Jerome Powell – Dennis Tubbergen

Long-Term Stock Forecast

While the overall stock market trend remains down, stocks did begin to show some signs of life last week, technically speaking. As the chart below, a weekly chart of an exchange-traded fund that tracks the S&P 500, illustrates, the longer-term downtrend line in place since the beginning of calendar year 2022 may have been broken to the upside last week.

From a fundamental perspective, stocks remain weak in my view, and as I wrote in my December 2022 client newsletter, I am forecasting more downside for stocks in 2023.

Short-term, we will have to wait and see.

Long-term, though, the outcome will be quite predictable in my view. We will have inflation followed by deflation. While stocks could rally in the inflation part of the cycle, when the deflation part of the cycle strikes, stocks and other financial assets will get hit.

In a recent piece, Egon von Greyerz of Matterhorn Capital comments. (Source: https://goldswitzerland.com/in-the-end-the-goes-to-zero-and-the-us-defaults/)

Although US debt has increased virtually every year since 1930, the acceleration started in the late 1960s and 1970s. With gold backing the dollar and, therefore, most currencies UNTIL 1971, the ability to borrow more money was restricted without depleting the gold reserves.

Since the gold standard prevented Nixon to print money and buy votes to stay in power, he conveniently got rid of those shackles “temporarily,” as he declared on August 15, 1971. Politicians don’t change. Powell and Lagarde recently called the increase in inflation “transitory,” but in spite of their bogus prediction, inflation has continued to rise.

Since 1971 total US debt has gone up 53X, with GDP only up 22X, as the graph below shows:

As the widening Gap between Debt and GDP in the graph above shows, it now takes ever more debt to achieve increases in GDP. So without printing worthless money, REAL GDP would show a decline.

So this is what our politicians are doing, buying votes and creating fake growth through printed money. This gives the voter the illusion of increased income and wealth. Sadly he doesn’t grasp that the illusory increase in living standard is all based on debt and devalued money.

Let’s also look at US Federal Debt:

Since Reagan became president in 1981, US federal debt has, on average, doubled every 8 years. Thus when Trump inherited the $20 trillion debt from Obama in 2017, I forecast that the debt would double by 2025 to $40t. That still looks like a valid projection, but with the economic problems I expect, a $50t debt by 2025-6 cannot be excluded.

So presidents know they can buy the love of the people by running chronic deficits and printing money to make up for the difference.

But if we look at the graph above again, it shows that debt has gone up 35X since 1981, but that tax revenue has only increased 8X from $0.6t to $4.9t.

How can any sane person believe that with debt going up 4.5X faster than tax revenue that, the debt can ever be repaid?

When debt goes unpaid, it is deflationary; currency disappears from the financial system.

Financial assets like stocks and real estate don’t react well to deflation. Ultimately, I believe stocks will have to go much lower.

As I have been suggesting, I believe that the Dow to Gold ratio will reach 1 or 2 in the end. Presently, when taking the value of the Dow and dividing it by the price of gold per ounce, one finds the Dow to Gold ratio at 19.

That’s more downside for stock and more upside for gold in my view, no matter what may happen short-term with stock rallies.

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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.

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.

The Fed, the Economy and the Markets

The double top theory for stocks that I called at the end of 2021 and have been discussing this month still looks intact despite a bit of a rally in stocks last week.

There was a lot of volatility in stock markets last week and a week end rally propelled stocks into positive territory for the week.

The big news last week was the Federal Reserve’s meeting. This from MSN about how investors may view the Fed’s post-meeting statement: (Source: https://www.msn.com/en-us/money/markets/what-to-expect-from-markets-in-the-next-six-weeks-before-the-federal-reserve-revamps-its-easy-money-stance/ar-AAThaoB)

Federal Reserve Chairman Jerome Powell fired a warning shot across Wall Street last week, telling investors the time has come for financial markets to stand on their own feet, while he works to tame inflation.

The policy update last Wednesday laid the groundwork for the first benchmark interest rate hike since 2018, probably in mid-March, and the eventual end of the central bank’s easy-money stance two years since the onset of the pandemic.

The problem is that the Fed strategy also gave investors about six weeks to brood over how sharply interest rates could climb in 2022, and how dramatically its balance sheet might shrink, as the Fed pulls levers to cool inflation which is at levels last seen in the early 1980s.

Instead of soothing market jitters, the wait-and-see approach has Wall Street’s “fear gauge,” the Cboe Volatility Index up a record 73% in the first 19 trading days of the year, according to Dow Jones Market Data Average, based on all available data going back to 1990.

“What investors don’t like is uncertainty,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, in a phone interview, pointing to a selloff that’s left few corners of financial markets unscathed in January.

Even with a sharp rally late Friday, the interest-rate-sensitive Nasdaq Composite Index remained in correction territory, defined as a fall of at least 10% from its most recent record close. Worse, the Russell 2000 index of small-capitalization stocks is in a bear market, down at least 20% from its Nov. 8 peak.

“Valuations across all asset classes were stretched,” said John McClain, portfolio manager for high yield and corporate credit strategies at Brandywine Global Investment Management. “That’s why there has been nowhere to hide.”

The Fed announced after its two-day meeting that rates hikes would likely begin in March and would end its quantitative easing program at about the same time. The Fed noted that it is considering how quickly to end that program.

I find it curious that despite near-record inflation, the Fed opted to wait a month before taking any action. Seems that if subduing inflation was the goal, action sooner rather than action later would be warranted.

As I’ve discussed in past issues of “Portfolio Watch” and on the weekly “Headline Roundup” webinar update that is broadcast live each Monday at Noon Eastern, I believe it will be difficult for the Fed to end its quantitative easing program.

There are many reasons I have reached this conclusion. Let me cover a couple of them with you.

First, via member banks, the Fed is helping the government cover its massive level of deficit spending. Since the spending by the Washington politicians is totally out of control, this will be a difficult thing for the Fed to get done.

Second, in my view, the economy isn’t strong enough to handle monetary tightening. Should the Fed follow through with its latest policy statement, I believe the economy and the financial markets will quickly and negatively react. Arguably, they have already begun to react adversely.

