Weak Stocks, Raging Inflation and Where We Probably Go From Here

            Financial markets continued to reflect a weakening economy last week.  Stocks, measured by the Standard and Poor’s 500 are now down nearly 25% year-to-date.  This from “Yahoo Finance” (Source:  https://ca.finance.yahoo.com/news/asian-stocks-set-fall-global-223134465.html)

US stocks suffered their worst monthly rout since March 2020 after markets were repeatedly pummeled by the Federal Reserve’s resolve to keep raising interest rates until inflation is under control.

The S&P 500 closed a volatile session lower. The index posted its third straight quarter of losses for the first time since 2009. US Treasuries dropped Friday after a late selloff into the month-end, with the benchmark 10-year yield around 3.82%.

Fed Vice Chair Lael Brainard briefly assuaged concerns on Friday after she acknowledged the need to monitor the impact rising borrowing costs could have on global-market stability. But markets continued to be on the edge as investors contended with continued strength in personal consumption expenditure, one of the Fed’s preferred inflation gauges.

Risk assets have been in a tailspin since the central bank delivered a third jumbo hike last week and officials repeatedly warned of more pain to come. UK markets added to the stress this week, after the government unveiled sweeping tax cuts that threatened to exacerbate inflationary pressures, and the Bank of England attempted to manage the mayhem that ensued.

Investors are now awaiting jobs data next week for further clues about the Fed’s rate-hike trajectory. Upcoming inflation and GDP readings will also provide details on whether price pressures are easing meaningfully. All eyes will be on the earnings season, which starts next month, for insight into how companies are managing through headwinds that include a strong dollar, rising expenses and slowing demand. Fears of a global recession are still mounting as the threat of higher rates saps growth.

            I find it interesting how perspective has changed over time.  The Fed increased interest rates by .75% to 3.25% and it’s called a ‘jumbo’ rate hike.  The fact that the S&P 500 is down nearly 25% year-to-date and the Fed Funds rate is just over 3% shows you just how addicted to easy money this market and economy have been.

            The Fed narrative is that interest rates are being increased to get inflation under control.  But, as I have often noted, it is unlikely that inflation is subdued until we get real positive interest rates.  We are still a long way from that and inflation is not yet slowing.

            The July reduction in the core inflation rate turned out to be the exception rather than a new, viable trend.  This from “Wolf Street”  (Source:  https://wolfstreet.com/2022/09/30/feds-favored-inflation-index-says-underlying-inflation-just-isnt-slowing-down/):

Just briefly here: The Fed uses the “core PCE” inflation index, released by the Bureau of Economic Analysis, as yardstick for its inflation target. This “core PCE” index – the overall PCE inflation index minus the volatile food and energy components – is therefore crucial in the current rate-hike scenario, amid red-hot inflation, when everyone wants to know when inflation is finally going to cry uncle.

Some folks thought that happened in July, when the month-to-month “core PCE” inflation slowed to “0%” (rounded down).

Turns out this much-ballyhooed month-to-month “core PCE” reading in July of “0%” was just a one-off event. In August, according to the BEA today, the core-PCE inflation index jumped by 0.6%, same as the multi-decade records in June 2022 and in April 2021 (all rounded to 0.6%). As Powell had said during the FOMC press conference: Underlying inflation is just not slowing down.

This “core PCE” is the lowest lowball inflation index the US government provides. But it is crucial in figuring out where the Fed’s monetary policy might go, and how far the Fed might go with its rate hikes, and when it might pause.

Compared to a year ago, the “core PCE” price index rose 4.9% in August, up from 4.7% in July.

This year-over-year measure is what the Fed uses for its 2% inflation target. But given the huge volatility in inflation last year, Powell said that they would be looking at month-to-month developments to get a feel of where inflation might be headed. They’re looking for “compelling” evidence that inflation is headed back to the 2% target.

            Seems we now find ourselves in a place where financial assets are losing value, but inflation is still a huge economic factor.  The question remains if the Fed will maintain its resolve to continue to increase interest rates until the 2% target is reached, or if they will capitulate and once again look to support the financial markets and the economy via easy money policies. 

            I believe the latter is more likely by sometime next year which will likely mean a continued wild ride for financial markets.

            The Bank of England just reversed its tightening program, doing an about face and once again beginning to create currency in order to buy gilts, or bonds issued by the British government.

            Past guest on the RLA Radio Program, Alasdair Macleod, had this to say on the topic (Source:  https://www.goldmoney.com/research/the-crisis-is-upon-us)

The big news was the collapse of the UK gilt market’s long maturities, which required the Bank of England to intervene, buying £65 bn in long gilts on Wednesday.  The situation arose out of pension funds leveraging their gilt portfolios through interest rate swaps and repurchase agreements up to seven times in an attempt to match their actuarial liabilities through liability-driven investing (LDI).  With over £1 trillion outstanding, a doom-loop of selling to meet margin calls was an emerging crisis which had to be stopped.

It’s been a wake-up call for investors who were not even aware of LDI’s, let alone the Lehman moment they brought about.  LDI’s are also common in the EU and the US so the problem is unlikely to be confined to London.

