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.

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.

Credit Card Use and Inflation

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

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

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

But consumers are still spending with credit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          We are a long way from that.

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

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

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

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

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

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

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, or Perhaps Worse?

Metals continued their slide last week as stocks rallied, US Treasuries fell slightly and the US Dollar Index rose.

Last week, I made the case that my January recession call was the correct one.  The most recent revisions to GDP indicate negative growth in the first quarter of the year likely to be followed by negative growth during the second quarter as well.

In my view, the reality of the current economic situation no matter what the week-to-week market numbers might say is that there is too much debt in both the private sector and on the public balance sheet to ever be paid with ‘honest’ money.

When measured as a percentage of the economy, private sector debt today is on par with the level of private-sector debt at the onset of the Great Depression.  However, U.S. Government debt is far more out of control than in the late 1920s.  In 1929, US Government debt was about 16% of the economy while today it is hovering at about 130%!

That means the outcome we are likely to see today will be worse than in the 1930s.  Former Presidential Candidate, Ron Paul (also a past guest on the RLA Radio program had this to say on the topic (Source:  https://www.breitbart.com/clips/2022/07/05/ron-paul-what-were-facing-today-a-lot-worse-than-the-depression-recent-downturns/)

Tuesday, during an appearance on Newsmax TV’s “American Agenda,” former Rep. Ron Paul (R-TX) warned the country was worse off than it had been in some of the most challenging economic times in its history, including the Great Depression of the last century.

Paul decried the economic policies of inflating the money supply and the U.S. debt as the causes.)

“[T]he founders understood exactly what we’re talking about,” he said. “They had the runaway inflation with the Continental Dollar. So they put in the Constitution that only gold and silver could be legal tender. And if we had followed that, we wouldn’t have had the welfare-warfare state with these huge deficits and what we’re facing because I think what we’re facing today is a lot worse than what we’ve had in the past, whether it was the Depression or whether it was the downturns we’ve had in recent years.”

“I think the bubble is bigger,” Ron Paul added. “I think the debt is bigger. The demands are bigger, and people are way overconfident even though they’re getting worried — way overconfident that you can take your debt at $10 trillion and, in a few years, switch it to $30 trillion, and nothing changes.”

But things are changing and changing quickly.  Debt is a drag on the economy as is becoming ever apparent.  Matthew Piepenburg had this to say on the topic (Source:  https://goldswitzerland.com/the-u-s-just-another-inflation-seeking-banana-republic/)

What the U.S. in particular, and the West in general, are failing to confess is that today’s so-called “Developed Economies” are in actual fact more like yesterday’s debt-straddled Emerging Market economies, and like a real banana republic, the only option ahead for our clueless elites is inflationary (and intentionally so).

Titanic Ignorance

I’ve often cryptically joked that listening to investors, mainstream financial pundits or downstream politicians debating about near-term asset class direction, inflation “management” or central bank miracle solutions is like listening to First Class passengers on the Titanic debating about dessert choices on the menu in their hands rather than the debt iceberg off their bow.

In short: The real issues are right in front of us, yet ignored until the economic ship is already dipping beneath the waves.

Rising Debt + Declining Income = Uh-Oh.

As for such hard facts (i.e., icebergs), the most obvious are fatal global and national debt levels rising at levels which can never be repaid….

Meanwhile, national income from GDP and tax receipts are falling, which means debts are grossly outpacing revenues, which any kitchen table, boardroom, or even cabinet meeting conversation should know is a bad thing…

Toward this end, it’s worth lifting our eyes above the A-deck menu and taking a hard look at the following iceberg scrapping the bow, namely: Tanking US tax receipts:

What Biden and Powell might wish to remind themselves is that U.S. tax receipts have fallen YoY by 16%, and are likely to fall even further as markets continue their trend South at the same time the US steers toward a recessionary block of ice.

What’s even more alarming is this stubborn fact: as U.S. Federal deficits are rising, foreign interest in Uncle Sam’s IOUs (i.e., U.S. Treasuries) are tanking.

China’s interest in U.S. Treasuries, for example, has hit a 12-year low, and Japan, as I’ve warned elsewhere, is too broke (and too busy buying its own JGB’s with mouse-klick Yen) to afford to bail out Uncle Sam.

The level of magical Yen creation (reminiscent of the Weimar era) coming out of Japan to “support” its pathetic bond market is simply mind-blowing:

Given the artificial and relative current strength of the USD and the fact that FX-hedged UST yields are negative in EUR, it’s fairly safe to conclude that there will be more sellers than buyers of USTs. That means rising yields and rates near-term.