Every week, I read articles that tout the economic recovery. Most of these are published by media with an agenda in my view which has now sadly become the norm. I believe these stories to be more rhetoric than fact.

This from “Zero Hedge” (Source: https://www.zerohedge.com/economics/atlanta-fed-shocker-us-economy-verge-contraction) (Editor’s note: The acronym BTFD defined and sanitized, means “buy the dip”)

Nothing says “BTFD in stocks” like collapsing sentiment (UMich 10 year lows this morning) and crashing growth expectations and no lesser entity than The Atlanta Fed just released its latest GDPNOW forecast for Q1 economic growth in the US… and it’s a doozy.

US macro data has been disappointing recently…

All of which have sent the initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 to just 0.1 percent on January 28, i.e. on the verge of contraction.

The chart on the right illustrates the GDPNow model. Note that it is at the zero line indicating the Atlanta Fed’s research has the economy on the verge of recession.

The Atlanta Fed is not alone in this opinion.

This from another “Zero Hedge” piece (Source: https://www.zerohedge.com/markets/recession-deck-bofa-slashes-gdp-forecast-sees-significant-risk-negative-growth-quarter)

Which brings us to the current Wall Street landscape where some banks, most notably the likes of Goldman, continue to predict even more rate hikes while ignoring the risk of a slowdown, its entire bullish economic outlook for 2022 predicated on households spending “excess savings” which they have spent a long time ago (expect a huge downgrade to GDP in 2022 from Goldman in the next few weeks as the bank realizes this), while on the other hand we have banks like JPMorgan, which recently pivoted to the new narrative, and as we reported last weekend, now sees a sharp slowdown in the US economy following a series of disappointing data recently…

… and as a result, JPM now “forecast growth decelerated from a 7.0% q/q saar in 4Q21 to a trend like 1.5% in 1Q22.“

And while not yet a recession, today Bank of America stunned the market when its chief economist joined JPM in slashing his GDP for 2022, and especially for Q1 where his forecast has collapsed from 4.0% previously to just 1.0%, a number which we are confident will drop to zero and soon negative if the slide in stocks accelerates due to the impact financial conditions and the (lack of) wealth effect have on the broader economy.

For a long time, I have been discussing my belief that the economy and the markets were artificial and a day of reckoning would have to come.

That day of reckoning would be inflation followed by deflation.

We are now in the inflation part of that pattern, headed at some future point for deflation.

The question is how out-of-control will inflation get before we see deflation that is likely to be on par with the deflation of the 1930’s.

The answer to that question, in my view, depends entirely on Fed policy.

I remain skeptical that the Fed will follow through completely with its rather vague promise to tighten monetary policy.

Corruption at the Fed?

Stocks, by my analysis, weakened even more last week. The first four trading days of the week were negative followed by a nice rally on Friday. Despite the rally, technicals in the stock market are breaking down by my measure.

4 of the 11 sectors that comprise the S&P 500 turned negative over the past month. For many months prior, all 11 market sectors have had positive momentum. Longer-term charts have been pointing to a potential downturn for the past couple of months and given current price action, we may be on the brink of a more major decline.

There is no shortage of market or economic news to share with you. Each week, I look for the one or two stories that are most likely to affect you or to be of interest to you. This week, I will begin with a story that at best suggests that there are lax rules on trading on insider information at the Fed by Fed members and at worst confirms the level of corruption that many have suspected for a very long time.

If you missed the story, two members of the Federal Reserve Board have resigned after their trading activities were revealed in an article in “The Wall Street Journal”. This from “The New York Post” on September 27 (Source: https://nypost.com/2021/09/27/dallas-boston-fed-presidents-announce-resignations-following-controversial-stock-trades/):

It was a “Fed letter day” as two regional Federal Reserve presidents announced early retirements following controversial stock trades that were exposed in news reports.

Monday morning, Boston Fed President Eric Rosengren announced he would retire nine months earlier than expected, citing health reasons. Hours later, Dallas Fed President Robert Kaplan said he would retire, acknowledging his recent trading activities had become a “distraction.”

Earlier this month, filings reported in the Wall Street Journal revealed that Kaplan executed multi-million dollar trades throughout 2020. Kaplan, a former Goldman Sachs executive owns millions of dollars worth of stock in major companies including Apple, Amazon, Facebook, Delta Airlines, and Tesla.

Kaplan will step down on Oct. 8, but defended his record in a statement, “During my tenure, I have adhered to all Federal Reserve ethical standards and policies.” Rosengren will retire Thursday. Both men are 64.

Following the disclosure that Kaplan and Rosengren had been actively trading while serving at the Federal Reserve, both men vowed to sell their stock by Sept. 30 and move their money to passive investment vehicles. Despite the pledge to end any controversial trades, both men still faced criticism for perceived conflicts of interest: shaping policy the monetary policy they could benefit from.

“While my personal saving and investment transactions have complied with the Federal Reserve’s ethics rules, I have decided to address even the appearance of any conflict of interest by taking the following steps,” Rosengren said in a statement earlier this month. Rosengren’s trades had been smaller than Kaplan — in the range of tens of thousands and hundreds of thousands.

Here are a couple of Federal Reserve Bank Presidents making stock trades while making monetary policy decisions. While the two men predictably stated that everything they did was within the rules when one considers what former Dallas Federal Reserve Bank President Richard Fisher revealed in a CNBC interview in 2016 after he’d left the post of President. (Source: www.cnbc.com/2016/01/06/dont-blame-china-for-the-market-sell-off-commentary.html)

“I spent 10 years (through last March) as a participant in the deliberations of the Federal Open Market Committee, setting monetary policy for the U.S. The purpose of zero interest rates engineered by the FOMC, together with the massive asset purchases of Treasuries and agency securities known as quantitative easing, was to create a wealth effect for the real economy by jump-starting the bond and equity markets.”