            The pension funds in the UK had taken on a lot of leverage to attempt to get returns that would allow them to meet their obligations.  Pension funds in the US have done the same thing as I have written about previously.

            It would not be surprising to see something similar happen here.  That would force the fed to reverse course and begin easy money policies once again.  While the crisis even here in the US may not be pensions, there are a number of other crisis-type events that could trigger the Fed’s policy reversal.

            While I don’t know what that event might be, I expect it will happen and we will once again see the Fed pursuing easy money policies.

            Ultimately, we will not avoid a deflationary event that will be unlike anything any of us have ever seen in my view. 

            As I write this the sage wisdom of Thomas Jefferson keeps running through my mind (if you’re a long-time reader, you’ve heard this before):

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the very continent their fathers conquered.”

            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.

Is Housing Confirming the Recession?

        Last week, I offered practical evidence that the US economy was in recession citing the examples of FedEx pulling its 2023 earnings guidance and the ‘unretirement’ trend that is now picking up steam.

        If you are among those who are of the belief that the long-held and widely accepted definition of a recession (two consecutive quarters of economic contraction) no longer applies, the real-world facts don’t support such an idea.

        This week, I’ll present some evidence that the real estate market is on the heels of the stock market, ready to move significantly lower.

        Incidentally, year-to-date, the Standard and Poor’s 500 is down more than 22% by my measure.  I expect that stocks will ultimately go lower and the evidence suggests that real estate is now following suit.

        Wolf Richter gathered some data this past week on the current state of the real estate market (Source:  https://wolfstreet.com/2022/09/21/housing-bubble-woes-home-prices-drop-3-5-steepest-monthly-drop-since-jan-2016-sales-already-at-lockdown-levels-drop-further-active-listings-rise-further/)

In July and through mid-August, mortgage rates fell sharply from the 6%-range in mid-June, on the widely propagated fantasy of a Fed “pivot” on rate hikes. By mid-August, the average 30-year fixed mortgage rate was down to 5%. Yesterday, they were at 6.47%. But the brief interlude of dropping mortgage rates slowed down the decline in home sales – sales declined again in August from July but at a slower rate – with Realtors in mid-August talking about the market waking back up.

But prices backed off for the second month in a row, and in a big way, amid widespread price reductions, and that also helped get some deals done.

The median price of existing single-family houses, condos, and co-ops whose sales closed in August dropped a hefty 3.5% in August from July, the largest month-to-month percentage drop since January 2016, after the 2.4% drop in the prior month, to $389,500, according to the National Association of Realtors. While there is some seasonality involved, the percentage drop was much bigger than normal in August, whittling down the year-over-year price increase to 7.7%, down from the 25% year-over-year increases last summer (data via YCharts):

In the West, price drops are further advanced, amid dismal sales. For example, in San Francisco and in Silicon Valley, median prices have plunged in recent months – now down on a year-over-year basis in San Francisco and Santa Clara County (San Jose) and up just a hair in San Mateo County, according to data from the California Association of Realtors.

Sales of existing houses, condos, and co-ops across the US dipped a smidgen from July, after the 5.9% plunge in the prior month, to a seasonally adjusted annual rate of sales of 4.80 million homes, roughly level with lockdown-June 2020, according to the National Association of Realtors in its report. This was the seventh month in a row of month-to-month declines.

Beyond the lockdown months, it was the lowest sales rate since 2014, and down by 29% from October 2020 (historic data via YCharts).

Sales of single-family houses dropped by 0.9% in August from July, and by 19% year-over-year, to a seasonally adjusted annual rate of 4.28 million houses.

Sales of condos and co-ops rose 4% from July to 520,000 seasonally adjusted annual rate, down 25% year-over-year.

Compared to August last year, sales fell by 20%, the 13th month in a row of year-over-year declines, based on the seasonally adjusted annual rate of sales.

Sales volume has been low because potential sellers are clinging to their aspirational prices of yesteryear when mortgage rates were 3%, and many would rather keep the home off the market or pull it off the market than sell for less, for as long as they can. But price reductions have now taken off, by sellers who want to sell.

Price reductions started spiking in May from record low levels last winter and spring as sales stalled, and as mortgage rates surged. In July, they reached the highest level since 2019, according to data from realtor.com. In August, price reductions dipped just a little as sellers might have felt that price reductions were less needed, amid the declining-mortgage-rate-Fed-pivot fantasy in July and August.

Active listings – total inventory for sale minus the properties with pending sales – rose to 779,400 homes in August, the highest since October 2020, up by 27% from a year ago, according to data from realtor.com:

The National Association of Realtors is clamoring for more single-family houses to be built. But homebuilders, they are having trouble selling the houses that they have already built or are building, sales have plunged, inventories have spiked to the highest since 2008, and homebuilders have started cutting prices, buying down mortgage rates, and piling on other incentives to get their inventory moving.

        If you read that carefully, you noted an amazing statistic – inventories of ‘spec’ houses are now at the highest level since 2008 which saw the worst of the Great Financial Crisis.  At that point, housing prices had already experienced a big decline.  Now, we find ourselves in a similar situation and it seems we may be at the onset of the housing price decline.

        I expect it to be severe.

        Just like the recession.

            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.

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.

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