Inflation – Dennis Tubbergen

Inflation and Debt Realities

Ever since the updated “New Retirement Rules” book was published in 2016, I have been warning that debt excesses would lead to a severe deflationary environment.

While such an economic climate has not yet fully emerged, there are signs that we are entering such a period. Stocks have fallen 20% from their peak, real estate markets are running out of steam, and the Federal Reserve is raising interest rates to attempt to tame inflation. Ironically, Federal Reserve easy money policies have led to the inflation we have been experiencing, and now the Fed is attempting to solve a problem that it had a big role in creating.

Meanwhile, as Americans are trying to deal with the inflationary environment, credit card debt has been rising – now topping $1 trillion for the first time in history. This¹ from “ABC News”:

U.S. consumers’ total credit card debt exceeded $1 trillion for the first time, according to a new study by the personal finance website WalletHub.

Consumers took on an additional $92.2 billion in debt last year, the highest single-year amount since 2007. The average U.S. household owes $8,600 on credit cards, WalletHub found.

The accumulation of debt reflected Americans’ confidence in the economy, according to Jill Gonzalez, a senior analyst at WalletHub.

“We haven’t seen anything like this,” she told ABC News. “Consumer confidence is at its highest point. Since the recession, people have been saving up for houses, cars … new furniture and appliances, which often get charged on credit cards.”

I find it interesting that Ms. Gonzalez interprets such high credit card debt as somehow being good for the economy.

In my view, Ms. Gonzales’ rationale for such a conclusion is completely nonsensical. If consumers have indeed been “saving up” for major purchases like cars, furniture, and appliances, it seems that credit card debt would not be higher; instead, it would be lower.

If I were saving up for a major purchase and elected to put the purchase on a credit card, I would be paying off the credit card balance on the due date to avoid interest charges.

This is NOT what is happening.

Instead, consumers are carrying balances on their credit cards.

And a quick review of the retail sales numbers confirms that this record-high level of credit card debt is not due to retail purchases. This² from “Market Watch”:
The numbers: Sales at retailers fell 0.4% in February and declined for the third time in four months, pointing to a slowdown in consumer spending as higher interest rates take a bite out of the U.S. economic growth.

Retail sales are a big part of consumer spending and offer clues about the strength of the economy. Sales had been forecast to fall 0.4%, based on a Wall Street Journal poll of economists.

Setting aside car dealers and gas stations, U.S. retail sales were still fairly tepid. Receipts fell at department stores, home centers and outlets that sell home furnishings, clothing and sporting goods.

Seems that these numbers invalidate the opinion of Ms. Gonzales.

It seems more likely that the reason credit card balances topped $1 trillion is that consumers are feeling the pinch of inflation and dealing with it by taking on debt.

Of course, this will only exacerbate the debt problem and make the eventual deflationary environment worse.

Another headwind for the economy and the government is the ever-increasing cost of servicing the US Government’s debt.

This⁴ from “Global Macro Monitor”:

Interest payments on the national debt during the current fiscal year (October to February) are up 29 percent y/y, one of the fastest-growing expenditure components of the Federal budget (see table).

Revenues are down, especially individual income taxes, which may reflect the slowing economy. Theory dictates (ceteris paribus) that government tax revenues should be rising with inflation, however. Hmmm.

The fact income tax receipts are lower but self-employment tax revenues (1099 employees) are higher, coupled with what is happening with the employment data, can we hypothesize that high income earners are leaving the workforce (or getting fired) and starting their own businesses, such as consultants, for example? Or could it be just a timing issue?

The overall deficit is exploding, btw, up 50 percent.

If the current situation normalizes and Treasury securities lose their flight-to-quality bid, interest rates are going to spike faster than one of Elon’s rockets.

Interest costs to service the debt are higher, and tax revenues are lower (can you say recession?).

Worse yet, can you say financial crisis ahead? Whether it is around the corner or a few years off, the current spending trajectory is not sustainable.

As the economy slows, expect tax revenues to decline and deficits to widen even further.

The overriding theme of the current world economy is excessive debt. Debt excesses exist in the private sector and on the balance sheet of nearly every world government.

Applying a little common sense (which has almost gone the way of the dinosaur) to the current worldwide debt situation has one concluding that there is no way for the debt to be paid.

The only question is how long it will be before the full reset arrives.

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The Problem with Fractional Reserve Banking and an Interesting Irony

Last week, I discussed the failure of Silicon Valley Bank and the harsh realities of the fractional reserve banking system.

Since I wrote that piece last week, there have been more bank failures and bank rescue packages.

Signature Bank followed Silicon Valley Bank. Credit Suisse was propped up with a $54 billion loan from the central bank of Switzerland. First Republic Bank is being bailed out by bigger banks.

As I have been stating here for a VERY long time, when there is too much debt to be paid, it won’t be paid. And, since banks have debt as assets, when debt goes unpaid, banks fail.

In the case of Signature Bank, there is an interesting ancillary story.

First, the facts around the Signature Bank failure. While I am no longer a fan of the editorial content of “Forbes”, the magazine did report on the Signature Bank failure (Source: https://www.forbes.com/sites/brianbushard/2023/03/13/what-happened-to-signature-bank-the-latest-bank-failure-marks-third-largest-in-history/?sh=b4456b890ff6):

Signature Bank, a New York-based regional bank that became a leader in cryptocurrency lending, shuttered suddenly on Sunday, marking the third-biggest bank failure in U.S. history just two days after the country’s second biggest failure, Silicon Valley Bank, rocked the stock market and reignited fears of “challenging and turbulent” economic times.

New York’s Department of Financial Services announced Sunday it had taken possession of the bank, which had more than $110 billion in assets and more than $88 billion in deposits as of the end of last year.

Signature Bank became the third regional bank to collapse in a matter of weeks, following the high-profile collapse of California-based crypto-friendly banks Silvergate Bank and Silicon Valley Bank, whose failure spooked investors wary of widespread financial vulnerability.

Interestingly, one of the Signature Bank board members is former US Congressman and co-sponsor of the Dodd-Frank Act, Mr. Barney Frank.

If you’re not familiar with the Dodd-Frank Act, it was passed in 2010 in response to the banking failures at the time of the Great Financial Crisis. Dodd-Frank (among other things) created the Financial Stability Oversight Council. According to the Dodd-Frank Act, the FSOC has three primary purposes (Source: https://www.investopedia.com/terms/f/financial-stability-oversight-council.asp):

“To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.
To promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.
To respond to emerging threats to the stability of the U.S. financial system.”

