Proof of a Stagflationary Recession?

          I’ve been offering my opinion since the beginning of the year that the US economy is in recession.

          More recently, it’s been confirmed that the US economy did indeed shrink in both the first and second quarter of the year, meeting the technical definition of a recession despite claims to the contrary by some politicians wanting to change the long-accepted definition of recession for political reasons.

          This past week, in addition to stock performance that was, in a word, dismal, other evidence of recession surfaced.

          FedEx the shipping company, saw its stock plummet after the company withdrew it’s 2023 earning guidance.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/fedex-plunges-2-year-lows-after-withdrawing-earnings-guidance)

Following FedEx’s ugly pre-announcement, CEO Raj Subramaniam went further into the drivers behind his company’s decision to pull guidance during an interview with Jim Cramer of CNBC.

“I think so. But you know, these numbers, they don’t portend very well,” Subramaniam said in response to Cramer’s question about whether the economy is “going into a worldwide recession.”

FedEx’s top executive, who took over the role at the beginning of this year, said that declining worldwide cargo volumes were the primary factor in the company’s unsatisfactory performance.

“I’m very disappointed in the results that we just announced here, and you know, the headline really is the macro situation that we’re facing,” Subramaniam said tonight in an interview on CNBC’s Mad Money.

Finally, the CEO said the drop in volumes is far-reaching:

We are a reflection of everybody else’s business, especially the high-value economy in the world,” he concluded.

As we detailed earlier, in a surprise pre-announcement Thursday after the closeFedEx said it’s withdrawing its fiscal year 2023 earnings forecast as a result of the preliminary 1Q financial performance and expectations for a continued volatile operating environment.

First quarter results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter. FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a revenue shortfall in this segment of approximately $500 million relative to company forecasts. FedEx Ground revenue was approximately $300 million below company forecasts.

Specifically for Q1:

  • FedEx prelim 1Q adj EPS $3.44, est. $5.10
  • FedEx prelim 1Q Rev. $23.2B, est. $23.54B
  • FedEx prelim 1Q Adj. oper income $1.23B, est. $1.74B

As a result of the preliminary first quarter financial performance and expectations for a continued volatile operating environment, FedEx is withdrawing its fiscal year 2023 earnings forecast provided on June 23, 2022.

          On top of the FedEx story, in which the CEO of the company was extremely negative, the CEO of Chevron warned that natural gas prices were headed much higher.  This story combined with the FedEx story points to the stagflationary recession forecast I have been offering.  This from “The Epoch Times” (Source:  https://www.theepochtimes.com/chevron-ceo-warns-americans-to-brace-for-higher-natural-gas-prices-this-winter_4729716.html?utm_source=partner&utm_campaign=ZeroHedge)

The chairman and CEO of energy company Chevron has warned Americans to brace for price increases in natural gas this winter.

CEO Mike Wirth made the comments in an interview with CNN on Sept. 13 in which he warned consumers that “there’s certainly a risk that costs will go up” when it comes to natural gas.

“Prices already are very high relative to history and relative to the rest of the world. We’re already seeing this impact being felt in the European economy and I do think it’s likely that Europe goes into a recession,” Wirth said.

Europe has been suffering from an energy squeeze in recent months, driven by its decision to wean itself off fuel from Russia in the wake of its invasion of Ukraine along with chronic shortages and a move by some EU countries to phase out coal.

The outlook for Europe this winter is now looking more strained after Russian state-owned energy corporation Gazprom scrapped plans to restart gas flows through its Nord Stream 1 pipeline to Germany earlier this month.

Following what was expected to be a temporary shutdown for routine maintenance, Gazprom said that it could not safely restart gas deliveries through the key pipeline until an oil leak in a critical turbine was fixed. Officials have not yet stated when gas supplies will resume through the pipeline.

While Worth noted that the situation in the United States would not be as bad as it is in Europe, the CEO stated that natural gas prices could still be “significantly higher” this winter in the former.

          Another story about “unretirement” confirms the current state of the US economy.  This from “FoxNews” (Source:  https://www.fox17online.com/news/some-people-considering-un-retiring-amid-inflation-stock-market-drop)

 Unretirement. It’s a concept most have probably not considered, but it’s a reality for many in the current economy. Some retirees are watching inflation rise while the stock market sinks and are reconsidering the plans they made just a short time ago.

Gesher Human Services held a “Returning Retiree Boot Camp” Wednesday in Southfield. Bob Rubin, 81, was one of the attendees.

“I found myself where I once had a great pile of gold, that the gold wasn’t there anymore, and the goose that laid the egg, he left town,” explained Rubin.

Rubin said he’s an expert in the mortgage business and did tremendously well until the mortgage crisis. Now, he is looking for new ways to find gainful employment. He said he showed up at the “Returning Retiree Boot Camp” for insight into how his skills can be best used.

“Are there niches? Are there areas in these desperate times that I can do well?” asked Rubin.

He said he was looking for help reaching out and connecting with those in need of his specialty. He admits, that common online resources just haven’t cut it for him.

“I found that using Indeed and that other such sources does not work for me. People are looking for specific skills. I never worked for anyone. I was an entrepreneur, I had my own business,” Rubin explained.

Tim Parsons, 61, also showed up for the boot camp.

“I recently accepted an early retirement package and haven’t decided if I’m truly going to retire or if I’m going to continue to look for work,” explained Parsons.

He said he has been looking at the stock market and the possibility of a recession and wondering if he would be able to find a job again.

He explained the questions he had been thinking about.

“Whether I could financially afford to officially retire. It’s about two years before my normal plan. Even though my financial advisor says I could, you’re always worried about money,” admitted Parsons

It doesn’t matter if it’s part-time work or full-time work.

“I’m open to either one. You know you got to bridge health care coverage until you’re 65. So, if a part-time job came along with healthcare coverage, I would consider that,” Parsons explained.

          Layoffs are intensifying, the last inflation report was not promising, the stock market is reacting negatively and many retirees are thinking about going back to work.  Seems to define a stagflationary recession doesn’t it?

            If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Rising Energy Costs and the Economy

            There is a lot going on globally that will, in my view, create some additional headwinds for the US economy moving ahead.

            This week, I’ll discuss one situation that has the potential to be especially impactful on the US economy.

            It’s the world energy situation.

            As we all are aware, energy costs are moving higher, even here in the United States.  This past week, I had the unpleasant experience of paying my September electric bill which was noticeably higher than it was one year ago.

            A quick visit to the file that holds my paid utility bills told the story.  Based on usage from one year ago and presently, my electric costs escalated more than 16% year-over-year.  Despite the fact that my usage was slightly lower, my check to the power company was higher.

            It could be worse.

            I could live in Europe where energy costs are literally off the charts.  Desperate politicians in some European countries are now threatening to legislate usage including passing laws mandating the maximum temperature at which a thermostat can be set and banning the use of portable heaters.

            This from Michael Snyder (Source:  http://theeconomiccollapseblog.com/this-winter-europe-plunges-into-the-new-dark-ages/):

Could you imagine being sent to prison for three years if you dared to set your thermostat above 66 degrees Fahrenheit?  As you will see below, this is a proposed regulation that is actually being considered in a major European country right now.  If you have not been paying much attention to what is happening in Europe, you need to wake up.  Natural gas in Europe is seven times more expensive than it was early last year, and that is because of the war in Ukraine.  Over the past few decades, the Europeans foolishly allowed themselves to become extremely dependent on gas from Russia.   In fact, more than 55 percent of the natural gas that Germany uses normally comes from Russia.  But now the war has changed everything, and Europe is facing an extremely harsh winter of severe shortages, mandatory rationing, and absolutely insane heating bills.

