a middle class that isn't being eaten alive by inflation — that's not just good monetary policy.
That's national security.
Have a wonderful weekend.
I'll see you Monday.
“The Buck Stops Here,”
P.S. When the Fed suppresses interest rates, the dollar loses value.
When the dollar loses value, the price of everything goes up.
Gold has been the answer to that problem for thousands of years.
And the world's most sophisticated money knows it.
Central banks bought a record 289 tonnes of gold in a single quarter this year.
Goldman Sachs projects 60 tonnes a month through the rest of 2026.
89% of central bank reserve managers expect to increase their gold holdings over the next twelve months.
These are not speculators.
These are the institutions that write the rules.
And they are buying gold hand over fist.
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Written by Dylan Jovine