That’s a bad sign for Uncle Sam’s bloated and unloved bar tab. Who but the Fed (and hence more QE) will buy his IOUs by end of August?

In the past, the spread between rising debts and declining faith in U.S. IOUs was filled by a magical money printer at the not-so-federal “Federal” Reserve.

But with a cornered Fed still tilting toward QT rather than QE, where will this magical money come from, as it sure as heck ain’t coming from tax receipts, the Japanese, China, or Europe?

As I see it, the Fed has only two pathetic options left if it wants to fill the widening gap between its growing deficits and declining faith from foreign bond buyers (or even US banks, see below).

Namely:  It can 1) default on its embarrassing IOUs and send markets over a cliff, or 2) pivot from QT to QE and create more magical (i.e., inflationary and toxic) money.

As I have been stating from day one, I believe the Fed will pivot; it will reverse course and begin currency creation once again.  That will likely be bullish for metals as well as commodities as the US Dollar is devalued even further.

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 the Fed About to Lose?

            One of the points of my “New Retirement Rules Book”, last updated in 2016, was that an economy that had accumulated far more debt than was sustainable would eventually experience a deflationary climate as debt was purged from the system.

            Prior to that deflationary environment emerging, I suggested that depending on the policies pursued by the Federal Reserve, we could see inflation prior to deflation.

            Since that book was published, the Federal Reserve, the central bank of the United States, has created trillions in new currency.  The result of that reckless policy is now evident – accelerating inflation in all areas of the economy but perhaps now most evident at the gas station and the grocery store.

            The Federal Reserve is now trying to engineer a soft economic landing.  That simply means the central bank wants to get inflation under control while avoiding a recession.

            In my view a snowman has a better chance of surviving from now until the 4th of July.

            In my conversations with many radio show listeners and New Retirement Rules class attendees, I find that there is confusion around the terms ‘inflation’ and ‘deflation’.

            Inflation is technically defined as an increase in the currency supply and deflation is defined as a decline or contraction in the currency supply.

            Increases in consumer prices are a symptom of inflation.

            In a deflationary environment, currency disappears from the financial system as debts go unpaid and stock values and real estate values plummet.

            It’s somewhat ironic that inflation can set off deflation.  But history teaches us that it happens time and time again.

            In Weimar, Germany, after the infamous hyperinflation destroyed the currency, deflation set in and an economic environment emerged that allowed a fringe political leader like Adolph Hitler to rise to power.

            Due to the monetary policies of the Federal Reserve, we are now experiencing inflation but we will not avoid a painful deflationary environment. 

            As I’ve discussed in the past, this is due to one major reason – the currency system that we are presently using and have been utilizing since 1971.

            Prior to 1971, the US Dollar was backed by gold. 

            In 1944, after World War II and the deflationary period of the 1930s, an international agreement made the US Dollar the world’s reserve currency.  At that time, the United States had more than 20,000 tons of gold reserves making the rest of the world comfortable that the US would be able to make good on her promise to redeem US Dollars for gold at a rate of $35 per ounce.

            It took about 25 years for the US to back out of this agreement.  In 1971, the US’ gold reserves were reduced to 8000 tons and President Nixon eliminated the link between the US Dollar and gold.  Since that time, US Dollars have been loaned into existence.

            Many of you reading this know that back story extremely well.

            Since all world currencies are debt today, when debt levels reach unsustainable heights and debt goes unpaid, the currency supply contracts and deflation sets in.

            Note from the chart on this page from Gold Switzerland (Source:  https://www.gold-eagle.com/sites/default/files/images2020/evg081821-5.jpg) that worldwide debt levels now stand at $300 trillion.

            Based on the current spending trajectory, within 4 to 9 years, global debt could reach $2 quadrillion!

            That is an increase of more than 600%!

            At some point, debt levels collapse under their own weight, and deflation sets in.

            The Federal Reserve and other world central banks are trying to avoid this deflationary outcome by creating currency.

            The chart shows the expansion of the currency supply.

            Notice the currency created by the Federal Reserve has been literally off the charts in an attempt to avoid this deflationary outcome which is inevitable in my view.

           History tells us this policy will not work.

            There cannot be an economic ‘soft landing’ in my view.

            And, it seems the economic data is starting to bear this out.

            Michael Snyder, wrote a piece last week in which he cited much of this data.  (Source:  http://theeconomiccollapseblog.com/here-are-11-statistics-that-show-how-u-s-consumers-are-faring-in-this-rapidly-deteriorating-economy/)

According to a Harvard CAPS/Harris Poll that was recently conducted, 56 percent of Americans say that their financial situations are getting worse, and only 20 percent of Americans say that their financial situations are improving.