Things are going to get very cold and very dark all over Europe in the months ahead, and those Europeans that choose to rebel against the new restrictions that are being implemented could literally find themselves in prison

Switzerland is considering jailing anyone who heats their rooms above 19C for up to three years if the country is forced to ration gas due to the Ukraine war.

The country could also give fines to those who violate the proposed new regulations.

Speaking to Blick, Markus Sporndli, who is a spokesman for the Federal Department of Finance, explained that the rate for fines on a daily basis could start at 30 Swiss Francs (£26).

            19 degrees Celsius is just 66 degrees Fahrenheit.

            If you live in Europe, prepare to dress very warmly this winter.

            Some may be anticipating that they will just use portable radiant heaters to keep things toasty, but apparently using such heaters “would not be allowed” under the new regulations that Switzerland is considering…

Blick also reported that radiant heaters would not be allowed and saunas and swimming pools would have to stay cold.

            This is serious.

            We have never seen anything like this before, and the longer the war in Ukraine stretches on the worse the energy crisis in Europe will become.

            What many financial analysts are missing is that rapidly escalating energy costs feed inflation in other areas of the economy and inevitably lead to economic contraction.  Snyder offers some perspective as it relates to Europe.          

            An end to the era of cheap energy also means that a severe economic slowdown is in the cards, and this is already starting to show up in the numbers…

Europe is showing signs of heading into a recession as multiple economic surveys show the region’s services and manufacturing sectors slowing down while a large number of the continent’s citizens are struggling to cope with rising prices.

The S&P Global Eurozone Composite Output Index fell to an 18-month low in August at 48.9, according to a Sept. 5 news release.

The eurozone private sector “moved further into contractionary territory” in August. Both services and manufacturing output fell for the month.

            Of course, what we have witnessed so far is just the beginning.

            Things are likely to get really bad this winter.

            In fact, German Economic Minister Robert Habeck has publicly admitted that some parts of the German economy will “simply stop producing for the time being”.

            Wow.

            And the truth is that this is already starting to happen

In yet another truly astonishing announcement that demonstrates the desperation of this hour, German steelmaker ArcelorMittal, one of the largest steel production facilities in Europe, has shuttered operations due to high energy prices.

“With gas and electricity prices increasing tenfold within just a few months, we are no longer competitive in a market that is 25% supplied by imports,” said CEO Reiner Blaschek.

This comes after announced closures of aluminum smelters, copper smelters, and ammonia production plants over the last few weeks. Ammonia — necessary for fertilizer — is now 70% offline in the EU.

            Many more factories will be forced to shut down in the coming months.

            Deeply alarmed by what is taking place, 40 CEOs from Europe’s metals industry have jointly issued an open letter in which they warn that their companies are facing an “existential threat to our future”

Ahead of Friday’s emergency summit, the business leaders of Europe’s non-ferrous metals industry are writing together to raise the alarm about Europe’s worsening energy crisis and its existential threat to our future. Our sector has already been forced to make unprecedented curtailments in the last 12 months. We are deeply concerned that the winter ahead could deliver a decisive blow to many of our operations, and we call on EU and Member State leaders to take emergency action to preserve their strategic electricity-intensive industries and prevent permanent job losses.

50% of the EU’s aluminum and zinc capacity has already been forced offline due to the power crisis, as well as significant curtailments in silicon and ferroalloys production and further impacts felt across copper and nickel sectors. In the last month, several companies have had to announce indefinite closures and many more are on the brink ahead of a life-or-death winter for many operations. Producers face electricity and gas costs over ten times higher than last year, far exceeding the sales price for their products. We know from experience that once a plant is closed it very often becomes a permanent situation, as re-opening implies significant uncertainty and cost.

            This is what an economic collapse looks like.

            Things are already so bad that scientists are even considering shutting down the Large Hadron Collider

Europe’s energy crisis is being felt by everyone – including the scientists working deep underground in Switzerland at the Large Hadron Collider.

The European Organization for Nuclear Research, better known as CERN, is even considering taking its particle accelerators offline.

This is due to the accelerators’ high energy demands, and the organization’s desire to keep the region’s electricity grid stable.

            So at least one good thing could potentially come out of this crisis.

            But overall, the months ahead are going to be an immensely uncomfortable time for Europe.

            As conditions become tougher and tougher, ordinary Europeans are going to become angrier and angrier.

            NATO Secretary General Jens Stoltenberg is openly admitting that there will be “civil unrest”, but he insists that Europeans must make sacrifices in order to support the war in Ukraine…

Vladimir Putin’s ‘energy blackmail’ over Europe could lead to ‘civil unrest’ this winter, the NATO Secretary General has warned.

Jens Stoltenberg acknowledged that winter ‘will be hard’ as ‘families and businesses feel the crunch of soaring energy prices and costs of living’ in the coming months.

Writing in the Financial Times, the boss of the Western security alliance said that it is worth paying the price to support Ukraine.

            Eventually, there will be tremendous civil unrest in major cities in the United States as well.

            We are still only in the very early stages of this new global energy crisis, and it is going to turn all of our lives upside down.

            Meanwhile, we are also plunging into a horrific global food crisis.  As I detailed a few days ago, even the head of the UN is admitting that there will be “multiple famines” in 2023.

            Life as we know it is about to change.

            Right now, all eyes are on Europe because things are starting to get really crazy over there.

            Europe is going to descend into “the new Dark Ages” this winter, and the entire world will experience extreme pain as a result.

            Rapidly rising energy costs will create economic conditions that I believe are currently being overlooked.  These economic conditions will eventually have to evolve into the deflationary environment that I have been warning about for several years.

            I believe that time is now getting closer.

            If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Does Consumer Behavior Confirm Recession Is Here?

            All markets had a tough week last week.  Historically speaking, stocks, US Treasuries, and precious metals are not typically correlated, but you wouldn’t know that looking at the performance of these asset classes year-to-date.

            I expect that this is an aberration of sorts and more typical inversely correlated performance will once again resume in the relatively near future.

             In my view, the worldwide economy is transitioning to a deeper recession.  There are many signs that point to this.

            The reality is that working Americans and those in the middle and lower economic classes worldwide are struggling.  The data bears this out.

            This from “The Epoch Times” (Source:  https://www.theepochtimes.com/average-credit-card-debt-soars-by-13-percent-largest-increase-since-1999_4706178.html) (Emphasis added):

The average credit card debt held by households in the United States surged by 13 percent in the second quarter, the largest increase in such debt since 1999according to an Aug. 30 report from the Federal Reserve Bank of New York.

More consumers are increasingly relying on credit amid sky-high inflation in order to pay their bills.

Credit card balances increased by $46 billion from last year, becoming the second-biggest source of overall debt last quarter, though it is below pre-pandemic levels.

Meanwhile, the current credit card interest rate is now at a record high of 17.96 percentaccording to Bankrate, a financial advice website.

Total American household debt rose by $312 billion from the second quarter of 2021 for a total of $16.15 trillion at the end of June 2022.

This is a 2 percent rise from the year-ago quarter, largely due to a jump in mortgage rates, and car loan and credit card balances, caused by40-year high inflation, said Joelle Scally, a  New York Fed analyst, in a statement.

The Federal Reserve is attempting to fight inflation by raising interest rates, causing fears that its aggressive moves may encourage a bad recession, as the economy recovers from the pandemic.