“The impact we had expected for the economy and for the markets was achieved. By February of 2009, the Fed had purchased over $1 trillion in securities. With interest rates throughout the yield curve moving in the direction of eventually resting at the lowest levels in 239 years of history, the stock market reacted: It bottomed in the first week of March of 2009 and then rose dramatically through 2014. The addition of a third round of QE, which had the Fed buying $85 billion per month of securities to ultimately expand its balance sheet to over $4.5 trillion, juiced the markets.”

It’s interesting that Mr. Kaplan succeeded Mr. Fisher as President of the Dallas Federal Reserve in 2015. (There was an interim President for 6 months between the tenures of Fisher and Kaplan)

Fisher freely admitted that the Federal Reserve’s objective, while he was President of the Dallas Fed, was to jump-start the bond and equity markets. Given that stocks have risen to all-time highs since Mr. Fisher left his post and interest rates have fallen to all-time lows, is there any reason to think that the Fed quit “jump-starting the bond and equity markets”?

Something smells fishy?

And, does anyone else think it’s interesting that both men agreed to sell their stock by September 30 only after they got caught?

Ryan McMaken wrote a piece³ that was published on Mises Wire commenting on this topic (Source: https://mises.org/wire/youll-be-shocked-learn-theres-corruption-fed). Here are some brief excerpts although I would encourage you to read the entire article.

Fed Chairman Jerome Powell has decided the Fed ought to “review” its ethics policies after it was revealed that high-ranking personnel at the Fed were actively trading stocks even as the Fed was busy pulling the levers on monetary policy.

Specifically, Dallas Fed President Robert Kaplan made numerous trades worth $1 million or more last year. Meanwhile, Boston Fed President Eric Rosengren last year was making large trades in real estate investment trusts, possibly in the six-figure range.1

The problem here is obvious to any normal person who watches the Fed.

The Fed is not just an instrument of monetary policy, but a regulator of financial institutions. The Fed regulates bank holding companies, foreign banks working in the US, hundreds of state member banks, and other institutions as well. This gives Fed policymakers an enormous amount of control over the fortunes of many financial institutions.

Moreover, Fed policy can be—and, these days, usually is—instrumental in pushing up stock prices and real estate prices through monetary inflation. Since the Great Recession—and arguably since the late 1980s, with the “Greenspan put”—the Fed has been instrumental in subsidizing stock prices through an implied promise that the Fed will rush to the rescue if financial markets face any real risk of falling prices. Since the Great Recession especially, the Fed’s unconventional monetary policy has meant the Fed has sucked up trillions of dollars in bonds and mortgage debt. This means both a direct subsidy of real estate investments and also—as Fed asset purchases push down interest rates—a flight to yield in the stock market.

Not surprisingly, we can see a clear correlation between the Fed’s easy money policy and a supercharged stock market.

The information available to these regulators and policymakers also provides an enormous amount of insider information not available to outsiders. So, perhaps, Fed officials should divest themselves of their stock and real estate portfolios, at the very least?

For Rosengren and Kaplan, however, this is crazy talk, since both men insisted their actions were “consistent with their respective bank’s code of conduct policies.” This may very well be true, although this only illustrates how the Federal Reserve System is soft on potential corruption within the ranks of its leadership.

After all, Rosengren and Kaplan only offered to sell their holdings after a public scandal broke out.

The position of Kaplan and Rosengren is typical for government officials—which is what Fed officials essentially are. This is also common in Congress: what matters is finding loopholes allowing the official to maximize his personal wealth, capitalizing on his ability to affect regulations and conditions that affect the prices of his investments. All that matters is that the lawyers say it’s okay.

It’s not surprising, of course, that Congress is chock-full of millionaires. The Fed’s boards aren’t exactly populated by “regular folk.”

And this may be significant in helping us understand how Fed policy has been so lopsided in favoring the ultrawealthy while imposing price inflation and a higher cost of living on people of more ordinary means. Fed policy has been extremely successful from the point of view of billionaires and hedge fund managers holding huge stock portfolios and real estate holdings. The prices just keep going up, and at rates that outpace official price inflation rates.

But for first-time home buyers, and the many millions of American workers who own few stocks? They just face higher prices for housing, education, healthcare, and now even food. Investing is out of the question because ultralow interest rate policy makes traditional, conservative, low-risk investments (like savings accounts) basically worthless.

In the past, I’ve commented on the widening wealth gap is largely attributable to Federal Reserve policy. Here we see firsthand why that is true.

Ron Paul, when he suggested decades ago that we should end the Fed was well ahead of his time.

The Political Realities of the Taper

This past week, after the Federal Reserve’s Jackson Hole, Wyoming symposium, Fed Chair, Jerome Powell commented on Fed policy. It was widely anticipated that the Fed Chair would discuss the ‘taper’, or the Fed’s plan to slow the rate at which currency is being created.

The Fed Chair, in many respects, disappointed. This is from “Zero Hedge” (Source:https://www.zerohedge.com/markets/dovish-powell-sparks-most-painful-meltup-52nd-record-high-2021):

All that angst and jitters heading into today’s Jerome Powell speech, with so many fearing that the Fed Chair would finally make good on urgent warnings from a growing number of Fed speakers that the Fed’s easing is causing bubbles across all asset classes – including housing and certainly stocks – and warns traders that the big, bad taper is coming, and… nothing.

Instead, Powell was far more dovish than almost anyone had expected, barely mentioning the upcoming taper (and only in the context of what the Fed said in the recent Minutes), while reserving the bulk of his speech to discuss why inflation is transitory.

Predictably, Powell’s dovishness sparked a waterfall in the dollar and yields, with the 10Y and the Bloomberg Dollar index both sliding.

I have long been of the strong opinion that it will be difficult for the Fed to ‘taper’. Not because of economic reasons, but because of political reasons. Ryan McMaken, of the Mises Institute, wrote an excellent piece on this topic that explains:

Much of the discussion over the Fed’s policies on interest rates tends to focus on how interest rate policy fits within the Fed’s so-called dual mandate. That is, it is assumed that the Fed’s policy on interest rates is guided by concerns over either “stable prices” or “maximizing sustainable employment.”

This naïve view of Fed policy tends to ignore the political realities of interest rates as a key factor in the federal government’s rapidly growing deficit spending.