Another new survey has just discovered that 66 percent of Americans “have avoided social events because they’ve felt embarrassed or uncomfortable” about their financial situations.

The housing bubble appears to be bursting.  At this point, sales of new single family homes are falling at a very frightening pace

Sales of new single-family houses in April plunged by 16.6% from March and by 26.9% from a year ago, to a seasonally adjusted annual rate of 591,000 houses, the lowest since lockdown April 2020, according to the Census Bureau today. Sales of new houses are registered when contracts are signed, not when deals close, and can serve as an early indicator of the overall housing market.

(Editor’s note:  I’ve been warning of an inevitable correction in real estate prices)

-After breaking the all-time national record in March, the average price of a gallon of gasoline in the United States has gone 42 cents above the old record and is now sitting at $4.59.

The average age of a car on U.S. roads has reached an all-time record high of 12.2 years.  Many Americans continue to delay replacing their current vehicles because new vehicles have become so unaffordable.

Millions of American families are struggling with rapidly rising food prices

The index for food away from home increased 7.2% over the last year, the Labor Department reported earlier this month. Food prices were up 9.4% in April from the same time last year — the biggest jump since April 1981, the Bureau of Labor Statistics recently reported. And grocery store prices increased 10.8% for the year ended in April.

U.S. natural gas futures just crossed the nine dollar threshold – the highest level that we have seen since the financial crisis of 2008.  That means that much higher energy costs are on the way for U.S. consumers.

Multiple Fed surveys are showing that manufacturing activity in the U.S. is really slowing down

The slowdown in manufacturing activity on display in reports from the Federal Reserve banks of New York and Philadelphia was confirmed by a survey from the Richmond Fed indicating that factory activity contracted in the mid-Atlantic region in May.  The Fifth District Survey of Manufacturing Activity index dropped 23 points from a positive reading of 14 in April to a minus nine, the lowest reading since May 2020, when much of the economy was still reeling from the onset of the pandemic and lockdowns.

-Zero Hedge is reporting extremely depressing news about U.S. macro data: “Other than April 2020 – when the entire economy was closed – May’s serial disappointment in US Macro data is the worst since Lehman”

-Thanks to plunging stock prices, approximately 20 trillion dollars in household net worth has been “wiped out” so far this year.

-A new CBS News/YouGov survey has found that 74 percent of Americans believe that things are going badly in this country and that 51 percent of Americans actually believe that Joe Biden is “incompetent”.

            In my view, we are likely seeing the beginning of the transition from inflation to deflation.

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.

Fed Revelations

        Stocks continued their losing ways last week.  The major stock market indices are now in a bear market officially.

        Stocks are following the script from 2018, the Fed tightens, and stocks fall.

        The big question here is whether the fed stays the course and continues to tighten.  Count me among the doubters.

        Peter Schiff, a past guest on my radio program, had an interesting take on Fed options and also reported on some past Fed discussions that are nothing short of eye-opening.  Here are some excerpts from his piece (Source:  https://schiffgold.com/commentaries/peter-schiff-the-fed-girds-for-battle/) (emphasis added):

It’s the Fed’s “hold my beer” moment.

After more than a year in which Federal Reserve leadership appeared clueless, pollyannish, and indecisive, the Fed is conducting a full-throated messaging campaign to show that it is as serious as cancer about the inflation surge that is scaring the bejesus out of consumers, investors, and economists.

Their public pronouncements in recent weeks go something like this: “Out of a good faith misreading of post-pandemic data we had concluded, mistakenly as it happens, that the inflation wave, which began in 2021, was transitory. But now that we know it is not, we are moving with great speed and resolve to bring the problem to heel. Given the power of our tools, the underlying strength of our economy, and our hard-earned credibility, we are confident we can get the job done quickly, and without inflicting undue harm on the economy. We will continue until inflation gets closer to our 2% target. And so, if you don’t mind, kind sir, please step aside and let us do the job we were created to do. We got this!”

This newly found resolve may assure many that at least the Fed is no longer in denial and has a plan to get us out of this mess. In reality, these open-mouth operations are simply a desperate Hail Mary designed to convince us that the Fed can do what it clearly has no stomach or power to do. I would suggest that Fed officials hold onto their beers and drink. They are going to need it.

While most observers have focused on Chairman Jerome Powell’s press conference last week as the clearest insight into the Fed’s thinking, I think more can be gleaned from the extensive conversation two days later in Minneapolis between Christopher Waller, a member of the Federal Reserve Board of Governors (a current voting member of the FOMC) and Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis (and an FOMC alternative member). In particular, Waller offered a very clear assessment of the Fed’s battle plan.