“The second quarter of 2022 showed robust increases in mortgage, auto loan, and credit card balances, driven in part by rising prices,” said Scally, who reviews microeconomic data at the central bank branch.

Household debt balances are about $2 trillion higher than they were at the end of 2019, before the start of the pandemic, as the price of goods and services have skyrocketed.

            Household debt is increasing at a time when debt levels are already near historical highs.  Desperate consumers are not only increasingly using existing credit card accounts but also opening new accounts to attempt to keep their liquidity options open in an increasingly challenging economic environment.  This from “Schiff Gold”  (Source:   https://schiffgold.com/key-gold-news/record-consumer-debt-levels-continue-to-climb/) (Emphasis added):

Not only are credit card balances growing; consumers are trying to find ways to borrow even more. According to Fed data, Americans opened 233 million new credit card accounts in the second quarter of this year. That was the largest number of new accounts opened in a single quarter since 2008 – the beginning of the Great Recession.

Aggregate limits on credit card accounts increased by $100 billion in Q2 and now stand at $4.22 trillion. That reflects the largest increase in more than 10 years.

Rising interest rates are bad news for Americans depending on credit to pay their bills. With interest rates rising, Americans are paying more in interest charges every month, and many will see minimum payments riseAverage annual percentage rates (APR) currently stand at just over 17.42%. That’s up from 16.6% just two months ago. Analysts say they may well rise above 18% by the end of the year, breaking the record high of 17.87% set in April 2019. With every Federal Reserve interest rate increase, the cost of borrowing will go up, putting a further squeeze on American consumers.

Non-revolving credit also surged in June, increasing by $25.4 billion, an 8.8% year-on-year jump. This includes auto loans and student loans. Total non-revolving credit now stands at $3.502 trillion.

            Payments on existing debt are rising due to higher interest rates while inflation erodes the purchasing power of the dollar, creating the perfect economic storm.

            Case in point, Americans have not opened this many new credit card accounts since 2008, which was the last time a Federal Reserve induced assets bubble burst and thrust the nation into a recession.

            The restaurant industry offers a snapshot of changing consumer behavior in light of inflation and the economic slowdown.  Traditional, full-service restaurants are seeing business decline, while fast food restaurants are seeing an increase in business.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/personal-finance/uncertain-times-americans-stick-fast-food) (Emphasis added):

U.S. fast food and other limited service restaurants did not only get through the pandemic better than the restaurant industry as a whole in high inflation times, affordable fast food has also been seeing steadily growing sales while other restaurant types could not uphold their post-pandemic growth trajectory.

In fact, as Statista’s Katharina Buchholz details below, in June, the latest month on record with the Census Bureauquick service restaurant sales grew by 14.4 percent, while those of other restaurants were down to 9.2 percent year-over-year.

Sales of limited-service restaurants – which were well equipped for pandemic lifestyles due to their emphasis on take-out and drive-thru experiences – did not dip as much in the pandemic as those of regular restaurants did.

However, by spring of 2021, other restaurant sales had once more overtaken fast food sales and stayed on a higher growth trajectory after leaving pandemic effects behind. In June, however, other restaurant sales slipped by almost $1.7 billion compared to May, while limited-service restaurant sales only decrease by $150 million.

According to Bloomberg, drive-thru services have been aiding fast food chains as they stayed popular beyond the pandemic. In February, U.S. drive-thru sales were 20 percent higher than they had been in the same month two years earlier.

Industry publication QSR is even speaking of a “golden age of fast food” as sales and restaurant numbers are expanding in the sector, while also acknowledging headwinds like the hiring crunch, inflation

            The decline in the sales numbers of full-service restaurants in June of this year is simply staggering.  More evidence that inflation is taking a toll on the budgets of Americans.

            Inflation and energy policy have seen utility costs rocket higher along with food and other consumer staples.  Record numbers of Americans are now behind on utility bills.  This from “Fox News”  (Source:  https://www.msn.com/en-us/news/us/more-than-20-million-us-households-are-behind-on-utility-bills/ar-AA119HlP)  (Emphasis added):

New data indicates a staggering number of American households are currently behind on making utility payments due mainly to soaring energy costs, sparking fears that mass power shutoffs are on the horizon.

The National Energy Assistance Directors Association says more than 20 million U.S. families are behind on their utility bills, numbers NEADA executive director Mark Wolfe believes are “historic.”

The NEADA chief told FOX Business what is even more alarming is the surge in the collective amount owed, which sat at roughly $8.1 billion at the end of 2019 and has now skyrocketed to around $16 billion. The average delinquent bill climbed from $403 to $792.

A primary driver behind the utility debt is a surge in energy prices. The cost of natural gas – used to power homes so folks can keep cool in the summer and warm in the winter – was up 30.5% year-over-year in July, according to the Labor Department.

While energy is in high demand in the summer, experts say heating bills this winter will bring more pain.

Andrew Lipow, president of energy consulting firm Lipow Oil Associates wrote this week that “the consumer is going to pay more for their heating bills this winter,” adding that “whether they use natural gas or home heating oil, most will have sticker shock.”

He went on to note that “natural gas futures prices are now more than double what they were a year ago.”

            Regardless of what you call it, a recession is here in my view.  And the data suggests it will get worse before it gets better.

            If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Forecast on Target

          Last week, I gave you an update on the housing market.  It’s my strong opinion that real estate is now at the beginning of a decline that will rival the plunge in prices experienced at the time of the Great Financial Crisis.

          This development fits in with my long-held belief that our economy will experience inflation followed by deflation.  In the interest of full disclosure, this is not an original economic theory, one of the founding fathers, Thomas Jefferson warned us of this inevitable outcome if we allowed private bankers to control the issue of our currency.

          I don’t need to convince anyone reading this that we are now experiencing the inflation part of this cycle.  However, beginning in 2022, we are now seeing the beginning of the deflationary part of the cycle.

          As I’ve commented in the past in this publication, the time frames separating inflationary periods from deflationary periods are not perfectly defined; there is evidence of both phenomena emerging at the same time.       

          It’s becoming increasingly probable from my viewpoint that we are headed for a stagflationary time – the prices of consumer essentials rise while the value of some financial assets fall.

          Some of you are likely taking issue with that forecast given what Federal Reserve Chair, Jerome Powell had to say last week after the Jackson Hole Fed meeting.

          In case you missed Mr. Powell’s statement, here is a bit from an article published on “Yahoo Finance” (Source:  https://news.yahoo.com/jerome-powell-us-stock-markets-235847493.html) (Emphasis added):

Stock markets in the US ended the week sharply down following tough comments by the head of the country’s central bank, the Federal Reserve.

The bank’s chairman, Jerome Powell, said the bank must continue to raise interest rates to stop inflation from becoming a permanent aspect of the US economy.

His words sent US stocks into a tailspin, with markets tumbling 3%.

It comes as Americans are having to pay more for basic goods.

Inflation in the world’s largest economy is at a four-decade high.

During a highly anticipated speech at a conference in Wyoming on Friday, Mr. Powell said the Federal Reserve would probably impose further interest rate hikes in the coming months and could keep them high “for some time”.

“Reducing inflation is likely to require a sustained period of below-trend growth,” he said at the meeting in Jackson Hole.

Investors are concerned that if economic growth falters, higher interest rates will increase the likelihood of a recession.

Mr. Powell conceded that getting inflation under control would come at a cost to American households and businesses but he argued it was a price worth paying.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.

“These are unfortunate costs of reducing inflation but a failure to restore price stability would mean far greater pain.”

