Inflation Delusions and the End of the Road

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

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

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

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

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

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

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

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

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

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

            Here are some excerpts:

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

A trillion is a massive, almost unfathomable number.

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

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

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

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

So that’s how enormous a trillion is.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allow me to simplify it in three steps.

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

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

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

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

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

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

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

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

In short, the Federal Reserve is trapped.

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

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

In other words, it’s game over.

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

The ‘Inflation Reduction Act’ Will Do Anything But

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Recession Imminent?

            US Treasuries rallied slightly last week as stocks, and precious metals fell.

            Since the beginning of 2022, I have been commenting that I believed the US economy was in recession.  As many of you know, after economic data is initially reported, it is often revised multiple times.

            This time is no exception to the revision rule.  This from CNN (Source: https://www.cnn.com/2022/06/29/economy/gdp-first-quarter-final/index.html):

The US economy shrank at a slightly faster rate than previously estimated during the first quarter, the Bureau of Economic Analysis said Wednesday.

With one quarter of negative economic growth in the books, the data adds to fears that a recession may be looming.

Real gross domestic product declined at an annualized rate of 1.6% from January to March, according to the BEA’s third and final revisions for the quarter.

Previously, the advance estimate released in April showed a contraction of 1.4%. Last month, that was revised to a decrease of 1.5%.

          The Atlanta Fed just reported (Source:  https://menafn.com/1104470550/GDP-of-Atlanta-Fed-shows-that-US-economy-already-in-recession) that the estimated growth for the second quarter will also be negative:

The United States economy is already in a recession, according to data from the Federal Reserve Bank of Atlanta’s gross domestic product (GDP) model released on Friday.

In a declaration, Atlanta Fed stated that “the GDPNow model estimate for real GDP growth, seasonally adjusted annual rate, in the second quarter of 2022 is -2.1 percent on July 1, down from -1.0 percent on June 30.”

The number is lower than the 0.3 percent growth anticipated announced on June 27; the next report will be issued on July 7, it was added. On the other hand, Real gross private domestic investment growth decreased to -15.2 percent from -13.2 percent, according to the bank, whereas real personal usage expenditures growth fell to 0.8 percent from 1.7 percent.

According to the Commerce Department’s third and final reading on Wednesday, the sharp decrease in data suggests that the largest economy in the world, which shrunk by 1.6 percent in the first quarter of the current year, may see a contraction in the months of April and June of the current year.
          

          In another sign the economy is slowing, Amazon, the giant online retailer, announced the company is canceling or delaying plans to build 16 more warehouses this year.  (Source: https://www.zerohedge.com/markets/amazon-cancels-or-delays-plans-least-16-warehouses-year)

After spending billions doubling the size of its fulfillment network during the pandemic, Amazon finds itself in a perilous position.

In the first quarter of 2022, the e-commerce giant reported a $3.8 billion net loss after raking in an $8.1 billion profit in Q1 2021. That includes $6 billion in added costs — the bulk of which can be traced back to that same fulfillment network.

Amazon CFO Brian Olsavsky said the company chose to expand its warehouse network based on “the high end of a very volatile demand outlook.” So far this year, though, it has shut down or delayed plans for at least 16 scheduled facilities.

“We currently have some excess capacity in the network that we need to grow into,” Olsavsky told investors on Amazon’s Q1 2022 earnings call. “So, we’ve brought down our build expectations. Note again that many of the build decisions were made 18 to 24 months ago, so there are limitations on what we can adjust midyear.”

          There are only politicians and members of the Federal Reserve Board who are suggesting that we will not see a recession based on the research that I have done.  If history teaches us anything about the prognostications of politicians and policymakers it is that these are attempts to control or direct the narrative rather than being legitimate forecasts.

          This from New York Federal Reserve Bank President John Williams (Source:  https://www.cnbc.com/2022/06/28/new-york-fed-president-john-williams-says-a-us-recession-is-not-his-base-case.html):

New York Federal Reserve President John Williams said Tuesday he expects the U.S. economy to avoid recession even as he sees the need for significantly higher interest rates to control inflation.

A recession is not my base case right now,” Williams told CNBC’s Steve Liesman during a live “Squawk Box” interview. “I think the economy is strong. Clearly, financial conditions have tightened and I’m expecting growth to slow this year quite a bit relative to what we had last year.”

Quantifying that, he said he could see gross domestic product gains reduced to about 1% to 1.5% for the year, a far cry from the 5.7% in 2021 that was the fastest pace since 1984.

“But that’s not a recession,” Williams noted. “It’s a slowdown that we need to see in the economy to really reduce the inflationary pressures that we have and bring inflation down.”

The most commonly followed inflation indicator shows prices increased 8.6% from a year ago in May, the highest level since 1981. A measure the Fed prefers runs lower, but is still well above the central bank’s 2% target.

In response, the Fed has enacted three interest rate increases this year totaling about 1.5 percentage points. Recent projections from the rate-setting Federal Open Market Committee indicate that more are on the way.

Williams said it’s likely that the federal funds rate, which banks charge each other for overnight borrowing but which sets a benchmark for many consumer debt instruments, could rise to 3%-3.5% from its current target range of 1.5%-1.75%.

He said “we’re far from where we need to be” on rates.

“My own baseline projection is we do need to get into somewhat restrictive territory next year given the high inflation, the need to bring inflation down and really to achieve our goals,” Williams said. “But that projection is about a year from now. Of course, we need to be data dependent.”

          While some may think that Mr. Williams’ forecast of a soft economic landing, getting inflation subdued while avoiding recession, is possible, I am not among them.  Particularly when the current ‘data’ being published by the Atlanta Fed squarely contradicts Mr. Williams’ statements.

          Bottom line as far as I’m concerned is that the Fed will ultimately reverse course and once again engage in easing to try to prop up the economy.  Of course, such action will be at the expense of the US Dollar.  And consumer prices.

          This perspective from Schiff Gold (Source:  https://schiffgold.com/commentaries/rick-rule-fed-will-chicken-out-on-inflation-fight/):

            Well-known investment advisor Rick Rule said the Fed will chicken out on its inflation fight.

            Rule runs Rule Investment Media and formerly served as the president and CEO of Sprott US Holdings Inc. In a recent interview, Rule said that the Fed could get inflation under control with significantly tighter monetary policy for a sustained period of time. But he said he doesn’t think the central bank has the wherewithal to follow through when the economy starts to crash.

I think they’ll chicken out. If we had a period of real interest rates it would certainly cure inflation, but it wouldn’t cure inflation until it did amazing damage to various balance sheets.”

            Rule has warned that the Fed won’t have the fortitude to fight inflation before. In an interview with MoneyWise earlier this year, he said, “I do not believe that the broad equities market will handle multiple rate hikes.”

            Inflation has run hot for months. During the June FOMC meeting, the Fed raised interest rates 75 basis points for the first time since 1994.

            Ron Paul has made similar statements, recently noting the Fed rate hikes have only raised rates to the level they were before the pandemic.

The Federal Reserve cannot increase rates to anywhere near the level they would be in a free market because doing so would increase interest payments to unsustainable levels for debt-ridden consumers, businesses, and the federal government.”

            Jerome Powell continues to insist that the central bank can tame inflation while bringing the economy to a “soft landing,” but this promise seems dubious at best.

            As noted, I expect the Fed to reverse course in the near future and once again pursue easy money policies.

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.

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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