While it is no doubt very neat and tidy to think the Fed makes its policies based primarily on economic science, it’s more likely that what actually concerns the Fed in 2021 is facilitating deficit spending for Congress and the White House.

The politics of the situation—not to be confused with the economics of the situation—dictate that interest rates be kept low, and this suggests that the Fed will work to keep interest rates low even as price inflation rises and even if it looks like the economy is “overheating.” If we seek to understand the Fed’s interest rate policy, it thus may be most fruitful to look at spending policy on Capitol Hill rather than the arcane theories of Fed economists.

Why Politicians Need the Fed to Keep Deficit Spending Going—at Low Rates

Federal spending has reached multigenerational highs in the United States, both in raw numbers and proportional to GDP.

If all this spending were just a matter of redistributing funds collected through taxation, that would be one thing. But the reality is more complicated than that. In 2020, the federal government spent $3.3 trillion more than it collected in taxes. That’s nearly double the $1.7 trillion deficit incurred at the height of the Great Recession bailouts. In 2021, the deficit is expected to top $3 trillion again.

In other words, the federal government needs to borrow a whole lot of money at unprecedented levels to fill that gap between tax revenue and what the Treasury actually spends.

Sure, Congress could just raise taxes and avoid deficits, but politicians don’t like to do that. Raising taxes is sure to meet political opposition, and when government spending is closely tied to taxation, the taxpayers can more clearly see the true cost of government spending programs.

Deficit spending, on the other hand, is often more politically feasible for policymakers, because the true costs are moved into the future, or they are—as we will see below—hidden behind a veil of inflation.

That’s where the Federal Reserve comes in. Washington politicians need the Fed’s help to facilitate ever-greater amounts of deficit spending through the Fed’s purchases of government debt.

Without the Fed, More Debt Pushes up Interest Rates

When Congress wants to engage in $3 trillion dollars of deficit spending, it must first issue $3 trillion dollars of government bonds.

That sounds easy enough, especially when interest rates are very low. After all, interest rates on government bonds are presently at incredibly low levels. Through most of 2020, for instance, the interest rate for the ten-year bond was under 1 percent, and the ten-year rate has been under 3 percent nearly all the time for the past decade.

But here’s the rub: larger and larger amounts put upward pressure on the interest rate—all else being equal. This is because if the US Treasury needs more and more people to buy up more and more debt, it’s going to have to raise the amount of money it pays out to investors.

Think of it this way: there are lots of places investors can put their money, but they’ll be willing to buy more government debt the more it pays out in yield (i.e., the interest rate). For example, if government debt were paying 10 percent interest, that would be a very good deal and people would flock to buy these bonds. The federal government would have no problem at all finding people to buy up US debt at such rates.

Politicians Must Choose between Interest Payments and Government Spending on “Free” Stuff

But politicians absolutely do not want to pay high-interest rates on government debt, because that would require devoting an ever-larger share of federal revenues just to paying interest on the debt.

For example, even at the rock-bottom interest rates during the last year, the Treasury was still having to pay out $345 billion dollars in net interest. That’s more than the combined budgets of the Department of Transportation, the Department of the Interior and the Department of Veterans Affairs combined. It’s a big chunk of the full federal budget.

Now, imagine if the interest rate doubled from today’s rates to around 2.5 percent—still a historically low rate. That would mean the federal government would have to pay out a lot more in interest. It might mean that instead of paying $345 billion per year, it would have to pay around $700 billion or maybe $800 billion. That would be equal to the entire defense budget or a very large portion of the Social Security budget.

So, if interest rates are rising, a growing chunk of the total federal budget must be shifted out of politically popular spending programs like defense, Social Security, Medicaid, education, and highways. That’s a big problem for elected officials because that money instead must be poured into debt payments, which doesn’t sound nearly as wonderful on the campaign trail when one is a candidate who wants to talk about all the great things he or she is spending federal money on. Spending on old-age pensions and education right now is good for getting votes. Paying interest on loans Congress took out years ago to fund some failed boondoggle like the Afghanistan war? That’s not very politically rewarding.

So, policymakers tend to be very interested in keeping interest rates low. It means they can buy more votes. So, when it comes time for lots of deficit spending, what elected officials really want is to be able to issue lots of new debt but not have to pay higher interest rates. And this is why politicians need the Fed.

The Fed Is Converting Debt into Dollars

Here’s how the mechanism works.

Upward pressure on rates can be reduced if the central bank steps in to mop up the excess and ensure there are enough willing buyers for government debt at very low-interest rates. Effectively, when the central bank is buying up trillions in government debt, the amount of debt out in the larger marketplace is reduced. This means interest rates don’t have to rise to attract enough buyers. The politicians remain happy.

And what happens to this debt as the Fed buys it up? It ends up in the Fed’s portfolio, and the Fed mostly pays for it by using newly created dollars. Along with mortgage securities, government debt makes up most of the Fed’s assets, and since 2008, the central bank has increased its total assets from under $1 trillion dollars to over $8 trillion. That’s trillions of new dollars flooding either into the banking system or the larger economy.

For years, of course, the Fed has pretended that it will reverse the trend and begin selling off its assets—and in the process remove these dollars from the economy. But clearly, the Fed has been too afraid of what this would do to asset prices and interest rates.

Rather, it is increasingly clear that the Fed’s purchases of these assets are really a monetization of debt. Through this process, the Fed is turning this government debt into dollars, and the result is monetary inflation. That means asset price inflation—which we’ve clearly already seen in real estate and stock prices—and it often means consumer price inflation, which we’re now beginning to see in food prices, gas prices, and elsewhere.

Greenspan the Gold Bug?

Markets were once again quiet last week.

Emerging market stocks continue to show weakness and the bond markets may be beginning to show signs of life.

Last week, I shared a chart of the “Buffet Indicator” a stock valuation tool that was named after Warren Buffet after he revealed in an interview it was his favorite method to use to value stocks.