Mr. Powell wants to avoid inflation becoming entrenched. Simply put, that means if people believe inflation will be high, they will alter their behavior accordingly, making it a self-fulfilling prophecy. For example, someone who thinks prices will go up 3% next year is more likely to seek a 3% rise in wages.

The last time this happened, Mr. Powell’s predecessor, Paul Volcker, had to slam on the brakes, raising interest rates dramatically and sending the economy into recession.

In March, the Federal Reserve’s key interest rate was almost zero; it has since been raised to a range of 2.25% to 2.5% in an effort to tackle inflation.

          Interesting that the author of the article referenced Paul Volcker, comparing the actions of Volcker as Fed Chair to the policy decisions of the current Fed Chair, Powell.

          THEY ARE VASTLY DIFFERENT.

          Volcker increased interest rates to nearly 20% to tame inflation; that’s a far cry from the current 2.5%!

          As I have previously stated, from my research, inflation will not be subdued without real positive interest rates.  Interest rates need to be higher than the inflation rate.

          I will also go out on a limb here and put forth my prediction that the Fed will reverse course as deflation takes hold.  As noted above, deflation signs are becoming more obvious.  Last week, I provided a housing update; this week, let’s look a bit more closely at corporate layoffs which are becoming more prevalent.  This from Michael Snyder (Source:  http://theeconomiccollapseblog.com/the-layoff-tsunami-has-begun-50-of-u-s-companies-plan-to-eliminate-jobs-within-the-next-12-months/):

Unfortunately, a brand new survey that was just released has discovered that 50 percent of all U.S. companies plan to eliminate jobs within the next 12 months.  The following comes from CNBC

Meanwhile, 50% of firms are anticipating a reduction in overall headcount, while 52% foresee instituting a hiring freeze and 44% rescinding job offers, according to a PwC survey of 722 U.S. executives fielded in early August.

These are executives’ expectations for the next six months to a year, and therefore may evolve, according to Bhushan Sethi, co-head of PwC’s global people and organization group.

Can those numbers be accurate?

I knew that things were bad because I write about this stuff on a daily basis.

But I didn’t think that half of the firms in the entire nation were already looking to cut workers.

Wow.

At this moment, I am at a loss for words.

It’s going to get bad out there.  If you have a good job right now, try to do whatever you can to hold on to it.

Sadly, some of the biggest names in the corporate world have already started to lay off workers.  For example, Ford Motor just announced that it will be laying off “roughly 3,000 white-collar and contract employees”

Wayfair has also decided that now is the time for mass layoffs…

I thought that Wayfair was doing quite well.

I guess not.

In a desperate attempt to stay afloat, Peloton has also chosen to lay off “hundreds of workers”

And even Groupon is getting in on the act.  500 of their workers will now be updating their resumes…

Other big names that have announced layoffs in recent weeks include Best Buy, HBO Max, Shopify, Re/Max, and Walmart.

Unfortunately, this is just the tip of the iceberg.

As this new economic downturn deepens, countless more Americans will lose their jobs.

And as that happens, all of a sudden there will be vast numbers of people that can’t pay their mortgages or make their rent payments, and that will make our new housing crash even worse.

We are now very clearly past the peak of the housing bubble, and the ride down is going to be really painful.

Last year at this time, the housing market in California was extremely hot, but now the numbers are definitely heading in the other direction

          Snyder goes on to quote statistics on the California real estate market.  He notes that the sales volume of single-family houses in California fell 14% in July from June and by 31% from one year ago.  Sales of single-family homes in California have fallen for 13 consecutive months.  Price declines are now starting to follow sales declines as one might expect.  Prices were down 3.5% in July from June.  While that may seem like a relatively small decline, it’s significant should it continue month-after-month.

          The forecast of inflation followed by deflation that I put out there in my “New Retirement Rules” book is now playing out.

          If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

The Beginning of the End for Real Estate?

        In the September issue of “The You May Not Know Report”, I discuss my view that the housing market is beginning to slow and is on the verge of a decline much like the one we witnessed at the time of the Great Financial Crisis.

        There are many reasons that I come to this conclusion which I discuss in detail in the September newsletter.

        Bottom line, it’s my view that if you have plans to sell your house and you can sell it now at a good price, you should think seriously about it.  If you are planning a purchase, you might be wise to wait a bit.

        This from the September newsletter:

Another month, another plunge in housing.

Hot on the heels of the latest catastrophic homebuilder sentiment print and plunging single-family starts and permits, analysts expected existing home sales to accelerate their recent decline with a 4.9% MoM drop in July They were right in direction but severely wrong in magnitude as existing home sales tumbled 5.9% MoM in June.

That is the 6th straight month of existing home sales declines – the longest stretch since 2013 – pulling home sales down a stunning 20.2% YoY. From the NAR:

“The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June,” said NAR Chief Economist Lawrence Yun.

“Home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.”

The collapsing housing market means the SAAR is now below the full-year pace of 2012 – one decade ago.

SAAR is an acronym meaning Seasonally Annually Adjusted Rate.

Despite the economist from the National Association of Realtors stating that home sales may soon stabilize, I don’t expect it.

        Private lenders in the mortgage space are starting to go bust due to rapidly declining demand for mortgages.  This from “Zero Hedge”  (Source: https://www.zerohedge.com/markets/private-mortgage-lender-bust-begins-loan-applications-crash):

The US mortgage industry could be on the cusp of a bust cycle as the Federal Reserve’s most aggressive interest rate hikes in decades have sent mortgage loan application volume crashing. 

The 30-year fixed mortgage rate jumped from 3.27% at the start of the year to as high as 6% in mid-June, sparking what we’ve been warning readers about is an affordability crisis where demand for homes has evaporated

Plunging demand for homes can be seen in the pace of mortgage application volumes, falling to levels not seen since the lows of the Dot-Com bubble implosion of 2000. 

This means that the rate shock has abruptly curbed the pipeline of new loans and refinancings for mortgage companies — where the poorly capitalized ones will fail first. 

        From the same article:

The epicenter of the implosion will be independent lenders, such as First Guaranty, who recently filed for bankruptcy after it held onto loans it made that quickly dropped in value earlier this year while trying to package them up to sell to investors.

Court papers revealed lending volume dropped when mortgage rates spiked earlier this year. The company said it could no longer bundle new loans as its pipeline dried up. First Guaranty owes Flagstar Bank and Customers Bank approximately $418 million. It also cut hundreds of employees. 

Another independent lender, LoanDepot, laid off 4,800 jobs in July as its pipeline of mortgage volume dried up. 

        I expect a repeat of the housing crash that occurred at the time of the Great Financial Crisis at some level.

        The evidence suggests the onset of that collapse may be getting close.

          If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Inflation Delusions and the End of the Road

The “Inflation Reduction Act” passed recently will do nothing to reduce inflation.  It increases federal spending which can only be financed via additional currency creation by the Federal Reserve. 

            While there is not sufficient space in this short, weekly newsletter to thoroughly discuss all the provisions of this bill, there is one provision that I find very interesting to be included in a bill titled the “Inflation Reduction Act”.  It is the provision that more than doubles the budget of the Internal Revenue Service.

            This from “The Epoch Times”  (Source:  https://www.theepochtimes.com/house-democrats-pass-the-senates-inflation-reduction-act_4660815.html)

Included in the bill’s $700 billion in new spending is an $80 billion appropriation to the Internal Revenue Service—six times the agency’s current budget—as well as an array of new climate policies and tax incentives for individuals and corporations who switch to renewable energy sources and low-emission vehicles.