Right off the bat, he confronted mounting criticism that the Fed failed to read the economy accurately over the past 18 months, thereby grossly miscalculating policy, which let the inflation genie out of the bottle. His defense, which essentially boils down to “don’t blame us, no one with mainstream credentials in government, economics, or finance saw this coming,” is both bizarre and inadvertently illuminative. Not only does this ignore the 2021 predictions of former Treasury Secretary Larry Summers, who used to have at least some mainstream credibility, but it completely ignores all those like me who had been shouting from the rooftops that this danger was lurking. Waller’s admission, which shows how deeply embedded Fed leaders are in their own echo chamber, is more of an indictment of the entire economic elite rather than an excuse for their errors.

Waller then admitted that inflation data that was released way back in September 2021 revealed to them that the “transitory story’ that they had been spinning since the beginning of 2021, would no longer hold water. He explained that members of the FOMC were so alarmed that they immediately responded with plans to roll out new messaging that hinted strongly at tighter policy. Say what?

They determined nine months ago that very high inflation had been running rampant for the better part of a year, that it showed no signs of slowing, that the Fed Funds rate (which was then at 0%, and likely 800 basis points below the rate of inflation) was adding fuel to the fire, and the only thing they were prepared to do was to start talking tougher?

The Fed did not implement its first rate hike (25 basis points) until March of this year, fully seven months later! And during that entire time, it continued to expand its balance sheet by hundreds of billions of dollars through quantitative easing rather than immediately stopping the program or, better yet, reversing it. That’s insane. Captain, there is a huge gash in the hull of the ship but rather than try to repair the damage now, let’s think about how we are going to word our next few press releases!

Instead of taking bold steps back in the fourth quarter of last year to get ahead of the curve, or to at least not fall far further behind, the Fed irresponsibly took a slow and muted path. Given its admitted understanding of the conditions nine months ago, its actions seem hard to justify.

Despite these past missteps, Waller claims that the Fed is well-suited to make up for lost time. Emboldened by what he sees as a “historically” strong labor market, Waller believes the current economy can absorb the negative effects of higher interest rates without succumbing to recession. As a result, he predicts the Fed will not be deterred by weaker jobs or economic reports that may emerge in the coming months. In fact, he claims such data would be welcome developments. In his view, the economy needs to lose jobs to be put back into balance. Reduced hiring, he argues, will diminish upward wage pressure, which he sees as the root cause of inflation.

To justify his confidence that higher rates will kill inflation but not the broad economy, Waller took pains to draw a sharp contrast between today’s conditions and those that predominated in the late 1970s/early 1980s, which was the last time the Fed confronted nearly double-digit inflation with bold monetary tightening. Back then, the sharp rise in interest rates brought down inflation AND plunged the country into a recession. But as he views the current economy as benefiting from a “historically strong” labor market, he believes that fate will be avoided.

But Waller is looking at the rear-view mirror. He assumes that the economy that arose during the last decade of almost zero percent interest rates and historically stimulative fiscal policy will persist after those props are removed. But now, as rates increase and stimulus is removed, the economy must contract and change. We are already seeing such a change in the more speculative end of the economy. That’s where the problems are usually first manifest.

In case you hadn’t noticed, the wheels are coming off the technology and the cryptocurrency sectors. The technology-heavy Nasdaq composite index is down more than 25% thus far this year. The ARK Innovation ETF, which tracks the highest-flying growth-oriented technology, and “new economy” stocks are down 56%. E-commerce bellwethers such as Netflix and Shopify are down even more. The carnage in the crypto space is also spectacular. Although bitcoin is down about 60% from its high, that’s the good news. Lesser-known cryptos are down 70% or 80%. Some have been nearly wiped out completely, even those “stable” coins that were supposed to be pegged to the dollar. The pain extends to the businesses that worked in the crypto space. Financial firm Microstrategies, which borrowed to invest in bitcoin, is down 60% year to date while Coinbase, the crypto trading platform, is down 72%. (Bear in mind that all the losses listed above are just this calendar year. If you started measuring from the November 2021 highs, the losses are significantly greater.)

Recall that the Recession of 2001 and 2002 largely resulted from the implosion of the dot-com bubble when the pain in Silicon Valley rippled through the broader economy. But this time the outsized gains were even bigger and less tethered to reality. Many tech firms have already announced large-scale layoffs. Hundreds of thousands of highly paid workers may suddenly find themselves looking for jobs. Falling stock prices may also encourage recent retirees, who may have been coaxed out of the labor force by oversized stock market gains, or millennials who’ve been trading meme stocks and cryptocurrencies on Robinhood for a living, to join former Netflix, Twitter and Peloton employees in looking for work. Boom will go bust, and the unemployment rate may rise much quicker than Fed models suggest.