I find number 2 above especially interesting. Reading it, one would logically conclude that bailouts would be a thing of the past. But, as we all know, bailouts are once again being used to make depositors, even uninsured depositors, whole. This from “CBS News” (Source: https://www.cbsnews.com/news/silicon-valley-bank-signature-bank-collapse-joe-biden-cbs-news-explains/)

The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.

In a bid to contain the risk of contagion, financial regulators announced Sunday that they will guarantee all deposits at the banks, while President Biden said Monday that “Americans can have confidence that the banking system is safe.”

In the case of the Signature Bank failure, there is an interesting, ironic side story. Seems that the co-sponsor of the Dodd-Frank Act, former congressman Barney Frank, is on the Board of Directors of Signature Bank. This from “The Wall Street Journal” (Source: https://www.wsj.com/articles/barney-frank-signature-bank-failure-silicon-valley-bank-dodd-frank-congress-elizabeth-warren-d1588178?mod=djemalertNEWS):

Life is full of irony, but it’s hard to think of a richer one than Barney Frank sitting on the board of the failed Signature Bank. The former Congressman who was the scourge of Wall Street, the co-author of the Dodd-Frank Act that was supposed to keep the banking system safe, wasn’t able to prevent his bank from becoming one of the first casualties of the latest bank panic.

It’s amusing to think of Mr. Frank cashing a check as a bank director, but then even left-wing former Congressmen have to make a living. And in Mr. Frank’s case, it has been a nice one, with cash compensation of $121,750 and stock awards of $180,182 in 2022 alone. He’s been on the board since 2015. Perhaps out of office and late in life, Mr. Frank developed a strange new respect for capitalism.

Mr. Frank once famously said he wanted to “roll the dice” to ramp up lending on Fannie Mae and Freddie Mac before they failed. Signature seems to have done the same as it dove into crypto during the Federal Reserve-fueled financial mania.

In recent interviews, Mr. Frank is blaming crypto for the bank’s demise in the wake of the Silicon Valley Bank (SVB) closure on Friday. He told Politico that Signature was in good shape as recently as Friday, but was then hit by “the nervousness and beyond nervousness from SVB and crypto.” He said the bank is the “unfortunate victim of the panic that really goes back to FTX,” the failed crypto exchange.

Mr. Frank seems to blame regulators for taking a needlessly hard line against Signature because of crypto. “I think that if we’d been allowed to open tomorrow, that we could’ve continued,” Mr. Frank told Bloomberg. “We have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit.”

We sympathize with Mr. Frank because the Biden Administration really does want to purge the U.S. banking system of any dealings with crypto companies. It may be that the regulators decided to roll up Signature Bank because of its crypto association. It wouldn’t be the first time regulators saw an opening in a crisis to achieve a political goal by other means.

If Mr. Frank is right, he now knows how hundreds of thousands of other people in business feel when regulators panic for political reasons and look for businesses to shut or blame.

As for the failure of Dodd-Frank’s regulatory machinery to prevent the latest bank failures, Mr. Frank is taking no blame. He says the reforms made the system sturdier, and he also dismisses claims by Sen. Elizabeth Warren that some modest Trump-era changes in bank rules for mid-sized banks made a difference.

“I don’t think that had any effect,” Mr. Frank told Bloomberg. “I don’t think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion.” He ought to know from where he sat on the Signature board.

Mr. Frank is getting a painful education in the difficulty of running a company when politicians don’t like the business you’re in.

The reality is, as I noted last week, that under the fractional reserve banking system, even banks that would be considered healthy by current standards can be taken out by a bank run by depositors. This is a reality that was reiterated in a recent MSNBC interview by former FDIC Chair Sheila Bair. (Source: https://www.msn.com/en-us/money/companies/banking-system-on-the-verge-of-a-bear-stearns-moment-former-fdic-chair/ar-AA18LP2A)

Bair added that the “immediate problem” posed by the situation in the banking system is “if people start to panic and take deposits out of a perfectly healthy bank, they’re going to force that bank to close.”

“It’s the classic Jimmy Stewart problem,” she told host Neil Cavuto. “We deposit money into a bank, they lend it out, they invest it in securities, it’s not all sitting in a vault. If you try to get all the money out at once, you’re going to force the bank to unnecessarily fail.”

According to Bair, actions taken by the government have created “mass confusion” that could cause efforts to support the banking system to backfire. Acknowledging there are some banks with problems, she also emphasized that only a small percentage of the overall banking system has issues.

“[The government is] trying to imply that all uninsured are protected, which they don’t have legal authority to do, frankly, and this is putting pressure on community banks,” she said. “It’s really troubling.”

Stagflation Imminent?

Last week, I discussed the inevitable outcome of government overspending and central bank overprinting.

This outcome will be as ugly as it will be predictable in my view.

Eventually, inflation will give way to an ugly deflationary environment. In the meantime, we will probably see stagflation – rising consumer prices and falling asset prices. Professor Noriel Roubini has a similar take. This from “Markets Insider” (Source: https://markets.businessinsider.com/news/stocks/nouriel-roubini-economy-recession-inflation-debt-market-crash-dr-doom-2023-3):

A “perfect storm” is brewing, and markets this year are going to get hit with a recession, a debt crisis, and out-of-control inflation, the economist Nouriel “Dr. Doom” Roubini said.

Roubini, one of the first economists to call the 2008 recession, has been warning for months of a stagflationary debt crisis, which would combine the worst aspects of ’70s-style stagflation and the ’08 debt crisis.

“I do believe that a stagflationary crisis is going to emerge this year,” Roubini said Thursday in an interview with Australia’s ABC.

With consumer inflation still sticky at 6.4%, Roubini said he estimated that the Federal Reserve would need to lift benchmark rates “well above” 6% for inflation to fall back to its 2% target.

That could spark a severe recession, a stock-market crash, and an explosion in debt defaults, leaving the Fed with no choice but to back off its inflation fight and let prices spiral out of control, he added. The result would be a steep recession, anyway, followed by more debt and inflation problems.

“Now we’re facing the perfect storm: inflation, stagflation, recession, and a potential debt crisis,” Roubini said.