Broken down, the roughly $80 billion appropriation to the IRS will go toward “necessary expenses for tax enforcement activities … to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations (including investigative technology), to provide digital asset monitoring and compliance activities, to enforce criminal statutes related to violations of internal revenue laws and other financial crimes … and to provide other services.”

In addition, the funds would go to hire tens of thousands of new IRS agents to further aid enforcement of the new tax rules—which likely will mean far more audits across the board.

Unsurprisingly, the effort to expand the IRS is not popular with Republicans, who have generally opposed such efforts in the past.

“Democrats are scheming to double the size of the IRS by hiring an army of 87,000 new agents to spy on Americans,” wrote House Minority Leader Kevin McCarthy (R-Calif.) in an Aug. 4 tweet.

            As deficit spending will likely increase and potentially a new army of IRS agents hitting the streets, the math seems to dictate that the Federal Reserve is at the point of no return.  It’s been my view that the Fed will reverse course on the interest rate increases in the relatively near future since the Federal Government will need the Fed to continue to subsidize federal deficit spending.

            “International Man” published a piece by Nick Giambruno titled “It’s Game Over for the Fed; Expect a Monetary ‘Rug Pull’ Soon”.  This piece makes many of the same points that I have been making about the Fed’s options.

            Here are some excerpts:

You often hear the media, politicians, and financial analysts casually toss around the word “trillion” without appreciating what it means.

A trillion is a massive, almost unfathomable number.

The human brain has trouble understanding something so huge. So let me try to put it into perspective.

If you earned $1 per second, it would take 11 days to make a million dollars.

If you earned $1 per second, it would take 31 and a half years to make a billion dollars.

And if you earned $1 per second, it would take 31,688 years to make a trillion dollars.

So that’s how enormous a trillion is.

When politicians carelessly spend and print money measured in the trillions, you are in dangerous territory.

And that is precisely what the Federal Reserve and the central banking system have enabled the US government to do.

From the start of the Covid hysteria until today, the Federal Reserve has printed more money than it has for the entire existence of the US.

For example, from the founding of the US, it took over 227 years to print its first $6 trillion. But in just a matter of months recently, the US government printed more than $6 trillion.

During that period, the US money supply increased by a whopping 41%.

In short, the Fed’s actions amounted to the biggest monetary explosion that has ever occurred in the US.

Initially, the Fed and its apologists in the media assured the American people its actions wouldn’t cause severe price increases. But unfortunately, it didn’t take long to prove that absurd assertion false.

As soon as rising prices became apparent, the mainstream media and Fed claimed that the inflation was only “transitory” and that there was nothing to be worried about. Then, when the inflation was obviously not “transitory,” they told us “inflation was actually a good thing.”

Of course, they were dead wrong and knew it—they were gaslighting.

The truth is that inflation is out of control, and nothing can stop it.

Even according to the government’s own crooked CPI statistics—which understates reality—inflation is breaking through 40-year highs. That means the actual situation is much worse.

The US federal government’s deficit spending and debt are the most significant factors driving this money printing, resulting in drastic price increases.

The US federal government has the biggest debt in the history of the world. And it’s continuing to grow at a rapid, unstoppable pace.

It took until 1981 for the US government to rack up its first trillion in debt. After that, the second trillion only took four years. The next trillions came in increasingly shorter intervals.

Today, the US federal debt has gone parabolic and is well over $30 trillion.

If you earned $1 per second, it would take over 966,484 YEARS to pay off the US federal debt.

And that’s with the unrealistic assumption that it would stop growing.

The truth is, the debt will keep piling up unless Congress makes some politically impossible decisions to cut spending. But don’t count on that happening. In fact, they’re racing in the opposite direction now that they’ve normalized multitrillion-dollar deficits.

So, who is going to finance these incomprehensible shortfalls? The only entity capable is the Fed’s printing presses.

Allow me to simplify it in three steps.

Step #1: Congress spends trillions more than the federal government takes in from taxes.

Step #2: The Treasury issues debt to cover the difference.

Step #3: The Federal Reserve creates currency out of thin air to buy the debt.

In short, this insidious process is nothing more than legalized counterfeiting. It’s taxation without consent via currency debasement and is the true source of inflation. Mainstream media and economists perform incredible mental gymnastics to conceal and justify this fraud.

That’s how government spending, deficits, and the federal debt affect inflation.

As long as the average person doesn’t notice the rising prices, the system works well. However, once the price increases become painful enough, it creates political pressure for the Fed to combat inflation by raising interest rates.

The amount of federal debt is so extreme that even a return of interest rates to their historical average would mean paying an interest expense that would consume more than half of tax revenues. Interest expense would eclipse Social Security and defense spending and become the largest item in the federal budget.

Further, with price increases soaring to 40-year highs, a return to the historical average interest rate will not be enough to reign in inflation—not even close. A drastic rise in interest rates is needed—perhaps to 10% or higher. If that happened, it would mean that the US government is paying more for the interest expense than it takes in from taxes.

In short, the Federal Reserve is trapped.

Raising interest rates high enough to dent inflation would bankrupt the US government.

In short, the US government is fast approaching the financial endgame. It needs to raise interest rates to combat out-of-control inflation… but can’t because it would cause its bankruptcy.

In other words, it’s game over.

          If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

The ‘Inflation Reduction Act’ Will Do Anything But

          Last week, I pointed out that using the long-accepted definition of recession, the United States finds itself smack in the middle of one despite the fact that there are politicians and policymakers who would like to change the way a recession is defined.

          This past week, the Washington politicians collectively passed a bill that will do exactly the opposite of its name.  It seems that the “Inflation Reduction Act” will now become law.

          While an “Inflation Reduction Act” sounds like a good idea, the act will add to the inflation problem we are now facing in my view.

          Before I get into some of what this law will do, let’s revisit some simple math. 

          When the government or any other entity spends more than it takes in, we say that expenditures exceed income and the result is a deficit.  Deficit spending needs to be covered by borrowing money to make up for the shortfall.

          Repeated, chronic deficit spending will eventually see the pool of lenders willing to cover deficit spending shrink ultimately reaching a point where there are no lenders left to cover the operating deficit.

          That is essentially where the US has been with the Federal Reserve becoming the lender of last resort creating currency to (at least indirectly) cover the operating deficit.  As we all know that massive level of currency creation has led to inflation despite attempts to spin the inflation story more favorably.

          Bottom line is this:  the math is undeniable.  When deficit spending can only be covered by currency creation, a point of no return has been reached.  The math dictates that expenditures must not exceed income if currency creation is to cease.

          That math is a reality every place on the planet except in Washington DC.

          Only in Washington DC could a group of politicians pass a massive spending bill that will likely require more currency creation to fund (despite the narrative to the contrary) and call it an “Inflation Reduction Act”.

          It’s laughable if the ultimate economic consequences of this recklessness weren’t so serious.

          Former guest on my radio program and past Presidential candidate and congressman, Ron Paul commented this past week on this topic.  (Emphasis mine) (Source:  http://ronpaulinstitute.org/archives/featured-articles/2022/august/01/inflation-reduction-act-another-dc-lie/)

The Affordable Care Act, No Child Left Behind, and the USA PATRIOT Act received new competition for the title of Most Inappropriately Named Bill when Senate Democrats unveiled the Inflation Reduction Act. This bill will not only increase inflation, it will also increase government spending and taxes.