Using that indicator, stock valuations are now 20% higher than at the peak of the tech stock bubble. That statistic alone validates a cautious approach to investing. Dollar-cost averaging into portfolios that have hedged stock positions or exit strategies are techniques to consider at this juncture in the markets.

This past week, I read an article that revealed that Alan Greenspan, the former Chair of the Federal Reserve is actually a gold bug. (Source: https://goldswitzerland.com/fed-heads-lose-their-head/)

The article was penned by Egon von Greyerz, whose work I often read.

It will come as no surprise that Mr. von Greyerz concludes that politicians and policymakers often speak with “forked tongues”. Here is a bit from his piece:

That politicians speak with forked tongues is a well-known axiom. The day they put the political cap on, it is impossible for them to tell the truth.
The same with the heads of the Federal Reserve. Whatever views the appointee previously had about sound money is completely blown out of the water, once he/she enters the Eccles building.

My colleague Matt Piepenburg wrote about the author of the “Everything Bubble” Alan Greenspan last week. And the “Maestro” is the epitome of someone who lost all his senses as he had to violate virtually every single principle he stood for when he became chairman of the Fed.

Egon then went on to discuss an essay that Mr. Greenspan authored in 1966 titled, “Gold and Economic Freedom”. It is important to note that Greenspan wrote this piece five years prior to the United States reneging on the Bretton Woods agreement in which the United States agreed to back the US Dollar with gold. The US agreed to exchange US Dollars for gold at a rate of $35 per ounce as part of that agreement.

Here is an excerpt from Greenspan’s 1966 essay (Source: https://www.swissamerica.com/article.php?art=06-2003/200306250118f.txt):

“Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade.”

Sure makes Greenspan sound like a gold bug, doesn’t it?

Mr. von Greyerz points out that Greenspan has taken this position regarding gold more than once. This, again, from Mr. von Greyerz’s article:

In a 1978 Congress hearing, Greenspan stated:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

You read that correctly. In testimony before congress, Greenspan said that without using gold as money, it is impossible to preserve wealth and protect that wealth from the ravages of inflation.

But, then in 1987, Mr. Greenspan became the Chair of the Federal Reserve and, at that point, it seems, his position changed. It was Greenspan who began the practice of money creation. While he served as Fed Chair prior to the advent of quantitative easing and helicopter money, Greenspan did manipulate the money supply by controlling interest rates.

It seems that during his tenure at the Fed, Greenspan suppressed his true feelings about gold as money. As von Greyerz notes in his article, Greenspan is the father of the everything bubble in which we now find ourselves.

Greenspan did slip once during testimony before the House of Representatives in 1998 when he said, “I am one of the rare people who still have a nostalgic view of the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.”

After he left his post as Fed Chair, Greenspan once again spoke openly and freely of his affinity for gold as a currency. In 2014, Greenspan said, “Gold is a currency. It is still, by all evidence, a premier currency, where no fiat currency, including the dollar can match it. Yet gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation.”

Mr. von Greyerz points out that subsequent Fed Chairs have not shared Greenspan’s views on gold.

Former Fed Chair, Ben Bernanke, while being questioned by Ron Paul stated “the reason people hold gold is to protect against a tail risk, a really, really bad outcome.”

When Dr. Paul asked Bernanke if gold was money, Bernanke replied, “No, it is an asset.”

Paul then followed up by asking Bernanke why central banks hold gold. Bernanke replied by saying, “Well, it is a tradition.”

Not a great answer.

Current Fed Chair Jerome Powell seems to be clueless about gold. This from von Greyerz’s article:

The current Fed head also has, not unexpectedly, very little understanding of gold. In a recent discussion at the Bank for International Settlement (BIS) Powell described Bitcoin as an asset that is not backed by anything.

So far I will clearly agree with him. “Crypto assets are highly volatile and therefore not useful as a store of value,” he said. It is a speculative asset that is essentially a substitute for gold rather than for the dollar”.

So yet another clueless Fed head!

The obvious question to ask Powell is:

Why the hell don’t you sell your 8,000 tonnes (allegedly) of gold and buy Bitcoin instead??
That is the obvious conclusion if Crypto assets are a substitute for gold. Also, imagine the costs you would save Mr Chairman as 8,000 tonnes of gold is $4.4 trillion and would fit on a small memory stick that you could keep in your pocket.

History teaches us that the basic rules of economics and currency cannot be changed. Ultimately, it is my firm belief that gold or gold and silver will once again become money. From that standpoint, I am in agreement with Mr. Greenspan.

Meanwhile, the massive money creation in which the Fed has been engaging is creating inflation in many areas of the economy. Food and lumber are just two examples.

Massive new money creation being distributed as helicopter money to the masses is creating a banana republic look in the United States.

The Chicago PMI Index has not been at the current level since 1980, when then Fed Chair, Paul Volker raised the Fed Funds rate to 22% to combat inflation. The chart illustrates.

Yet, the Fed sees no inflation?

Last week, the Fed issued a statement that conveyed the Fed intends to keep interest rates near zero and continue ‘bond purchases’ (a.k.a. money creation) of $150 billion per month.

Mr. Powell made the following statement to reporters last week. “We want inflation to run a little bit higher than it’s been running the last quarter century. We want it at 2%, not 1.7%.”

The Fed’s policy moving ahead is clear. Print, print, and print some more. Interesting that Mr. Powell subtly changed the inflation narrative once again suggesting that the Fed is now averaging inflation over a 25-year time frame.

When you couple that fact with the truth that the Fed’s measure of inflation is severely flawed and underestimates the inflation rate by a significant margin, seems that we might all take Mr. Greenspan’s advice and make sure we’ve hedged our assets by owning gold and silver.

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Inflation, Deflation and Number Games

By my technical measure, stocks remain in an uptrend although it’s difficult to justify current valuations from a fundamental perspective. Gold and silver, as I noted last week are in downtrends although the fundamentals are still very bullish for precious metals.

One reason I am bullish on precious metals moving ahead is the expansion of the fiat money supply. The chart on this page, from the Federal Reserve and tweeted by Sven Henrich, shows that in the last year, by the Fed’s own accounting, the M-1 money supply increased more than $14 trillion!