He has remained ultrabearish on the economy, despite the market’s growing hope that the US could skirt a recession this year.

Though more bullish commentators are making the case for a healthy rebound in the S&P 500, which fell 20% last year, Roubini has previously said the benchmark stock index could slide another 30% as investors battled extreme macro conditions.

“They will continue to go down,” he said of stocks, pointing to the recent sell-off as investors priced in higher interest rates from the Fed. “The market is already correcting.”

He urged investors to protect themselves by choosing inflation hedges, such as gold, inflation-indexed bonds, and short-term bonds. Those picks are likely to beat stocks and bonds, he said, which could suffer.

I believe Roubini is correct on a couple counts.

Stocks will likely decline further in my view. One only needs to look at the Buffet Indicator to quickly conclude that despite last year’s decline in stock values, stocks remain heavily overvalued.

And, in order to tame inflation, as I have stated previously, real interest rates need to be positive – interest rates need to be higher than the inflation rate.

There are already signs of stagflation emerging. The real estate market is a good example. Wolf Richter, had this to say on real estate (Source: https://wolfstreet.com/2023/03/04/housing-bust-2-has-begun/):

The housing market in the United States has turned down, and in some big markets very dramatically so. Other markets lag a little behind.

That’s how it went during the last Housing Bust, that I now call Housing Bust #1. During Housing Bust #1, Miami, Phoenix, San Diego, Las Vegas, etc. were a little ahead; other places, like San Francisco were a little behind. In 2007, people in San Francisco thought they would be spared the housing bust they saw unfolding across the country. And then it came to San Francisco with a vengeance.

This time around, San Francisco and Silicon Valley, and the entire San Francisco Bay Area, are at the forefront, along with Boise, Seattle, and some others. In the San Francisco Bay Area, during the first 10 months of this housing bust, Housing Bust #2, the median house price has plunged faster than it did during the first 10 months of Housing Bust #1. That’s what we’re looking at. I’ll get into the details in a moment.

Across the US, home sales have plunged month after month ever since mortgage rates started to rise a year ago. In January, across the US, total home sales plunged by 37% from January last year. Sales plunged in all regions, but they plunged worst in the West, by 42% year-over-year, and the least worst, if I may, in the Midwest, by 33%. This is happening everywhere.

The median price of all types of homes across the US in January fell for the seventh month in a row, down over 13% from the peak in June. Some of the decline is seasonal, and some is not.

This drop whittled down the year-over-year gain to just 1.3%. At this pace, we will see a year-over-year price decline in February or March, which would be the first year-over-year price decline across the US since Housing Bust 1.

Active listings were up by nearly 70% from a year ago, though by historical standards they’re still low. Lots of sellers are sitting on their vacant properties and are holding them off the market, and are putting them on the rental market or are trying to make a go of it as vacation rentals. And they’re all hoping that “this too shall pass.”

“This too shall pass” – that’s the mortgage rates. The average 30-year fixed mortgage rate went over 7% late last year, then in January, it dropped, went as low as 6%, and the entire industry was breathing a sigh of relief. This was based on fervent hopes that inflation would just vanish, and that the Federal Reserve would cut interest rates soon, and be done with this whole nightmare.

But in early February came the realization that inflation wasn’t just going away. Friday’s inflation data confirmed that inflation is reaccelerating, that it already started the process of reacceleration in December. Some goods prices are down, but inflation in services spiked to a four-decade high. Services is nearly two-thirds of what consumers spend their money on. Inflation is very difficult to dislodge from services. The Federal Reserve is going to have its hands full dealing with this – meaning higher rates for longer.

And mortgage rates jumped again and on Friday were back to about 6.9%, according to the daily measure by Mortgage News Daily. Just a hair below the magic 7%.

And potential sellers are still sitting on their vacant properties, thinking: and this too shall pass.

So how many vacant homes are there? The Census Bureau tracks this. In the fourth quarter last year, there were nearly 15 million vacant housing units – so single-family houses, condos, and rental apartments. That’s over 10% of the total housing stock.

In 2022, the number of total housing units increased by over 1.3 million. If each housing unit is occupied on average by 2.5 people, that’s housing for 3.3 million more people than in the prior year. The US population hasn’t grown nearly that fast in 2022.

Ok, so now here are nearly 15 million vacant housing units. Of them, 11 million were vacant year-round. Some of the 11 million were being remodeled to be rented out, and others were for sale, and that’s the inventory we actually see, and there are other reasons why homes were vacant.

But 6.6 million homes were held off the market, for a variety of reasons, such as that the owners don’t want to sell the property at the moment.

If just 10% of these 6.6 million homes that are held off the market show up on the market, it would double the total number of active listings. If 20% of these homes show up on the market, it would trigger an enormous glut.

This is the shadow inventory. It can emerge at any time. And during Housing Bust 1, this shadow inventory that suddenly emerged created the biggest housing glut ever.

As I noted last week, history teaches us that excessive debt levels lead to deflation.

This time will ultimately be no different.

Deflation will at some point, become the prevalent economic force. In the meantime, expect stagflation.

That will be more bad news for stocks and real estate as well as consumer prices.

The best advice that I can offer is to have some of your assets that will be protected from a prolonged decline in stocks and real estate and other assets that will perform well in an inflationary environment.

An Artificial Economy

The March “You May Not Know Report” discusses how the current economy (since the time of the Great Financial Crisis) is artificial- the result of easy money policies by the Federal Reserve and government stimulus.

History teaches us that when governments overspend and central banks over print, eventually, reality sets in. One of the founding fathers, Thomas Jefferson, told us that we could expect inflation followed by deflation and that is exactly the track on which we now find ourselves.

Inflation has not subsided; the most recent data shows that inflation is accelerating exactly as Jefferson suggested it would. And Americans are suffering as a result. There are now also signs of deflation setting in as well. This from Michael Maharrey writing for Schiff Gold (Source: https://schiffgold.com/commentaries/this-strong-economy-is-a-facade-built-out-of-debt/):

Retail sales surged in January, creating the impression that the economy is humming along nicely. After all, there can’t be a problem if consumers are out there consuming, right?

But a lot of people are ignoring a key question: how are people paying for this shopping spree?

As it turns out, they’re putting a lot of this spending on credit cards.