Inflation is the act of money creation by the Federal Reserve. High prices are one adverse effect of inflation, along with bubbles and the bursting of bubbles. One reason the Federal Reserve increases the money supply is to keep interest rates low, thus enabling the federal government to run large deficits without incurring unmanageable interest payments.
The so-called Inflation Reduction Act increases government spending. For example, the bill authorizes spending hundreds of billions of dollars on energy and fighting climate change. Much of this is subsidies for renewable energy — in other words green corporate welfare. Government programs subsidizing certain industries take resources out of the hands of investors and entrepreneurs, who allocate resources in accordance with the wants and needs of consumers, and give the resources to the government, where resources are allocated according to the agendas of politicians and bureaucrats. When government takes resources out of the market, it also disrupts the price system through which entrepreneurs, investors, workers, and consumers discover the true value of goods and services. Thus, “green energy” programs will lead to increased cronyism and waste.

The bill also extends the “temporary” increase in Obamacare subsidies passed as part of covid relief. This will further increase health care prices. Increasing prices is a strange way to eliminate price inflation. The only way to decrease healthcare
costs without diminishing healthcare quality is by putting patients back in charge of the healthcare dollar.

The bill’s authors claim the legislation fights inflation by reducing the deficit via tax increases on the rich and a new 15 percent minimum corporate tax. Tax increases won’t reduce the deficit if, as is going to be the case, Congress continues increasing spending. Increasing taxes on “the rich” and corporations also reduces investments, slowing the economy and thus increasing demand for government programs. This leads to increased government spending and debt. While there is never a good time to raise taxes, the absolute worst time for tax increases is when, as is the case today, the economy is both suffering from price inflation and, despite the gaslighting coming from the Biden administration and its apologists, is in a recession.

The bill also spends 80 billion dollars on the IRS. Supposedly this will help collect more revenue from “rich tax cheats.” While supporters of increasing the IRS’s ability to harass taxpayers claim their target is the rich, these new powers will actually be used against middle-class taxpayers and small businesses that cannot afford legions of tax accountants and attorneys and thus are likely to simply pay the agency whatever it demands.

Increasing spending and taxes will increase the pressure on the Federal Reserve to keep interest rates low, thus increasing inflation. If Congress was serious about ending inflation, it would cut spending — starting with overseas militarism and corporate welfare. A Congress that took inflation seriously would also take the first step toward restoring a free-market monetary system by passing Audit the Fed and legalizing competition in currency.

          I believe Dr. Paul has this absolutely correct.  The math doesn’t lie and no matter what this bill is called, more inflation will be the result.

          A less-reported aspect of the bill is that the IRS would double in size as a result.  Stephen Moore (Source:  https://marketsanity.com/the-so-called-inflation-reduction-act-will-add-87000-irs-agents/) reports that another $80 billion for the IRS will mean the workforce of the IRS will more than double and the end result will be 1.2 million new audits and 800,000 new tax liens.

          The IRS will become one of the largest agencies in government as a result of this bill.  This from a piece written by Jazz Shaw (Source:  https://hotair.com/jazz-shaw/2022/08/06/inflation-reduction-act-would-make-irs-among-the-largest-agencies-in-government-n487847):

Tucked away in the hilariously-named “Inflation Reduction Act” that Joe Manchin has been working on with Chuck Schumer is one significant bit of spending that has been mostly flying under the radar. The measure would fund a massive expansion of the Internal Revenue Service to the tune of eighty billion dollars. And we’re not using the word “massive” in a hyperbolic fashion here. This money would go toward hiring an additional 87,000 employees for the detested agency, more than doubling the size of its workforce. As the Free Beacon points out this week, that would make the IRS larger (in terms of manpower) than the Pentagon, the State Department, the FBI, and the Border Patrol combined. And what do they plan to do with that many people? Do you really need us to tell you?

          The “Free Beacon” piece referenced by Shaw suggested that the additional IRS funding is integral to the Democrat’s reconciliation package.  A Congressional Budget Office analysis found the hiring of new IRS agents would result in more than $200 billion in additional revenue for the federal government over the next decade.  More than half of that funding is specifically earmarked for enforcement, meaning tax audits and other responsibilities such as ‘digital asset monitoring’.

          While I don’t know precisely what ‘digital asset monitoring’ means, it seems that the politicians are hoping to use the IRS to control the use of crypto-currencies and maintain their monopoly in currencies.

            Bottom line is this in my view.  This bill will ultimately mean more inflation not less inflation.

          If you don’t yet have precious metals in your portfolio, now is a good time to consider them in my view.

          Metals prices are comparatively low at this point and it may be a good time to add this asset class to your portfolio.

          History teaches us that as fiat currencies evolve and are replaced, tangible assets like precious metals are where one should keep assets.

          If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Recession is Here:  Fed’s Next Move Will Be……

          Using the longstanding and widely accepted definition of recession, the United States now finds herself smack in the middle of one.

          If you’ve been a long-term reader of “Portfolio Watch”, you know that I have been suggesting that we are in recession since the first of the year.  Now, the facts are confirming that this is the case.

          The Bureau of Economic Analysis reported that second-quarter economic growth was negative.  This follows negative economic growth in the first quarter.  Two consecutive quarters of negative economic growth has always been the textbook definition of a recession.

          Despite the facts telling us that we are in a recession, there are many politicians and policymakers predictably trying to spin this dire economic news as better than it is.  While spinning a news story is nothing new, this one is a lot harder to put in a positive light.

          Perhaps that is why some of those who stand to be politically harmed by a recession are attempting to spin this story favorably by changing the accepted definition of a recession.  Yet, no matter how they try to spin it, the economy is weakening.  This from “Mises Wire”  (Source: https://mises.org/wire/gdp-shrinks-again-biden-quibbles-over-definition-recession):

The U.S. economy contracted for the second straight quarter during the second quarter this year, the Bureau of Economic Analysis reported Thursday. With that, economic growth has hit a widely accepted benchmark for defining an economy as being in recession: two consecutive quarters of negative economic growth. 

According to the BEA, the US economy contracted 0.9 percent during the second quarter in the first estimate of real GDP as a compounded annual rate. This follows the first quarter’s decline of 1.6 percent. 

This comes just a few days after the Biden administration’s Treasury Secretary Janet Yellen attempted to preemptively head off talk of labeling the decline a recession when she declared that a second consecutive decline in GDP doesn’t really point to recession, and “we’re not in a recession” because the labor market—a lagging indicator of economic activity—is allegedly too strong. 

 President Biden said the same on Monday. White House spokeswoman Karine Jean-Pierre continued Yellen’s PR campaign on Wednesday quibbling over the “technical” definition of a recession

Given Thursday’s GDP numbers, however, the most appropriate answer to the question “is the US technically in a recession?” is “who cares?” The data is clear that the US economy is extremely weak and gives every impression that it’s getting weaker. 

Moreover, the “technical” definition of a recession is decided by an obscure panel of eight economists—seriously, it’s eight economists from prestigious universities—who decide if the US is “technically” in recession. 

Meanwhile, on the street, two-quarters of declining economic growth means “the economy isn’t looking good” however one wants to slice and dice it. Or, as Rick Santelli put it Thursday morning, the two-quarters-of-negative-growth definition may not be the “technical” definition, but it is a recession “in the eyes of investors who trade in markets.” That is, for people in the real world who buy and sell things, the US is either in recession or something very close to it. Santelli concludes “call it whatever you want.” 

Meanwhile, the Federal Reserve and the administration are tenaciously clinging for dear life to the job numbers as evidence that the economy is doing too well to be called a recession. Perhaps. But the job numbers are nothing to crow about and point toward more weakening themselves. When we look at real wages, the news is anything but great. Specifically, both Fed chair Powell and Sec. Yellen have repeatedly pointed to the nonfarm total employment numbers, and the JOLTS data showing a healthy supply of job openings. But this is only a small slice of the story. 