Here is the big takeaway from the piece.  The fed knew inflation was not transitory yet did nothing for months.  Then, when the Fed did take action, it was anemic and more form than substance. I would encourage you to read the entire piece; it is very well done.

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.

An Inevitable Outcome

          Last week, I discussed that stagflation was the most likely immediate economic outcome in my view.

          Just in case you missed last week’s post, stagflation is defined as price inflation combined with a shrinking economy.

          Ultimately though, I believe we will see a very painful deflationary environment that may rival the 1930s.  This past week, Mr. Egon von Greyerz, whose work I follow and admire, analyzed the current situation.  Excerpts from his piece follow: (Source:  https://www.silverdoctors.com/headlines/world-news/viscous-cycle-of-self-destruction-gold-outperforming-all-asset-classes/)

The current fake monetary system will collapse under its own worthless weight…

“The first panacea of a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permeant ruin. But both are the refuge of political and economic opportunists.”

-Ernest Hemingway

As the West is standing on the edge of the precipice, there are only unpalatable outcomes.

At best, the world is facing a hyperinflationary depression later followed by a deflationary depression.

But sadly, there is today much more at stake as the West is frenetically escalating the sound of war drums against Russia’s invasion in Ukraine.

As the global economy reaches the point of collapse, countries get the leaders they deserve. There is today no leader or statesman in the West who can stand up to Putin in order to negotiate peace. Biden sadly neither has the vigor nor the ability to play any significant role in solving the conflict. Also, he has the neocons pressuring him to attack and defeat Russia. And Biden’s rhetoric against Putin is certainly not conducive to peace, with words like war criminal and genocide. Biden mustn’t forget that just like in the Vietnam war, the North Vietnamese and Viet Cong are estimated to have lost one million soldiers and two million civilians. Unprovoked wars are, of course, always senseless, whoever starts them.

President Zelensky is doing all he can to involve the rest of the world militarily by demanding more money and more weapons from the West rather than putting his efforts into peace negotiations. Ukraine can, of course, never win the war against Russia alone. And dragging in the US and NATO can only lead to a war of incalculable consequences and potentially a WWIII which could be nuclear.

And in the West, not a single leader is making a serious peace attempt. From Biden to Johnson, Macron, and Scholz, we only hear talk of more weapons and more money for Ukraine. This is terribly tragic and a sign of totally incompetent leadership in the West.

So the US and the West have no ability or desire to achieve peace. And Boris Johnson has welcomed the war as a diversion from his domestic “Partygate” political pressures and therefore has taken an aggressive position against Russia rather than finding a peaceful solution.

Macron is an opportunist who stands with one foot in each camp by being chummy with Putin and at the same time condemning him.

And Scholz, the German chancellor, is in an impossible position caused by Merkel’s poor management of Germany’s energy position. The three remaining German nuclear power stations will be closed down, and fossil fuels are politically unacceptable. Nearly 60% of German gas imports come from Russia. German industry would not survive without Russian gas. So Scholz wants to have his cake and eat it, sanctioning Russia on the one hand and simultaneously spending billions of Euros buying their energy and other natural resources, including food.

Quite a precarious position for Germany to be totally dependent economically on its war enemy. At the same time, this is good for the world as Germany has a vested interest to achieve peace.

But we must remember that only a minority of countries are backing the actions of the US and Europe.  Africa, South America, and most of Asia are not taking sides and continuing to trade with Russia, and these regions represent around 85% of the world population.

So the vast majority of the world has no desire for war with Russia, but their voice is seldom heard in the Western-dominated media.

Politics and money cannot be separated, and the geopolitical situation that has now arisen will act as a perfect catalyst to the end of the monetary era since the creation of the Fed in 1913.

But what we must remember is that it is primarily the Western-controlled monetary system  (including Japan) which will come to an end.

America’s and the EU’s final desperate attempt to save their broken system by sanctions on world trade will eventually fail as the Western economies gradually decay in an economic and social breakdown brought about by a quagmire of currency collapse, deficits, debts, and history’s most epic of asset bubbles.

The Phoenix emerging will clearly be the East, led by China, with Russia as an important partner. China is, population-wise, the biggest country in the world and will soon be the biggest country in GDP terms. With total US assistance in the form of know-how and technology, China has built up a strategic and advanced manufacturing base with dominance in many sectors.

For example, 18% of all US imports come from China, including 35% of all computers and electronics. Chinese sellers represent 40% of all top brands on Amazon and 75% of all new sellers.

The US and the rest of the world criticize Germany for being dependent on Russian energy, but the US folly of shifting much of its manufacturing to China certainly qualifies for joint first prize in commercial and strategic idiocy.