Even with a big 1.8% decline in retail sales in December, revolving credit, primarily reflecting credit card debt, grew by another $7.2 billion that month, a 7.3% increase.

To put the numbers into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that Americans are still heavily relying on credit cards to make ends meet.

Meanwhile, household debt rose by $394 billion in the fourth quarter of 2022. It was the largest quarter-on-quarter increase in household debt in two decades.

Debt balances have risen $2.7 trillion higher than they were at the beginning of the pandemic.

Clearly, this isn’t a sign of a healthy economy. Americans are spending more on everything thanks to rampant price inflation that doesn’t appear to be waning, and they’re relying on credit cards to do it. Saving has plunged. This isn’t a sound economic foundation, and it isn’t even sustainable. Credit cards have a nasty thing called a limit. And with credit card interest rates at record-high levels, people will reach those limits pretty quickly.

I ran across something the other day that provides an even more striking example of just how reliant the US economy is on debt.

A company called the Wisconsin Cheeseman sells gift packs of cheese, candies and other treats. And you can buy the gifts on their in-house credit plan.

Let this sink in for a moment. A primary pitch from a gift company is that you can buy on credit.

The annual percentage rate will run you a modest 5.75% to a hefty 25.99% depending on the state. (Most states are currently above 20%. But don’t worry. Your payments can be as low as $10 a month.) Just don’t think about the fact that you’ll probably be paying for this cheese for years to come.

There are other companies facilitating borrowing this doesn’t even show up in the official debt figures.

The use of BNLP services such as Affirm, Afterpay and Klarna has exploded in the last couple of years. These services allow consumers to pay off purchases through installment payments, often interest-free. In a December 2021 report, Cardify CEO Derrick Fung said buy now, pay later has rapidly become more mainstream.

“The consumer over the last 12 months has become more compulsive and BNPL products are the result of us being locked up for too long and wanting more instant gratification,” he said.

Buy now, pay later is a convenient way to spread out spending, but there is a dark side. It encourages consumers to spend more. Nearly 46% of those polled said they would spend less if BNPL wasn’t an option.

The rise of buy now pay later (BNPL) is another sign of a deeply dysfunctional economy. Americans are piling up millions of dollars of additional debt using BNPL on top of their credit cards.

So, while the mainstream pundits tell you the economy is strong, they are looking at a facade. It’s a house of cards. And eventually, it will collapse.

American consumers continue to “support the economy” by spending money today despite rising prices. But they’re borrowing to do it. Tomorrow is fast approaching. And with it depleted savings, higher interest rates, and looming credit card limits. This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it.

Consumers are struggling. That means that the deflation part of the cycle that Jefferson warned us about may be about to emerge in earnest.

As I have stated in the past (and there are many analysts who would disagree with me), I expect that the Federal Reserve will reverse course and begin pursuing easy money policies once again.

Should I be right about this, we will have to wait and see if the Fed can be effective. I have my doubts. Consumers are accumulating too much debt.

The chart below breaks down debt accumulation by age. Alarmingly, those age 60 plus are accumulating more debt on a percentage basis than other age groups. That should serve as a huge red flag and warning sign.

This time will be no different.

Deflation will, at some point, become the prevalent economic force.

That will be more bad news for stocks and real estate.

Stocks are already feeling it, and real estate is now beginning to dramatically unwind in many parts of the country.

Economic Deterioration and Washington Excesses

As the year 2022 comes to a close, and we look forward to next year, it is difficult to move ahead, anticipating a better year economically speaking.

That might seem too negative since the year 2022 wasn’t great economically. This past year saw negative economic growth in the first two quarters of the year, raging inflation, and now, as the year draws to a close, the evidence suggests that the economy is deteriorating despite the claims of some politicians to the contrary.

We have been discussing the economy and investing markets in this publication each week all year, and some of what will be discussed this week is a review of past discussions. However, this past week, Michael Snyder wrote a well-sourced piece documenting the strength of the economy as we move into 2023.

Here is a bit from the piece (Source: http://theeconomiccollapseblog.com/15-facts-that-prove-that-a-massive-economic-meltdown-is-already-happening-right-now/):

Economic conditions just keep getting worse. As we prepare to enter 2023, we find ourselves in a high inflation environment at the same time that economic activity is really slowing down. And just like we witnessed in 2008, employers are conducting mass layoffs as a horrifying housing crash sweeps across the nation. Those that have been waiting for the U.S. economy to implode can stop waiting, because an economic implosion has officially arrived. The following are 15 facts that prove that a massive economic meltdown is already happening right now…

#1 Existing home sales have now fallen for 10 consecutive months.

#2 Existing home sales are down 35.4 percent over the last 12 months. That is the largest year over year decline in existing home sales since the collapse of Lehman Brothers.

#3 Homebuilder sentiment has now dropped for 12 consecutive months.

#4 Home construction costs have risen more than 30 percent since the beginning of 2022.

#5 The number of single-family housing unit permits has fallen for nine months in a row.

#6 The Empire State Manufacturing Index has plunged “to a reading of negative 11.2 in December”. That figure was way, way below expectations.

#7 In November, we witnessed the largest decline in retail sales that we have seen all year long.

#8 Even the biggest names on Wall Street are starting to let workers go. In fact, it is being reported that Goldman Sachs will soon lay off approximately 4,000 employees.

#9 The Federal Reserve is admitting that the number of actual jobs in the United States has been overstated by over a million.

#10 U.S. job cuts were 417 percent higher in November than they were during the same month a year ago.

#11 A recent Wall Street Journal survey found that approximately two-thirds of all Americans expect the economy to get even worse next year.

#12 A newly released Bloomberg survey has discovered that 70 percent of U.S. economists believe that a recession is coming in 2023.

#13 Inflation continues to spiral wildly out of control. At this point, a head of lettuce now costs 11 dollars at one grocery store in California.

#14 Overall, vegetable prices in the United States are more than 80 percent higher than they were at this same time last year.

#15 Thanks to the rapidly rising cost of living, 63 percent of the U.S. population is now living paycheck to paycheck.

In a desperate attempt to get inflation under control, the Federal Reserve has been dramatically increasing interest rates.

Those interest rate hikes are what has caused the housing market to crash, but Fed officials insist that such short-term pain is necessary in order to tame inflation.