For example, there are two surveys of employment, and only the “establishment” survey of large businesses shows job gains. The household survey, on the other hand, shows jobs have gone nowhere for months, and have even declined slightly (month-over-month) for two of the past three months. The establishment survey is a survey of jobs. The household survey is a survey of employed persons. The fact that the former is growing while the latter isn’t, suggests people are taking on second jobs to deal with price inflation, but that more people aren’t actually becoming employed. 

This would make sense given that real wages have fallen below the trend. Looking at median weekly real earnings, we find that incomes are falling. That’s not exactly evidence the economy is too strong to be in recession. 

Other indicators often look even more grim. The yield curve points to recession. The small business index—which goes back 50 years, just hit a record low. The Chicago Fed’s National Activity Index shows two months below trend—which points to recession. 

So, will the NBER’s little board of economists conclude the US was “technically” in recession in mid 2022 when it issues its opinion months from now? It doesn’t really matter when it comes to making a judgment about the state of the economy right now. The state of the economy is not good.

          One example of the economy weakening can be found when looking at the automobile industry.  This, from “Zero Hedge”  (Source:  https://www.zerohedge.com/markets/july-new-vehicle-retail-sales-expected-crash-108):

It sure looks like the recession that the White House continues to claim doesn’t exist is hitting the auto market. At least according to new projections by J.D. Power, who this week released their estimates and analysis for July 2022. 

A joint forecast from J.D. Power and LMC Automotive predicts that “retail sales of new vehicles this month are expected to reach 988,400 units, a 10.8% decrease compared with July 2021 when adjusted for selling days”.

Without adjusting for the one less selling day in July 2022, the plunge would have been 14.1%. 

          Meanwhile, the Federal Reserve continues to tighten.  At the recent Fed meeting, the Fed Funds rate was increased by .75% getting the rate to between 2.25% and 2.50%; hardly a move back toward interest rates that one would consider to be more ‘normal’ from a historical perspective.

          Moving ahead, the Fed has stated that fighting inflation remains a top priority.  That statement would seem to suggest more interest rate increases.

          I will go on record again stating that I believe the Fed will reverse course at some point in the next 6 to 12 months and begin to reduce interest rates again pointing to a weak economy that might need support.

          The Fed Chair, Jerome Powell, seemed to begin to open the door to such a possibility in his statement after the last Fed meeting.  This from an article published on “Schiff Gold”  (Source: https://schiffgold.com/commentaries/is-the-federal-reserve-at-the-end-of-its-rope/):

Federal Reserve Chairman Jerome Powell left even more space to retreat from the inflation fights, saying there is “significantly” more uncertainty right now than normal and the lack of any clear insight into the future trajectory of the economy means the Fed can only provide reliable policy guidance on a “meeting by meeting” basis.

The markets seemed to interpret the Fed’s stance as more doveish. Stocks were up, as was gold.

When interest rates reached this level in 2018, the stock market crashed and economic data went wobbly.  In response, the Fed reversed course and put tightening on pause.  In 2019, it cut rates three times and relaunched quantitative easing.  This all happened long before the extraordinarily loose monetary policies in the wake of the coronavirus pandemic.

          Should the Fed’s policy reverse in the relatively near future as I believe it will, the price inflation we are now experiencing in consumer goods will likely intensify.

          If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Are Precious Metals Markets Manipulated?

            This week I’m going to discuss a topic that I am often asked about; that is the manipulation of the precious metals markets.  More specifically, are the prices of precious metals manipulated?

            While I can’t speak to the frequency of the manipulation of precious metals prices, there is indisputable evidence that this market has been rigged some of the time in the past.  This from Ronan Manly of “Bullion Star” (Source:  https://www.zerohedge.com/markets/despite-manipulating-precious-metals-prices-jp-morgan-still-heart-lbma-sbma-and-comex):

With a group of former JP Morgan precious metals traders currently on criminal trial in front of a federal jury in Chicago, accused of engaging in a racketeering conspiracy involving precious metals price manipulation, commodities fraud and trade spoofing, while another group of their colleagues have already pleaded guilty, now is a good time to ask how the bank JP Morgan is still considered fit and proper to not only continue to trade in the precious metals markets, but to continue to literally dominate the entire precious metals industry in London, Singapore and New York, with the support of the London Bullion Market Association (LBMA), the Singapore Bullion Market Association (SBMA) and the CME Group (operator of the COMEX and NYMEX).

While JP Morgan made a deferred prosecution deal with the US Department of Justice (DoJ) and Commodity Futures Trade Commission (CFTC) in 2020 and admitted wrongdoing for the criminal conduct of numerous JP Morgan traders and sales personnel on the bank’s precious metals desk located in London, Singapore, and New York, while paying US$ 920 million in the form of a criminal monetary penalty, criminal disgorgement, and victim compensation in relation to this criminal precious metals scheme, the LBMA and SBMA and CME Group (owner of COMEX), as you will see below, continue to not only welcome the proven criminal bank JP Morgan with open arms, but to allow JP Morgan to operate at the highest levels of each organization.

The current criminal trial, which kicked off on Friday 8 July 2022, with the US DoJ and CFTC as prosecution, accuses Michael Nowak (former head of JP Morgan’s precious metals trading desk), Gregg Smith (former JP Morgan precious metals trader) and Jeffery Ruffo (former JP Morgan precious metals salesman) of being involved in a criminal enterprise that entered and cancelled thousands of fake precious metals futures orders (deceptive orders) for gold, silver, platinum and palladium futures contracts traded on COMEX and NYMEX between March 2008 and August 2016 in order to manipulate precious metals prices as well as manipulate barrier options based on the futures prices.     

A fourth former JP Morgan precious metals trader, Christopher Jordan, who left JP Morgan in December 2009, is also accused of similar crimes by the DOJ and will be tried separately.  

The Nowak – Smith – Ruffo trial is being presided over by Edmond E. Chang, United States District Judge. Unbelievably  (or maybe not), Nowak’s defense lawyer in the trial is none other than David Meister, who from 2010 – 2013 was the CFTC’s Director of Enforcement, and who was at the CFTC during the chairmanship of Gary Gensler during which time the CFTC did a 5 year investigation into precious metals price manipulation, and then shut down the investigation claiming it had found no evidence of manipulation. That could explain why Meister is called “the Gensler Whisperer” by lawyer profile experts Chambers.

At the time the indictment of Nowak, Smith, and Jordan was unsealed in September 2019, US Assistant Attorney General Brian A. Benczkowski at the DOJ said: 

“The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants.

In the current trial of Nowak, Smith, and Ruffo, the US Government is calling two other former JP Morgan precious metals traders as witnesses for the prosecution, namely John Edmonds, Christian Trunz, and one colleague of Gregg Smith’s who worked with him at Bear Stearns, namely Corey Flaum.

Edmonds and Trunz have already pleaded guilty to their roles in the JP Morgan criminal scheme, and Flaum has already pleaded guilty to manipulating precious metals prices via COMEX futures between 2007 and 2016.

As of the time of writing, John Edmonds, Corey Flaum, and Christian Trunz have all just testified to the federal jury in the Nowak – Smith – Ruffo trial. 

On 9 October 2018, John Edmonds pleaded guilty to “commodities fraud and a spoofing conspiracy in connection with his participation in fraudulent and deceptive trading activity in the precious metals futures contracts markets”.