Since gold is the ultimate money and the only money that has survived in history, it will have a very important role in the coming years as the fiat currency system collapses.

Empires normally suffer a drawn-out and painful death. The fall of the US and the West has certainly been long, starting over half a century ago. But the fake prosperity has benefitted a small elite and lumbered the masses with colossal debts.

In 1971, US debt was $1.7 trillion, and 50 years later, it is $90 trillion, a mere 53x increase. 

As the finale of the debt and currency collapse approaches, the desperation rises exponentially. Consequently, increasing amounts of money need to be created and wars initiated to justify the debt explosion, all in a vicious cycle of self-destruction.  

For over half a century, the US has destroyed its currency and initiated unprovoked military actions in numerous countries – virtually all of them unsuccessful.

Yes, the US has certainly experienced a temporary false prosperity. But that could only be achieved with deficits, debt, and printing fake money.

The massive cost of the failed Vietnam war led to Nixon closing the gold window in 1971.

As Nixon said at the time, “the strength of the currency is based on the strength of the economy”! 

          Hmmm, half a century later, that currency has lost 98% in real terms (GOLD), and the Federal Debt has grown 75-fold from $400 billion to $30 trillion. It took 22 years, from 1971 to 1993, for the debt to expand by $15 trillion. Just in the last 2 years, the debt is up by the same amount of $15 trillion.

            This debt will ultimately have to be dealt with.  Simple math has one concluding that this level of debt can never be paid. 

          It is the massive defaults on debt that will have to come that will ultimately lead to a painful deflationary environment.

          Stocks will fall, real estate prices will collapse, and unemployment will soar.

          It’s ironic that the currency creation that has taken place on such a reckless scale since the financial crisis has allowed the debt to build.

          Worldwide, at the time of the financial crisis, total debt was $120 trillion.  Today, worldwide debt stands at $300 trillion.  That’s an eye-popping increase of 250%!

          This can’t possibly end well.

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.

Possible Economic Outcomes

          From where I sit, it seems that stagflation is the most likely economic outcome near term.

          Stagflation is defined as inflation combined with economic contraction.

          The official inflation rate is 8.5%, but any long-term reader of “Portfolio Watch” knows this official number is highly manipulated.  The actual inflation rate, absent favorable adjustments to make the reported number appear more palatable, is higher, likely mid-teens, depending on whose data you want to believe.

          No matter, inflation is rampant.  The Fed is ever-so-incrementally increasing interest rates to ostensibly fight inflation.  The reality is that the level of increase so far will probably not subdue inflation.

          The economy is still growing officially, but from my perspective, once the ultimate revisions are made, we are probably in a recession presently.

          On my weekly “Headline Roundup” webinar, I discussed the opinion of Mr. Peter Grandich, founder of Peter Grandich and Company, relating to inflation.  Grandich is of the opinion that the Fed is well behind the curve when addressing the inflation problem.  Long-time readers of “Portfolio Watch” know that I agree completely.

          Grandich says that inflation today is a completely different animal than it was in the 1970s which was the last stagflationary environment experienced by the country.  Grandich says “the situation is beyond what the Fed can do now”.

          “Social and political disharmony is at the highest level since the onset of the Civil War in the U.S.,” Grandich said, “and with the world suffering economic challenges, it does not paint a good picture for the future.”

          Grandich added, that he is investing only in the gold market presently.

          As far as the topic of economic contraction is concerned, Deutsche Bank recently became one of the world’s first major banks to forecast a recession.

          This from “CNN Business”:

“Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a mild one.

Now, it’s warning of a deeper downturn caused by the Federal Reserve’s quest to knock down stubbornly high inflation.

‘We will get a major recession,’ Deutsche Bank economists wrote in a report to clients on Tuesday.

The problem, according to the bank, is that while inflation may be peaking, it will take a long time before it gets back down to the Fed’s goal of 2%.  That suggests the central bank will raise interest rates so aggressively that it hurts the economy.”

          As I have often stated, the Fed is between the proverbial rock and a hard place, all of their own making.  If the bank increases interest rates in a meaningful manner, recession will have to be the ultimate outcome.

          On the other hand, if the economy officially enters a recession and the Fed reacts by easing once again, the inflation monster will be further fueled.

          There are already signs that the economy, addicted to the artificial stimulus of the Fed is reacting negatively to the very modest tightening to date.

          Stocks are declining in 2022.

         

          The chart is a weekly chart of the Standard and Poor’s 500.  Each bar on the price chart represents one week of price action in this market.  The green bars represent weeks the market finished up, and the red bars represent weeks that the market finished lower.