If you’d like to learn more details, visit www.RetirementLifestyleAdvocates.com and view the 12/26/2022 “Headline Roundup” webinar where I go into detail on each of these 15 points.

As I have discussed frequently in the past in this publication and on the “Headline Roundup” webinars, inflation cannot be brought under control until the Washington politicians balance the budget.

Rather than taking inflation and the budget deficit seriously, the Washington politicians recently rammed through a 4,000+ page piece of legislation that will set the country back $1.7 trillion.

True to form, given the time frame between the introduction of the bill and its passage and the sheer volume of the bill, there is not one politician that voted for the bill that could have read it.

As I noted last week, the politicians are not only wildly spending on a deficit basis, they are also fabricating the reported deficit numbers. Last week, in “Portfolio Watch”, I shared an excerpt from a piece written by Egon von Greyerz who noted that as the reported deficit was $1.4 trillion, the national debt increased by $2.5 trillion.

It must terribly frustrate Washington politicians that there are still citizens that can actually do the math. Sigh, it’s probably only a matter of time before the reported debt numbers are also manipulated to make them seem more favorable.

I liken this to the decades-old metaphor of re-arranging the deck chairs on the Titanic. It might seem more comfortable for a brief period, but the ship is still going to sink.

Michael Snyder, in the piece referenced above, comments:

This week, an abominable 1.7 trillion dollar omnibus spending bill is being rammed through Congress, but not a single member of Congress has read it.

The bill is 4,155 pages long, and U.S. Senator Rand Paul just held a press briefing during which he wheeled it out on a trolley…

After the grossly bloated $1.7 trillion Omnibus spending bill advanced in the Senate by a vote of 70-25, GOP Senator Rand Paul held a press briefing during which he wheeled in the “abomination” on a trolley and demanded to know how anyone would be able to read it before the end of the week.

Paul, along with the only other dissenting Senate Republicans Mike Braun, Ron Johnson, Mike Lee, and Rick Scott highlighted how ludicrous the fast tracking of the bill has been.

Unfortunately, this absurd spending bill has broad support on both sides of the aisle, and that just shows how broken Washington has become.

Our system of government has failed time after time, and our politicians continue to spend money on some of the most ridiculous things imaginable.

The following examples that were pulled out of the 1.7 trillion dollar omnibus spending bill were discovered by the Heritage Foundation…

-$1.2 million for “LGBTQIA+ Pride Centers”
-$1.2 million for “services for DACA recipients” (aka helping illegal aliens with taxpayer funds) at San Diego Community College.
-$477k for the Equity Institute in RI to indoctrinate teachers with “antiracism virtual labs.”
-$1 million for Zora’s House in Ohio, a “coworking and community space” for “women and gender-expansive people of color.”
-$3 million for the American LGBTQ+ Museum in New York City.
-$3.6 million for a Michelle Obama Trail in Georgia.
-$750k for the for “LGBT and Gender Non-Conforming housing” in Albany, New York.
-$856k for the “LGBT Center” in New York.

And have you noticed that our politicians often prefer to push these types of bills through just before major holidays when hardly anyone is paying attention?

Ironically, the bill that established the Federal Reserve in 1913 was jammed through congress and signed into law just before the Christmas holiday as well.

Because of the actions of the politicians and the Fed, it’s my firm belief that severe deflation and economic pain lie ahead.

Make sure you educate yourself and take action to protect yourself.

Inflation and Digital Currency

The push toward central bank-issued digital currencies continues as inflation continues to demolish purchasing power around the world.

This chart, published by “Visual Capitalist,” illustrates how the official inflation rate is now double digits in more than half the countries around the world.

Not really all that surprising, given that politicians around the world overpromise and overspend while central banks subsidize their reckless monetary policies through currency creation.

It’s also important to remember that the real inflation rate in these countries is likely much higher since the reported inflation rate is the official rate which is typically massaged to make it more palatable to the populace.

As I have often stated, as we near the end of the currency-money cycle, there are currency changes that ultimately culminate with a currency being backed by a tangible asset like gold and/or silver.

One of the currency changes being aggressively pursued in many countries is a central bank-issued digital currency.

A digital currency would replace cash and allow for more controls by central bankers and politicians, including a social scoring system that may allow ‘model citizens’ more money privileges than those who score lower on a government-developed social scoring system.

For those of you who are wondering how such a system might be implemented, you might be interested in what is now happening in the country of Nigeria.

This from “NFCW” (Source: https://www.nfcw.com/2022/12/08/380838/central-bank-of-nigeria-limits-cash-withdrawals-to-drive-cbdc-and-digital-payments-adoption/)

The Central Bank of Nigeria (CBN) is restricting the amount of cash that consumers and businesses can withdraw from ATMs to 20,000 naira (US$45) per day and 100,000 naira (US$225) per week.

It has also instructed banks to encourage customers to use the country’s eNaira central bank digital currency (CBDC) and digital payment channels — including mobile and online banking and card payments — instead of cash.

Cashback transactions at the point of sale will also be limited to 20,000 naira (US$45) a day, while over-the-counter cash withdrawals in banks will be restricted to 100,000 naira (US$225) per week for individuals and 500,000 naira (US$1,128) a week for business customers, a CBN directive to Nigeria’s banks and financial institutions states.

The central bank is introducing the revised cash withdrawal limits in January 2023 “in line with the cashless policy of the CBN” and, rather than withdrawing cash, “customers should be encouraged to use alternative channels (internet banking, mobile banking apps, USSD, cards/POS, eNaira etc) to conduct their banking transactions”, the directive says.

Customers will still be able to make in-person cash withdrawals above the revised limits “for legitimate purposes” and “in compelling circumstances, not exceeding once a month”, but will be charged a 5% or 10% processing fee per withdrawal and will be required to provide state-issued identity documents, a “notarized customer declaration of the purpose for the cash withdrawal” and written authorisation by the CEO of the bank approving the transaction.

Banks will also be required to report all such transactions on “the CBN portal created for the purpose”.

The CBN launched the eNaira in October 2021, announced in November 2021 that nearly 500,000 consumers had downloaded the eNaira digital wallet and in June this year began letting consumers use feature phones to make CBDC payments.

Nigeria is forcing the use of digital currency. Cash withdrawals are severely limited.