Edmonds admitted that:

“from approximately 2009 through 2015, he conspired with other precious metals traders at the Bank to manipulate the markets for gold, silver, platinum and palladium futures contracts traded on the COMEX and NYMEX.”

Notably, Edmonds also:

“admitted that he learned this deceptive trading strategy from more senior traders at the Bank, and he personally deployed this strategy hundreds of times with the knowledge and consent of his immediate supervisors.”

On 25 July 2019, Corey Flaum (who worked with Gregg Smith at Bear Sterns before Smith moved to JP Morgan) pleaded guilty to attempted commodities price manipulation and admitted that:

“between approximately June 2007 and July 2016, [he] placed thousands of orders to manipulate the prices of gold, silver, platinum and palladium futures contracts traded on COMEX and NYMEX.”

Corey Flaum worked at Bear Stearns from 2006 until 2008, and then worked at Scotia Capital from 2010 until 2016.

On 20 August 2019, Christian Trunz, “a former precious metals trader at the London, Singapore, and New York offices of JP Morgan” pleaded guilty to conspiracy and spoofing charges. Trunz also admitted that:

“between approximately July 2007 and August 2016, [he] placed thousands of orders that he did not intend to execute for gold, silver, platinum and palladium futures contracts traded on the NYMEX and COMEX).”

Notably, the DoJ says that Trunz admitted that he:

“learned to spoof from more senior traders, and spoofed with the knowledge and consent of his supervisors.”

Trunz is interesting in that he worked at various times in all three locations that JP Morgan’s global trading desk spans, i.e. London, Singapore, and New York. 

The guilty please of Edmonds, Flaum, and Trunz over 2018 – 2019 then allowed the US Department of Justice to move forward with its indictment of Michael Nowak, Gregg Smith, and Christopher Jordan, an indictment which was filed on 22 August 2019, and then unsealed on 16 September 2019. In fact, the Nowak – Smith – Jordan indictment was filed only 2 days after Trunz had pleaded guilty.

            I would encourage you to read the entire article at the link posted above. 

            Here are my points.

            One, despite admitted price manipulation, gold and silver prices have moved steadily upward since 2007 when the price manipulation allegedly began.  This demonstrates that as currency is created, it is ultimately difficult, perhaps impossible to keep metals prices down.

            Two, as noted here previously, JP Morgan paid nearly $1 billion in criminal and civil penalties in 2020 as part of a deferred prosecution agreement.  The current trial of those accused of price manipulation in the precious metals markets is a result of the continuation of that original investigation.

            Finally, three, despite these events, JP Morgan remains a prominent player in precious metals markets.  Despite the fines and the deferred prosecution agreement, JP Morgan has three entities that are part of the London Bullion Market Association.  The author of this article, Mr. Ronan Manly comments:

Why have the LBMA and the LPPM not kicked JP Morgan out of their associations? Has the LBMA no moral compass or ethics? Additionally, why does the Bank of England observer on the LBMA Board, Andrew Grice, not call for JP Morgan to be immediately ejected from the London Bullion Market Association (LBMA) and the London Platinum and Palladium Market (LPPM) and permanently banned from trading, clearing and vaulting gold, silver, platinum and palladium in London?

Perhaps it has something to do with the fact that, through Morgan Guaranty Trust Company of New York, JP Morgan was one of the 6 founding members of the London Bullion Market Association (LBMA) in November 1987.

            I believe that, moving ahead, should the Fed reverse course on tightening (which I believe they will), it will be next to impossible to keep precious metals prices down.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Credit Card Use and Inflation

          During this week’s “Headline Roundup” newscast (broadcast live every Monday at noon, then posted at www.RetirementLifestyleAdvocates.com), I expounded on a trend I discussed previously.  That trend is that consumer spending is being increasingly funded by debt accumulation, primarily on credit cards.

          This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/recession-imminent-spending-fueled-debt-savings-run-dry):

The US personal savings rate is near a five-year low as pandemic fiscal stimulus savings run dry. 

But consumers are still spending with credit.

How long can consumers keep spending with revolving credit at the highest level in decades?

The risk is that equity markets have a lot more room to the downside.

The danger is that consumer spending, which drives some 70% of GDP, will soon be tapped out.

Lower spending, lower earnings with lower economic growth, while inflation is still running hot, will likely leave equities nowhere to go but down.

          Consumers are tapped out, with many using credit cards to fund spending.

          One has to realize that many of these consumers who are using credit cards to fund spending would rather not, they just don’t have any other choice as inflation continues to intensify.  This from “The Washington Examiner”  (Source:  https://www.washingtonexaminer.com/policy/economy/inflation-producer-index-june-near-highest-record)

Inflation as measured by producer wholesale prices ticked up to a red-hot 11.3% for the year ending in June, according to a report Thursday from the Bureau of Labor Statistics, near the highest on record.

Thursday’s report comes a day after headline inflation as measured by the consumer price index exploded to 9.1% for the 12 months ending in June, the highest level since 1981 and a bigger increase than expected.

The new producer price index numbers are just another indicator that prices are wildly out of control even as the Federal Reserve moves ever more aggressively to jack up interest rates to rein in the country’s historic inflation.

The PPI gauges the wholesale prices of goods, which are eventually passed down to consumers.

“Despite a modest improvement in supply conditions, price pressures will remain uncomfortable in the near term and bolster the Fed’s resolve to prevent inflation from becoming entrenched in the economy,” economists with Oxford Economics said.

The high rate of inflation has politically damaged President Joe Biden and undercut support for spending proposals from the White House and congressional Democrats.

Last month, the central bank hiked its interest rate target by a whopping three-fourths of a percentage point for the first time since 1994. The Fed typically raises rates by a quarter of a percentage point, or 25 basis points, so the June hike was analogous to three simultaneous rate increases.

The Fed is set to meet again later this month, and it will likely raise its rate target by another 75 basis points, although some analysts think that the central bank could act even more aggressively and raise interest rates by a full percentage point.

Nomura, a major Japanese financial holding company, is now predicting that the Fed will raise rates by 100 basis points, given Wednesday’s hotter-than-anticipated inflation reading.

Atlanta Fed President Raphael Bostic said that “everything is in play,” including a full percentage point hike, after June’s CPI report, according to Bloomberg.

There are concerns that the Fed’s aggressive cycle of rate hiking will knock the economy into a recession, fears that worsen as inflation keeps growing higher and the Fed keeps having to take a more hawkish approach to monetary policy.

          I have stated that I believe we have been in a recession since the end of calendar year 2021.  I have also stated that inflation will likely not be subdued until real positive interest rates exist, in other words, interest rates are higher than the inflation rate.

          We are a long way from that.

          As the chart below illustrates, the current Fed Funds rate is hovering just under 2%.

        Even if the Fed raises interest rates by 1%, inflation will probably not be affected but financial markets may be.

          I expect that before the year is over the Fed will reverse course on the interest rate increases so the ‘economy can be supported’.  I should also point out that there are some analysts who disagree with me on this arguing that the dollar would be devalued to an even greater extent, further threatening it’s use as an international currency.

          I believe that is the outcome that the Fed will choose given that that other choice is a painful deflationary period.

          Ironically, the painful deflationary period will probably not be avoided.  In fact, we may be witnessing the onset of such a period presently.  Stocks are down significantly year to date and I believe real estate will soon follow. 

          Take a look at this chart illustrating US housing prices versus wage growth.  Seems apparent that this housing bubble is bigger than the one at the time of the financial crisis.

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