          Note the uptrend line drawn on the chart from the most recent market bottom in 2020 to the end of 2021. 

          That trend was broken as we entered 2022.  And, since the trend was broken, we are now seeing the market ‘stair-step’ lower with a series of lower highs and lower lows.

          In this report, shortly after the first of the year, I suggested that the top in stocks might be in.  At this point, that seems to be the case, and I expect the series of lower highs and lower lows to continue.

          At this juncture, the Fed is continuing with its modest program of tightening.  The question will be how they react if stocks fall harder and go much lower.

          As noted above, more easing will mean more inflation.

          There are three economic outcomes here, in my view:

          One, the Fed stays the course, raising interest rates modestly and intermittently.  This course of action means that inflation may accelerate more slowly, but we also have a recession.  This is the stagflation outcome I discussed above.

          Two, the Fed, fearing recession, reverses course and begins currency creation once again while reducing interest rates.  This could mean more inflation, even hyperinflation, which will ultimately transition to a severely deflationary environment, perhaps after a currency event of some type.

          Three, the Fed, to get inflation in hand, increases interest rates so we have net positive interest rates after factoring in inflation.  This course of action likely leads almost immediately to the deflationary outcome.  In order to pursue this option, the federal budget would also have to be balanced or be a lot closer to balanced.

          Near term, I expect option one or a stagflation outcome. 

          However, it would not be surprising to see the Fed revert to option two when the economy worsens.

          And that seems to be what is occurring.

          Credit card debt that Americans are carrying increased almost unbelievably last month.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/economics/shocking-consumer-credit-numbers-everyone-maxing-out-their-credit-card-ahead-recession):

While it is traditionally viewed as a B-grade indicator, the March consumer credit report from the Federal Reserve was an absolute shock and confirmed what we have been saying for months: any excess savings accumulated by the US middle class are long gone, and in their place, Americans have unleashed a credit-card fueled spending spree.

Here are the shocking numbers: in March, one month after the February print already came in more than double the $18 billion expected, consumer credit exploded to an absolute blowout of $52.435 billion, again more than double the expected $25 billion print, and the highest on record!

And while non-revolving credit (student and car loans) rose by a relatively pedestrian 21.1 billion (which was still the 6th highest on record)… … the real stunner was revolving, or credit card debt, which more than doubled from the already elevated February print of $14.2 billion to a stunning $31.4 billion, the highest print on record… just in time for those credit card APR to start moving higher, first slowly and then very fast.

            Yes, you read that correctly; credit card debt doubled and then some from February to March. 

          The best explanation, in my view, is that consumers are forced to borrow money or use credit to meet their household living expenses.

            That is a trend that is also unsustainable.

            There are many unsustainable trends; consumer debt levels, government debt levels, government spending, overvalued markets, and currency creation, to name a few.

            A reversal of these unsustainable trends is inevitable.

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.

How Evolving Money Affects Investing Markets

         I just finished writing a special report for the month of May that is titled, “How Evolving Money Affects Investing Markets”.

          This week, I want to give you a preview as I think it’s important to understand how evolving money leads to economic seasons and what I believe are predictable investing conditions.

          While the whole idea of economic seasons may sound a bit crazy on the surface, a study of history has one concluding that these economic seasons have repeated themselves over and over again.

The severity and intensity of each season is affected by the currency system that is in place as the economic season changes.

There are many economists who have written extensively on the topic of economic seasons.  Mr. Ian Gordon, of the Long Wave Group, now retired, introduced me to the concepts many years ago.  It was an important “connect the dots” moment for me helping me understand why financial markets were doing what they did.

While economic seasons are predictable, the exact time at which one season ends and the next economic season begins is not precise from a forecasting perspective.  Yet, like the seasons of the year, we know that at some point, summer weather will follow spring weather.

For ease in understanding these economic seasons, we will name them after the seasons of the year: spring, summer, autumn, and winter.  Like the four seasons of the year, each economic season also has its own characteristics.

Here is a brief overview of the economic seasons and the characteristics of each one.  (These definitions are taken from the “New Retirement Rules” book.)

Spring Economic Season

During spring, an economy experiences a gradual increase in business and employment. Consumer confidence gradually increases. Consumer prices begin a gradual increase compared to the levels seen during the previous cycle (the winter cycle). Stock prices rise and reach a peak at the end of the spring cycle, and credit gradually expands. At the beginning of the spring cycle, overall debt levels are low.

Summer Economic Season

During summer, an economy sees an increase in the currency supply, which leads to inflation. Gold prices reach a significant peak at the end of the summer period. Interest rates rise rapidly and peak at the end of the summer season. Stocks are under pressure and decline throughout the period, reaching a low at the end of the summer cycle.