While this is Nigeria, it is worth noting that as the end of the fiat currency cycle has been reached historically, currency changes appear more frequently and the changes are more dramatic. This from “Mises.org” (Source: https://mises.org/wire/digital-currency-fed-moves-toward-monetary-totalitarianism):

The Federal Reserve is sowing the seeds for its central bank digital currency (CBDC). It may seem that the purpose of a CBDC is to facilitate transactions and enhance economic activity, but CBDCs are mainly about more government control over individuals. If a CBDC were implemented, the central bank would have access to all transactions in addition to being capable of freezing accounts.

It may seem dystopian—something that only totalitarian governments would do—but there have been recent cases of asset freezing in Canada and Brazil. Moreover, a CBDC would give the government the power to determine how much a person can spend, establish expiration dates for deposits, and even penalize people who saved money.

The war on cash is also a reason why governments want to implement CBDCs. The end of cash would mean less privacy for individuals and would allow central banks to maintain a monetary policy of negative interest rates with greater ease (since individuals would be unable to withdraw money commercial banks to avoid losses).

Once the CBDC arrives, instead of a deposit being a commercial bank’s liability, a deposit would be the central bank’s liability.

In 2020, China launched a digital yuan pilot program. As mentioned by Seeking Alpha, China wants to implement a CBDC because “this would give [the government] a remarkable amount of information about what consumers are spending their money on.”

The Chinese government is waging war on cash. And they are not alone. In 2017, the International Monetary Fund (IMF) published a document offering suggestions to governments—even in the face of strong public opposition—on how to move toward a cashless society. Governments and central bankers claim that the shift to a cashless society will help prevent crime and increase convenience for ordinary people. But the real motivation behind the war on cash is more government control over the individual.

And the US is getting ready to establish its own CBDC (or something similar). The first step was taken in August, when the Fed announced FedNow. FedNow will be an instant payment system and is scheduled to be launched between May and July 2023.

FedNow is practically identical to Brazil’s PIX. PIX was implemented by the Central Bank of Brazil (BCB) in November 2020. It is a convenient instant payment system (using mobile devices) without user fees, and a reputation as being safe to use.

A year after its launch, PIX already had 112 million people registered, or just over half of the Brazilian population. Of course, frauds and scams do occur over PIX, but most are social engineering scams (see here, here, and here) and are not system flaws; that is, they are scams that exploit the public’s lack of knowledge of PIX technology.

Bear in mind that PIX is not the Brazilian CBDC. It is just a payment system. However, the BCB has access to transactions made through PIX; therefore, PIX can be considered the seed of the Brazilian CBDC. It is already an invasion of the privacy of Brazilians. And FedNow is set to follow suit.

Additionally, the New York Fed has recently launched a twelve-week pilot program with several commercial banks to test the feasibility of a CBDC in the US. The program will use digital tokens to represent bank deposits. Institutions involved in the program will make simulated transactions to test the system. According to Reuters, “the pilot [program] will test how banks using digital dollar tokens in a common database can help speed up payments.”

Banks involved in the pilot program include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank, and Wells Fargo. The global financial messaging service provider SWIFT is also participating to “support interoperability across the international financial ecosystem.”

If you needed another reason to get some of your wealth out of the fiat money system, here it is.

The Next Economic Storm?

As I noted last week, I expected there was a possibility of more stock upside last week given how oversold stocks were when the current rally started. I view the current rally as a countertrend with more downside ahead.

As many savvy readers of “Portfolio Watch” have undoubtedly noted, there is a growing divergence in the precious metals markets between the spot price of gold and silver and the reality of the pricing of real metals.

While the spot price of silver is around $19.50 per ounce, anyone looking to invest in silver knows that it’s impossible to find an ounce of tangible silver for that price. For example, a one-ounce silver American Eagle silver coin sells for $34 to $37 per ounce currently.

Pre-1965 ‘junk” or “90% silver” sells for around $32 per ounce. Even a 100-ounce silver bar, assuming you are comfortable buying in that quantity, sells for between $23 and $24 per ounce.

As far as gold is concerned, a 1 oz. gold American Eagle coin sells for between $1850 and $1900 per ounce even though the spot price of gold is at least $200 less than that.

This disparity in price between physical metals and the spot price of metals has always existed but has been growing of late.

It is just one phenomenon that exists due to the artificial economy created by fed policies over the past decade-plus.

One of the other threats that I have been writing about occasionally for several years is the huge problem of pension underfunding. While many companies no longer offer a traditional defined benefit pension, many state and municipal governments do. And many of these plans are so far underfunded, benefits cannot possibly be paid to pension recipients as promised.

There are a couple of reasons for this in my view.

One, pensions have suffered under the Federal Reserve’s artificially low-interest rates over the past dozen years or so. A traditional, defined benefit pension plan is funded so that there is enough money in the plan to eventually pay promised benefits to pension plan participants. Contributions are made to pension plans based on an interest rate assumption. Therein lies the problem.

Despite interest rates being at historically low levels, pension plans were not required to adjust their actuarial assumptions to reflect reality. As a result, many pensions are now woefully underfunded.

Two, many public pensions paid by states and municipalities are ridiculously rich, at least in my view. While this is true in many states, an article was recently published describing the very generous pension benefits being received by many retired Illinois employees (the article also reveals some very exorbitant salaries for public servants. Here is a bit from the piece (Source: https://openthebooks.substack.com/p/why-illinois-is-in-trouble-132188):

So, just who is making all of this money?

Meet the Illinois government employee $100,000 Club. It’s comprised of 132,188 public employees and retirees who earned a new ‘minimum wage’ of $100,000 or more.

While crime skyrockets in the neighborhoods, test scores plummet in the public schools, and inflation decimates private-sector paychecks, the Illinois public employee class is living the good life.

Our auditors at OpenTheBooks.com found nearly 500 educators in the public schools with salaries between $200,000 and $439,000. In small towns, city managers made up to $341,300. Three doctors at the University of Illinois at Chicago earned incomes between $1 million and $2.1 million.

Barbers trimmed off $104,000 at State Corrections; janitors at the Chicago Transit Authority cleaned up $143,634; bus drivers in Chicago picked up $242,812; and suburban community college presidents made $418,677.

Public schools (43,500) – Last year, 26,904 educators earned six-figure salaries while 16,592 retirees pocketed $100,000+ pensions. However, test scores plummeted with only 31-percent of students reading at grade level.