Notice the increase over the past 12 months; the trajectory of the money supply, when plotted on a graph, is completely vertical.

While this chart tells you everything you need to know about the money supply currently, this massive and rapid expansion of the money supply, is poised to continue at this same pace.

Past radio program guest, Alasdair Macleod, wrote a piece this past week reporting on monetary policy moving ahead. He notes (Source: https://www.goldmoney.com/research/goldmoney-insights/monetary-inflation-the-next-step) (emphasis added):

Earlier this month the US Treasury released its plan to flood the financial system with cash by reducing its balance on its general account at the Fed by $1.229 trillion by not renewing an equivalent amount of T-Bills.

Separately, the Fed will continue with its QE at the rate of $120bn every month, which combined with the Treasury’s plans means an inflation of the money supply totalling $1.829 trillion [(120×5 months)+929+300] is in progress from the beginning of this month until end-June. This does not include the planned stimulus of $1.9 trillion.

The banks do not have the balance sheet capacity to take this expansion on board, and if they are forced to turn new depositors away it will almost certainly be by charging for deposits (imposing negative interest rates). That being the case, not only will the US economy be flooded with unprecedented levels of inflated money, but commercial banks will implement negative rates without the Fed having to do so.

Just when you thought monetary policy couldn’t get crazier, it seems it’s about to get crazier. We may about to see negative interest rates in the US and England, two areas of the world that have not yet seen this lunacy.

In my view, this development, should it occur, will make the case for many investors increasing their holdings of precious metals. One of the main arguments against owning metals is that there is no yield. That argument is about to be turned on its head should negative interest rates become reality. Not only are metals a good inflation hedge but no yield on metals will be more attractive than a negative yield on bank deposits.

As Mr. Macleod points out in his article, a negative interest rate policy destroys small savers and pension funds. Pensions are already using actuarial assumptions that are totally unrealistic and moving into an environment of negative interest rates will only exacerbate the already huge problems with pension funding.

For a long time, I have long contended that there are only two economic outcomes possible; one, deflation. Or two, inflation followed by deflation.

Arguably, we are now seeing inflation.

Past radio program guest, John Williams of Shadowstats.com tracks economic data using the methods that were previously used by the government. As many of our readers know, as time has passed, the reporting data has changed to make the reported data look more favorable.

This chart, republished here from www.Shadowstats.com, shows that using the reporting methods that were used prior to 1980, the current, real inflation rate is approaching 10%. Arguably, that is close to 1970’s level inflation.

The question is this, how long can inflation continue before the bubble bursts and deflation sets in?

That is the question that is impossible to answer.

Could we see hyperinflation before the deflation sets in?

It’s a definite possibility given the Fed’s current policy stance.

Or will the highly inflated stock and real estate markets crash making deflation the dominant economic theme?

Also, a possibility.

That’s why I have long been in favor of owning some assets that do well in an inflationary environment and owning other assets that do well in a deflationary climate. The amount that is allocated to each type of asset depends on one’s own individual facts and circumstances.

For now, it seems that we are still headed for more inflation but a quick and severe stock market correction could change that course at any time.

Here’s what Jerome Powell, the Federal Reserve Chair, had to say about inflation last week (Source: https://seekingalpha.com/article/4409135-jerome-powell-and-coming-inflation-what-should) (emphasis added):

In response to a questions posed by Congressman Warren Davidson about whether “M2 [money supply] going up by 25% in one year” is going to “diminish the value of the U.S. dollar,” Powell responded, “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time.”

Powell added that “the correlation between different aggregates [like] M2 and inflation is just very, very low.

Let’s rephrase the Chairman’s statement for clarity.

“There was a time that money creation caused inflation but that’s not the case presently. The amount of money printed and the rate of inflation are not closely correlated.”

So, it used to be that money printing increased the rate of inflation but, according to the Fed Chairman, that is no longer the case?

What has changed?

Have the basic rules of economics changed?

Have the laws of supply and demand changed? Does an abundance of something (including money) make that something more valuable?

Obviously the basic rules of economics have not changed.

Scarcity creates value and abundance does exactly the opposite.

An abundance of money makes it less potent. An abundance of money has inflationary tendencies.

So what’s changed?

Only the way the inflation rate is calculated.

I have often used the following illustration to make this point.

I like to go fishing in Florida. One of my favorite species of fish to catch requires that it be 12 inches in length in order to keep it. When fishing, it’s easy to figure out if the fish is a ‘keeper’ or not by taking an ordinary 12-inch ruler and holding it next to the fish.

If I decide to cut my ruler in half and recalibrate the numbers so there are 12 inches on the ruler, I still have a ruler that says it’s a 12 inch ruler but its half as long as the ruler I used on my prior fishing trips.

Now, using the new, shorter ruler, I catch a lot more ‘keepers’.

Am I a better fisherman?

No. But I changed the measuring stick so I can now keep more fish. Reality hasn’t changed, only the way I measure it.

That’s the game the Fed is playing. Reality hasn’t changed but the way its measured has.

You want to be prepared for the inflationary outcome as well as the deflationary outcome.

Stocks, Metals and the Fed’s ‘New’ Policy

While there is no fundamental justification for it, stocks rallied again last week and rallied strongly. The Dow Jones Industrial Average was 2.59% higher while the S&P 500 rose more than 3%.

Stock valuations of the most popular stocks are literally, nearly off the charts. Call me old-fashioned, but buying stocks with a price to earnings ratios of more than 1000 is foolish for all but the most speculative investors. Some of these high-flying stocks have gains of 500% plus since the market bottom with parabolic chart patterns. Historically speaking these parabolic chart patterns end badly.

Both stocks and metals have formed parabolic price patterns on the charts. In prior posts, I have suggested that gold and silver would need to consolidate or pull back before a price rally continued. I am still of a mind that further consolidation or more of a pullback could happen but long-term, I remain a precious metals bull.

Analysis of a current silver price chart shows that current prices are far removed from the up-trending line that began in March. Often, prices pull back to the long term trend line. That could happen here but it doesn’t have to occur.