Autumn Economic Season

During autumn, money is plentiful and gold prices fall, reaching a gold bear market low by the end of the autumn season. During autumn, there is a massive stock bull market and much speculation. Financial fraud is prevalent, and real estate prices rise significantly due to speculation. Debt levels are astronomical. Consumer confidence is at an all-time high due to high stock prices, high real estate prices, and plentiful jobs.

Winter Economic Season

During winter, an economy experiences a crippling credit crisis and money becomes scarce. Financial institutions are in trouble. There are unprecedented bankruptcies at the personal, corporate, and government levels. There is a credit crunch, and interest rates rise. There is an international monetary crisis.

          The economist who first discovered that these economic cycles exist was Nikolai Kondratieff who outlined his work in a book first published in 1925 titled, “The Major Economic Cycles”.

          The economic winter season from 1929 to 1949 was particularly devastating.  That period of time we now refer to as The Great Depression.

          The reason the depression occurred was that debt levels were unsustainable.  During a winter economic season or a depression, debt needs to be purged from the system.

          There are only two ways to eliminate debt, pay it down by making principal and interest payments or default on it by walking away from the responsibility to repay the debt.

          It’s instructive to quickly look at each of the winter seasons in US history and then draw a parallel to today.

          Let’s begin with the winter season that began in 1837.  Like the winter season that commenced in 1929 with the crash of the stock market, the winter season that began in 1837 was catalyzed by the Panic of 1837.

          It’s interesting that the winter season of 1837 was preceded by easy money policies.  After the War of 1812, the country was dealing with mammoth levels of debt.  The politicians of the day predictably established a central bank that could create paper currency with a loose link to precious metals.

          This loose link to metals characterizes the money systems in place prior to the first three winter seasons in US history.  Policymakers reduced the backing of the paper currency by precious metals without eliminating the link and making the currency a pure fiat currency.

          This is what happened with the establishment of the Second National Bank which opened for business in January of 1817.  The bank began to issue paper notes that could be redeemed for precious metals.  As typically happens, the bank issued more paper currency than it had precious metals to back resulting in a large increase in the currency supply.

          It was the early 1800’s version of quantitative easing or currency creation.

          It was inevitable that this expansion of the currency supply would lead to a price bubble in some assets.  With the Panic of 1837, stocks and real estate crashed and banks failed.

          The second winter season in US history occurred after the Civil War.  In order to fund the Civil War, President Lincoln and congress changed the banking rules to allow US Dollars to be backed by gold, silver, and US Government debt.  Prior to these changes being made, gold and silver were money.

          These changes resulted in a huge increase in the currency supply and predictably, bubbles formed in real estate and stocks. 

          Stocks and real estate collapsed and banks failed during the Long Depression of 1873.

          The country once again returned to a currency system that was more sound, using gold and silver as currency.

          The Federal Reserve, the nation’s third central bank and the same central bank that controls monetary policy today, was founded in 1913.

          Almost immediately, the Fed reduced the backing of the US Dollar by gold from 100% backed by gold to only 40% backed by gold creating a large increase in the currency supply.

          Predictably, the Roaring Twenties followed this evolution to more loose money policies.  Stock prices, fueled by extremely loose margin requirements, soared.  As did real estate prices with the State of Florida being the site of wildly increasing real estate values.

          The Great Depression followed.  Stock prices fell as did real estate prices and banks failed.

         In each of these historical, U.S.-based winter economic seasons, easy money allowed for the building of debt-fueled bubbles that eventually collapsed.

          It’s also important to point out that in each of these historical examples, the US Dollar was still linked to gold to some extent.

          That brings us to where we now find ourselves.

          There has been no link between the US Dollar and a precious metal since 1971 making the US Dollar a full fiat currency for more than 50 years.  That has allowed debt levels in the private and public sectors to soar.        

          Around 15 years ago, real estate prices began to fall and stock prices followed.  The Federal Reserve’s response has been currency creation literally out of thin air.

          That action has reinflated what I call the “everything bubble”. 

          At some point, the everything bubble will deflate resulting in what I believe could be the worst economic winter season in US history.

          Why do I theorize this?

          Simple, debt levels are far more extended presently than at any time historically.  That will have to make the debt purging process more painful.

          We may now be seeing the beginning of the effects of debt excesses.  Stocks are falling and interest rates are rising.

          I fully expect the Fed to reverse course and ease in a last-ditch effort to avoid a deflationary outcome but history teaches us that is where we will ultimately end up. 

          The question is how much inflation we endure in the meantime.  And, the answer to that question lies with the Fed.

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