Big salaries: Eighteen school superintendents made $300,000+, among them Edward Mansfield (Homewood Flossmoor D233— $434,323); Michael Lubelfeld (North Shore School D112— $392,952); Gregory Jackson (Ford Heights D169—$379,465); Kevin Nohelty (Dolton School D148—$373,626); and Blair Nuccio (Indian Springs D109—$355,154).

Big pensions: Eighteen retired school superintendents received $300,000+ in retirement pensions, among them Lawrence A. Wyllie (Lincoln-Way CHSD 210 – $361,787.64); Henry Bangser (New Trier Township HSD 203 – $351,676); Gary Catalani (Wheaton-Warrenville Unit SD 200 – $350,113.08); Laura Murray (Homewood-Flossmoor CHSD 233 – $344,450); and Mary Curley (Hinsdale CCSD 181 – $334,540.20).

There are several legal loopholes for individuals to access state funding through private associations, nonprofit organizations, and state legislative bodies.

Retired Chicago Mayor Richard M. Daley (D) double dipped pension systems for nearly $249,636. Daley made $158,076 per year in pension payouts after a short eight-year career as a state senator plus another $91,560 per year in city pension payouts for his 22 years as the mayor of Chicago.
Three top paid earners within the municipal-government pension system work for private associations – not government. Brad Cole of the Illinois Municipal League pulled down $437,447, up from $407,656, (2020). Peter Murphy, executive director of Illinois Association of Park Districts, made $357,816, while Brett Davis, executive director of the Park District Risk management Agency, brought in $342,405.
Former Illinois Governor Jim Edgar (R) double dipped pension systems: General Assembly pension ($186,660 per year) and University Retirement System pension ($90,336). Last year, Edgar’s total payout in pension heaven? $276,996

Since Edgar left the governorship in 1999, we estimate that he earned $2.4 million in compensation from the University of Illinois (2000-2013) and another $2.5 million in pension payments from his career as legislator, secretary of state and governor.

While this is a small sampling from just one state, it represents the problems with public pay and pensions in many states. “The Wall Street Journal” recently [published a piece on this very topic (Source: https://www.wsj.com/articles/pension-funds-plunge-into-riskier-betsjust-as-markets-are-struggling-11656274270):

U.S. public pension funds don’t have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money.
As both stock and bond markets struggle, it’s a precarious gamble.
More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data. Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined.
The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019. Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as Calpers, will add leverage for the first time in its 90-year history.
While most pension funds still avoid investing borrowed money, the use of leverage is spreading faster than ever. Just four years ago, none of the five largest pension funds used leverage.
Public pension funds are “operating more like hedge funds in some cases,” said Joseph Brusuelas, chief economist at accounting firm RSM. “They’re treading on very risky footing doing things like this.”
Pension funds historically invested very conservatively, favoring relatively low-yielding fixed-income investments. Calpers had all its money in bonds until 1967.
Funds suffered significant losses in the 2000-02 dot-com bust and the 2008 financial crisis. Those setbacks, coupled with years of insufficiently funded benefit promises, left the funds as a whole well over a trillion dollars short of the asset level they ought to have. The level is dictated by a formula that includes their obligations and their targeted investment returns.

It is just a matter of time before there are major US public pensions with funding problems that will affect payouts.

Should the federal government attempt to help as it probably will, such assistance will be funded by more currency creation. This will add to the inflation problem that we are all presently experiencing and punish pension recipients who have well-funded plans as well as retirees who have accumulated assets in 401(k) or other defined-contribution plans.

I have gone on record since the beginning of 2022 with my forecast that the Fed will at some future point reverse course and cease tightening in favor of more easy money policies.

Studying the historical behavior of groups of politicians concludes that this is how this story always ends.

If you aren’t using the Revenue Sourcing™ planning strategy to manage your retirement assets, it’s time to learn more. Call the office at 1-866-921-3613 for a free copy of my best-selling book “Revenue Sourcing”.

Is This the Future for Stocks?

Stocks staged a strong rally last week on a percentage basis. There could be more upside in this rally that I view as a countertrend, but there doesn’t necessarily have to be. I expect that there is more downside for stocks ahead. Likely, eventually a lot more downside.

I have often discussed the relationship between margin debt and stock performance. Accumulating margin debt can drive stock prices higher and declining levels of margin debt can forecast a stock price decline.

Wolf Richter recently commented on this topic. (Source: https://wolfstreet.com/2022/10/21/margin-debt-is-still-far-from-calling-a-bottom-for-stocks/):

Increases and decreases in leverage, when large enough, drive markets up or down. The only summary data on stock-market leverage that we can get is margin debt, reported monthly by FINRA, which obtains the data from its member brokers. There is a lot more leverage in the market, but we don’t get a summary figure of it. Margin debt is our stand-in for overall stock market leverage.

Margin debt data that was released last November, for the month of October, nailed the top in the stock market, as margin debt had nailed prior tops. More on that in a moment, including my annotated long-term chart. Now we’re looking for signs of a bottom. But as of the latest release of margin debt, we’re far from any bottom.

Margin debt fell by $24 billion in September from August to $664 billion. But it is still very high, 39% above the March 2020 low. The drops in margin debt in January and February 2020 showed that there was already concern that Covid might be tearing up the markets, and some investors prepared by reducing their leverage. At the current level, margin debt has a lot more room to fall – and the process can take years as we’ll see in a moment – before it signals a bottom in the stock market.

In the chart above, you can see that the summer rally was doomed to be just another bear-market rally because margin debt didn’t jump with it; it barely ticked up a little and then fizzled.

Leverage is a huge factor in the direction of any market. Leverage is the great accelerator on the way up, and on the way down. Big spikes in margin debt led invariably to stock market “events,” and a bottoming out of margin debt either preceded or closely followed the bottom of the sell-off.

The bottom signal occurs when margin debt drops to the lows from a few years earlier and then starts rising again.

In the long-term view of margin debt, it’s not the absolute dollar amounts that matter, but the steep spikes in margin debt before the selloffs and the declines that start with the sell-off, and bottom out at the end of the sell-off.

The long-term chart below of margin debt also shows stock market events. Margin debt will need to fall somewhere near a prior low established several years before the spike in order to give a bottom signal.

When one considers the level of margin debt that still exists in the market, there will probably have to be more downside for stocks moving ahead.