As drawn on the chart, there is also a pennant pattern forming which is often a continuation pattern.

As noted above, over the long term, I expect nominally higher gold and silver prices as central banks around the world continue to create more fiat currencies. History teaches us that eventually, it’s highly likely we go back to a currency system based on gold, silver, or both. In my view, that makes owning gold and silver in one’s portfolio essential.

As many of you are undoubtedly aware, the Fed this past week met virtually for it’s annual Jackson Hole monetary policy symposium. During this meeting, the Fed announced that it will change its interest rate policy and keep interest rates low for the foreseeable future. (Not really a policy change, just an official announcement.)

All 17 top Fed officials agreed to adopt a policy called “Average Inflation Targeting” which will allow inflation to run above the targeted 2% annual inflation rate for a period of time.

While Mr. Powell did not specify how much above the 2% annual inflation rate the Fed might allow inflation to run, his colleague Robert Kaplan, the Dallas Federal Reserve Bank President stated it meant that the annual inflation rate might be allowed to reach 2.25% to 2.5% annually.

The Fed’s decision to “officially” change policy was not surprising to me. The Fed actually made the decision to keep interest rates low back in May of 2019 when the Fed Funds rate began to be lowered. The Fed Funds rate has fallen from 2.41% in April of 2019 to essentially zero at the current time.

With last week’s announcement, the Fed is “fessing up” to a policy that they have been pursuing for more than a year.

If you’re a savvy observer, there is a pattern of failed policy here.

After the financial crisis more than one decade ago, the Fed elected to engage in an emergency measure that they called quantitative easing a.k.a. money printing. Despite their insistence that this measure was a temporary measure required because of the extraordinary economic circumstances, at the time, I suggested the money printing would continue and intensify.

That is exactly what has happened as the Fed has expanded its balance sheet by printing more than $3.5 trillion this year alone.

Now, on top of massive money creation, the Fed has made the formal policy decision to allow the official inflation rate to run higher than the targeted rate.

This policy change was simply the next logical step that moves us further down the slippery slope of currency destruction.

This is evident when noting the disparity between the officially reported inflation rate and one’s actual day-to-day experience making purchases.

As I have reported and discussed often, the methods used to calculate the official inflation rate have changed over time to make the reported inflation rate look more favorable than the real inflation rate.

Powell’s higher inflation rate policy announcement comes as no surprise; many of us have been expecting it. The fact that Powell made an announcement about this policy may signal that higher inflation is now imminent; it’s always been inevitable.

As Open Money co-founder, Jill Carlson opined, when the bill comes due, there are two ways out. Option A is to hurt the poor with inflation and option B is to hurt the rich with taxation. The Fed just made option A the official policy.

It’s my view that this policy combined with more ‘helicopter money’ which seems inevitable, makes serious inflation in the relatively near future highly likely.

As Tom Luongo noted, “If we digitally airdrop 10% more money into everyone’s accounts, as the latest proposals from economists attached to the Federal Reserve suggest, then the general price level will, in fact, rise 10% if that money is spent on necessities.”

The data suggests that is where consumers are spending money. Mr. Luongo suggests:

In an environment where most people’s time preference is short because they are literally fighting for their economic lives, this new stimulus money will go right into the things people need right now — food, clothing, shelter.

Things are so bad for so many Americans now that they saved their first stimulus checks and only spent them on the bare necessities, forgoing any thought of paying down debt.

They used what’s left of their credit rating to feed themselves now on someone else’s dime and let the bank choke on their mortgage when the credit card is maxed.

To the casual observer, the helicopter money and stimulus spending are in response to the COVID-19 economic fallout which is undoubtedly a factor. However, some critical thought has me concluding that the system is totally broken and a reset is on the way.

Prior to the financial crisis, money was loaned into existence. Banks were required to reserve 10% of deposits and could loan out the balance. When the Fed wanted to create more money, they would reduce interest rates which encouraged borrowing which in turn created more money.

At the time of the financial crisis, the Fed went back to this playbook and found that it didn’t work. Interest rates at 0% did not spur borrowing so the Fed began a program of quantitative easing which had the Fed creating money out of thin air to buy securities from member banks. The idea was that these banks would get rid of some of their ‘toxic assets’ (remember sub-prime mortgages?) and clean up their balance sheets. By law, the Fed could only buy government-backed securities; instruments like government bonds and government-backed mortgages.

This worked for a while but earlier this year as bank’s balance sheets contracted, the Fed began to loan money to the US Treasury to allow the Treasury to use SPV’s to begin to buy corporate bonds with newly created money loaned to the Treasury by the Fed.

All these monetary experiments were implemented with the caveat that the Fed would keep an eye on their inflation target and reel in these easy money programs when inflation threatened.

Now, the Fed is open to higher inflation. Perhaps because higher inflation has arrived.

This chart illustrated the price pattern of the US Dollar Index which measures the purchasing power of the US Dollar against the purchasing power of the 6 major trading partners of the United States. Notice since March of this year, the US Dollar has declined about 11% against other fiat currencies and about 34% against gold.

While markets never go straight up or down, the Fed’s officially revised inflation policy seems to ensure that this trend will continue.

As I noted last week, inflation hurts the less affluent more than the affluent.

While the Fed’s officially revised policy is really nothing new, I am reminded of a quote that seems especially appropriate:

“When ideas fail, words come in very handy.”

-Johann Wolfgang von Goethe (1749-1832)

Dollar Devaluation and a Developing Depression

Stocks and metals both rallied last week; silver was up more than 15%.

When discussing the performance of markets, it’s important to remember that market performance is measured in US Dollars. As US Dollars are devalued, markets move nominally higher. Measured in real terms, adjusted for the true inflation rate, markets may not be moving much or may actually be declining.

Let’s look at an example to make the point.

To examine a scenario that is realistic, we need to use an inflation rate that is not the official inflation rate, or the Consumer Price Index. As we’ve considered previously, the CPI measure of inflation is heavily manipulated and does not reflect the real-world price experience of an average American.

The Chapwood Index measures inflation without the manipulative maneuvers that take place in the calculation of the Consumer Price Index. The Chapwood Index measures the cost of a basket of goods and services in a metropolitan area in one year and then compares it to the cost of that same basket of goods and services one year later.

Using the Chapwood Index method of measuring inflation, the average inflation rate over the past 5 years ranges from 9% to 13% depending on which part of the country one lives in.

Five years ago, the Dow stood at about 17,800. It has now reached the 27,400 level. If one grows the Dow for five years beginning with a value of 17,800 at a real inflation rate of 10%, the Dow would stand at approximately 28,700 today due to the devaluation of the US Dollar.

There’s a good argument to be made that stocks are higher only due to currency devaluation.

This currency devaluation has been taking place for a long time; however, recently it’s accelerated radically.

If one goes back to 1933 when the law was changed to make it illegal for US citizens to own gold, one would find that the price of gold per ounce stood at $20.67.

Today, gold is selling for $2043 per ounce. A little, simple math concludes that the dollar has been devalued versus gold by about 99%. There was a time this past week that the price of gold exceeded $2,067 per ounce, a level exactly 100 times higher than in 1933!

Here is a perspective on this from Jan Niewenhuijs (emphasis added) (Source: https://www.voimagold.com/insight/gold-price-crosses-2-067-us-dollar-devalues-by-99-against-gold-in-100-years):

A world reserve currency is supposed to be superior in storing value, but through boundless money printing, the U.S. dollar hasn’t been able to compete with gold by a long shot. In 1932 the gold price was $20.67 dollars per troy ounce, today it crossed $2,067 dollars.

That’s a 99% decline in the value of the dollar against gold. Other reserve currencies such as the British pound and Japanese yen have done even worse. The yen has lost 99.98% of its value against gold in 100 years.

Gold doesn’t yield if you don’t lend it, but it’s the only globally accepted financial asset without counterparty risk. Because of its immutable properties, gold sustained its role as the sun in our monetary cosmos after the gold standard was abandoned in 1971. Central banks around the world kept holding on to their gold, despite its price reaching all-time highs such as now. This is due to Gresham’s law, which states “bad money drives out good.” If the price of gold rises central banks are more inclined to hoard gold (good money) and spend the currency that declines in value (bad money).

Presently, we are witnessing Gresham’s law in action as I report in the August “You May Not Know Report” newsletter. Central banks are adding to their gold holdings to the tune of more than 35 tons per month; the equivalent of more than 13 years of mining production at present production rates.

That’s telling.

If you’ve been to the grocery store recently, you’ve witnessed food inflation first-hand. While some of this food price inflation can be blamed on supply chain interruptions, it is my view that is only partially to blame. The primary cause of food price inflation, in my view, is Fed monetary policies.

“The Washington Post” reported (Source: https://www.washingtonpost.com/business/2020/08/04/grocery-prices-unemployed/) (Emphasis added):

Last week, Federal Reserve Chair Jerome H. Powell said consumer prices have been kept in check due to weak demand, especially in sectors such as travel and hospitality that have been most affected by the pandemic. But food prices are the exception.

“For some goods, including food, supply constraints have led to notably higher prices, adding to the burden for those struggling with lost income,” Powell noted.

Indeed, nearly every category of food become more expensive at some point since February, according to data released Friday by the Bureau of Economic Analysis. Beef and veal prices saw the steepest spike (20.2 percent), followed by eggs (10.4 percent), poultry (8.6 percent), and pork (8.5 percent).

Compared with this time last year, prices for beef and veal are up 25.1 percent. Eggs are up 12.1 percent, and pork is up 11.8 percent from a year earlier, according to seasonally adjusted BEA data.

Of course, it’s not surprising that the Fed Chair blamed supply constraints rather than monetary policy.

I fully expect this inflation trend to continue. The Fed has no choice. The reported economic data indicates a full-blown depression. This from Michael Snyder (emphasis added)(Source: http://themostimportantnews.com/archives/the-economic-depression-of-2020-is-becoming-an-endless-nightmare-for-millions-of-americans):

On Thursday, we got yet another sign that this downturn is here for the long haul. According to the Labor Department, approximately 1.2 million Americans filed new claims for unemployment benefits last week…

Four months after the COVID-19 pandemic largely shut down the economy and left millions of Americans out of work, employers continue to lay off workers at a historic pace.

About 1.2 million people last week filed initial applications for unemployment insurance – a rough measure of layoffs – the Labor Department said Thursday, down substantially from 1.4 million the previous week and the lowest level since March.

Initially, I thought that this was good news.

1.2 million is still a catastrophic number, but at least it appeared to be an improvement over last week’s level of 1.4 million.

Unfortunately, there is more to the story.

As Wolf Richter has pointed out, when you look at the unadjusted numbers and you include all state and federal programs, the number of continuing unemployment claims increased by a whopping 1.3 million last week…

The total number of people who continued to claim unemployment insurance under all state and federal unemployment programs jumped by 1.3 million from the prior week to 32.12 million (not seasonally adjusted), the Department of Labor reported this morning. It was the second-highest ever.

That would seem to indicate that unemployment is dramatically surging, and that is really bad news for an economy that is already deeply suffering.

Overall, more than 55 million Americans have now filed initial claims for unemployment benefits over the past 20 weeks. That is a number that should be almost theoretically impossible, but this is actually happening.

Prior to this year, the all-time record for new unemployment claims in a single week was just 695,000, and now we have been above a million for 20 consecutive weeks.

Up until recently, a weekly $600 unemployment supplement from the federal government had been helping tens of millions of unemployed Americans pay their bills, but now that supplement has expired, and Congress has not yet agreed to another one.

The response to this souring economic news is likely to be more money creation which will only exacerbate the problem. While gold and silver markets are surging here and a pullback is probably likely, if your time frame is long term, going tangible with a greater portion of your assets probably makes sense.

I have been offering this perspective and advice for a long time and it’s paid off well for our clients and readers who have followed it.

While a pullback in metals prices is likely in our view but not inevitable, continuing to add to metals holdings is likely still advisable for many investors.