The “Buffet Indicator” a measure of total market capitalization divided by gross domestic product or economic output has us drawing a similar conclusion.

In other news, raging inflation has led to the largest Social Security cost of living adjustment in more than 40 years. In 2023, Social Security benefits will rise by 8.7%. This from MSN (Source: https://www.msn.com/en-us/news/technology/social-securitys-big-cola-increase-for-2023-heres-what-you-need-to-know/ar-AAXasVi)

The cost-of-living adjustment, or COLA, for Social Security benefits next year will be 8.7%, or an extra $146 a month for the average retiree. It’s the biggest increase since 1981, when the COLA hit 11.2%, and reflects ongoing inflation in the US.

“A COLA of 8.7% is extremely rare and would be the highest ever received by most Social Security beneficiaries alive today,” Senior Citizens League policy analyst Mary Johnson said in an earlier statement.

In fact, the annual adjustment has risen above 7% only five times since 1975, when it was introduced. (The 2022 COLA was 5.9%.).

The 401(k) contribution limit was also raised as it is indexed to the official, headline inflation rate as well. The 2023 contribution limit to a 401(k) plan will be $22,500 if a plan participant is under age 50. Participants age 50 and older can contribute $30,000.

The same limits apply to participants in a 403(b) plan.

Inflation Update and Recession Realities

When inflation first became a topic of conversation, I stated my view that unless we saw real positive, net interest rates, inflation would not be controlled.

If you are a new reader, that simply means that the interest rates have to be higher than the inflation rate. If the inflation rate is higher than credited interest rates, the incentive to save disappears and inflation is fed not tamed.

So far, it seems, that opinion is spot on. Despite increasing interest rates, inflation is now officially hotter than at any time in the last 40 years. This from Wolf Richter (Source: https://wolfstreet.com/2022/10/13/services-now-drive-inflation-worst-in-40-years-services-cpi-core-cpi-show-inflation-is-entrenched-in-broad-economy-some-goods-prices-fall-gasoline-plunges/) on the topic:

Nearly two-thirds of consumer spending goes to services. And they’re now the driver of inflation. The CPI for services spiked in September for the 13th month in a row, and by the most since 1982, and it accelerated month-to-month. Housing costs spiked, but also all kinds of other services, such as health insurance (+2.1% month-to-month and +28% year-over-year).

“Core CPI,” which excludes food and energy, was the worst since 1982. Food prices spiked again, but spiked slightly less than the prior month which had been the worst since 1979. But some relief came from a decline in prices of used vehicles and consumer electronics, and from gasoline, which plunged.

Overall inflation as measured by the year-over-year Consumer Price Index (CPI-U), released today by the Bureau of Labor Statistics, jumped by 0.4% in September from August, a sharp acceleration from the prior two months, and by 8.2% year-over-year. What held down overall CPI was the plunge in gasoline prices and the drop in used vehicle prices.

The Social Security COLA for 2023 was also determined with today’s inflation data. It is based on the average of the year-over-year increases in the Consumer Price Index for All Urban Wage Earners and Clerical Workers (CPI-W) in July, August, and September. For 2023, the COLA will be 8.7%, the highest since 1981, but in 2021 and 2022, the COLAs got crushed by raging inflation.

Services Inflation spiked for the 13th month.

The CPI for services spiked by 0.7% in September from August, a sharp acceleration from the prior two months; and by 7.4% year-over-year, the worst increase since August 1982. This is where nearly two-thirds of the money goes that consumer spend, and consumers are getting whacked.

I split services into two groups: categories where prices rose year-over-year and categories where prices fell year-over-year.

Service categories where CPI rose year-to-year.

In some categories, the CPI declined on a month-to-month basis but was still up year-over-year. Note the massive month-to-month increases in insurance, medical services, motor vehicle maintenance, and delivery services.

With inflation continuing to rage, it’s not surprising that spending on some items, especially discretionary items is down. Admission to sporting events is one good example.

It’s also not surprising that consumer spending on retail, services and other general merchandise was down in September as consumers are using more of their income to meet basic living expenses. This from CNBC (Source: https://www.cnbc.com/2022/10/14/retail-sales-september-2022.html):

Consumer spending was flat in September as prices moved sharply higher and the Federal Reserve implemented higher interest rates to slow the economy, according to government figures released Thursday.

Retail and food services sales were little changed for the month after rising 0.4% in August, according to the advance estimate from the Commerce Department. That was below the Dow Jones estimate for a 0.3% gain. Excluding autos, sales rose 0.1%, against an estimate for no change.

Considering that the retail sales numbers are not adjusted for inflation, the report shows that real spending across the range of sectors the report covers retreated for the month.

A Bureau of Labor Statistics report Thursday indicated that consumer prices rose 0.4% including all goods and services, and 0.6% when excluding food and energy.

Miscellaneous store retailers saw a decline of 2.5% for the month, while gasoline stations were off 1.4% as energy prices declined.

A slew of other sectors also posted drops, including sporting goods, hobby, books and music stores as well as furniture and home furnishing stores, both of which posted a -0.7% drop, while electronics and appliances were off 0.8% and motor vehicle and parts dealers fell 0.4%.

I continue to be of the opinion that the Federal Reserve will eventually choose to reverse course and once again pursue easy money policies. While that may fuel inflation in the near-term, ultimately deflation due to massively excessive debt levels will be the primary economic trend in my view.

That’s why I also believe its important to use the Revenue Sourcing™ planning process to manage your nest egg and plan your retirement income and allocation strategies.

Meanwhile, as we approach election day, there is another strong economic headwind being created by the Fed’s tightening policies. Interest rates on a 30-Year mortgage now exceed 7%, up from 2.75% at the beginning of the year. This fact reported by CNBC (Source: https://www.cnbc.com/video/2022/10/12/higher-rates-are-hitting-homebuyers-hard-30-year-fixed-rate-mortgage-over-7percent.html).

This will be a huge obstacle for the artificial economy created by Fed policy in the first place.

On a $400,000 mortgage, the interest costs are now about $17,000 per year more than they were in January.

That’s an increase in monthly interest cost of more than $1400!

That is taking many buyers out of the market and quickly taking the wind out of the sails of a once red-hot real estate market. If you have plans to buy real estate, there may be much better buys down the road as higher interest rates and an economy in recession are rapidly slowing the real estate market.

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.”