The Party’s Over! – Miller on the Money

Fed Chairman Powell tried to convince the public inflation was “transitory”. Eventually, he could no longer ignore reality. The Fed raised interest rates several times and vows to continue to do so, until inflation is stabilized at 2%.

As expected, mortgage rates are skyrocketing, the real estate market is tumbling, along with the stock and bond markets. The Party’s Over!

When asked about unemployment, Powell said:

“I think that there’s a very high likelihood that we’ll have a period of…much lower growth. …. And it could give rise to increases in unemployment, but I think…we need to have softer labor market conditions as well.

…. People really are suffering from inflation. And if we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us.

I wish there were a painless way to do that, there isn’t. …. What we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation, and that’s what we’re doing….”

He emphasized that it would be a mistake to reverse course too soon which would make things even worse. Whether he is willing to take the pressure Volcker did when he tamed inflation remains to be seen.

At this point, if he sees things through, or waffles along the way, the modern-day version of the “roaring 20’s” is now over! The consequences of reckless monetary policies have come home to roost.

Billionaire investor Carl Icahn warns:

“We printed up too much money, and thought the party would never end,” he said, adding that with the Fed switching stances and raising rates to fight inflation, he now believes ‘the party’s over.’

The hangover from the Fed’s loose monetary policies, according to Icahn, is sky-high inflation ….

‘Inflation is a terrible thing. You can’t cure it,’ Icahn said, noting that rising inflation was one of the key factors that brought down the Roman Empire.”

Who caused this mess?

Bill Bonner is very candid in his article, “After the Party”:

“Investors reach for the pain relief as the post bubble era hangover sets in….

Inflation is always…a political phenomenon. We get inflation when the politicians spend more than they can afford…and then ‘print’ money to fill the gap. It is fundamentally a default to creditors, who get back less than they were promised. For everyone else, inflation is a tax – disguised and delayed – that is levied mostly on the poor and middle classes…and people who don’t know what’s going on.

…. Politicians of both parties agree – they want more of it. …. It allows them to spend money they don’t have on programs we don’t need.

But they also need a deflationary recession…to provide cover for their renewed inflation, and to keep consumer prices down for the masses as they boost asset prices for the elite.

So, there you have it. Coming down the pike – tightening to cause a crisis; then loosening up to save the world.”

A few days later Bonner elaborated:

“In the most remarkable period in US financial history, America’s government debt went from just $23 trillion in 2020 to nearly $31 trillion today. That additional $8 trillion of spending should have stimulated the pants off the economy. Instead, it was squandered on wars and stimmies…and now is recalled – like a wine-stained bill from a fancy bordello – only as debt.

The Fed partied hard.

…. The feds wanted more money. Neither the taxpayers nor the credit markets were willing to provide it. The result was a policy – inflation. The Fed ‘printed’ up the necessary funds. It was spent. The real costs were pushed into the future. And this year, the future showed up.”

The debt did little to stimulate the economy as the Debt to GDP ratio soared.

Historically war debt was paid off when times were good. It was only after 2000 that debt skyrocketed; regardless of which political party ran the show.

Alasdair Macleod discusses stagflation:

“What happened in the 1970s has been described as stagflation…a combination of a stagnant economy and soaring inflation….

…. They ignore that inflation is a transfer of wealth from the private sector to the state, and from savers to the commercial banks and their favored borrowers. The more the expansion of currency and credit, the greater the transfer of wealth becomes, and the impoverishment of ordinary citizen results.”

Hangover Galore!

Investopedia tells us, “Buffett Indicator Spells Bad News for Stock Investors”:

The market-to-GDP numbers are downright scary….

Longtermtrends plots the numbers:

In 2000 & 2007 the numbers surpassed the 100% “Danger zone”; a significant market correction soon followed. The indicator recently hit a record 200%. The market would have to drop by 60% to get back to the “Safe to put money in stocks” zone that Buffett recommends.

Can investors survive a market correction to $20,000 or lower? 401k’s, pensions and retirement plans will be crushed, bond defaults will skyrocket, and 5% unemployment will be a pipe dream.

James Rickards queries, “How Far Could Stocks Fall?”

“The real problem for stock investors today is not that the crash is bad so far, but that it might just be getting started.

The culprit this time will not be reckless mortgage lending, Chinese viruses, or sock puppet spokespersons. The danger is the much higher interest rates needed to squash global inflation.”

He quotes Jerome Powell:

“‘The labor market has remained extremely tight…. Job openings are incredibly high…. They need…to come down.’ That’s Powell’s way of saying higher unemployment is the key to lower inflation.

Powell also said, ‘We think that we’ll need to bring our funds rate to a restrictive level and to keep it there for some time.

…. We have got to get inflation behind us. I wish there were a painless way to do that but there isn’t.’

…. Powell is dead serious about hitting a 2% inflation target. It seems he’ll raise rates as long as it takes to get there. He’s in a hurry to do so.

…. Unfortunately, the cost will be a severe recession and a rise of unemployment to 5% or higher with millions of job losses, massive business failures, billions of dollars in bad debts and a continued crash in stock prices.”

Paul Volcker raised rates to 20% and it took around three (painful) years to get inflation under control. Rickards suggests Powell is trying to thread the needle to get the job done:

“Rates will have to go to 4.75% (currently 3%) in the hope that inflation drops from 4.6% to 3.5%.

At that point, real rates will be over 1.0% and the Fed will wait as long as a year for inflation to drop from 3.5% to the Fed’s target of 2.0%.”

Volcker raised rates 5%+ above inflation – and kept them high for almost three years. Powell’s is inching rates higher, hoping to get 1% above inflation; predicting the job will be done by the end of 2023. Yeah right! Soft landing – Fuggetaboutit!

Friend Chuck Butler fears the Fed will drag it out, or flinch, “We need to pause and assess things” – resulting in stagflation that could last for decades.

If the Fed reverses course too soon and cuts rates, expect inflation to soar. What comes after recession? Depression and civil unrest.

Minimize the impact

After the recent rate increase, my investment account dropped more in one day than ever before. It was expected, and gut-wrenching.

The drop was primarily interest-rate-sensitive dividend stocks and precious metal investments. While things will get worse, I see no reason to sell. It hurts to see my cash reserves lose buying power to inflation. I’m avoiding the “buy on the dips” game. It will take fortitude, but I feel some real bargains will appear and patience will be rewarded.

Today’s market is NOT the time to be passive or abdicate the responsibility for managing your life savings to others.

Alasdair Macloud tells us:

“It is with great regret that we must admit that the majority of investors who delegate the management of their capital into the hands of professional fund managers and investment advisers are likely to suffer a destruction of wealth that could become almost total.

…. (Some) investors have…taken comfort in leaving investment decisions to the experts…. Meanwhile, their advisers are rewarded by the volume of assets under their management or by fees.”

The current generation of advisers have not experienced what is appearing on the horizon. They will be pressured to keep their clients fully invested.

If you have an adviser, take an active role, review your investments, and don’t get bullied! “The market always comes back” may be true, but it could take decades as it did after the Great Depression.

Mutual funds are fraught with risk; particularly when investors panic and fund managers are forced to sell solid investments to meet redemptions. I prefer holding individual stocks.

Even if Powell does everything right, curing the inflation disease will be gut-wrenching painful. Most investors are unprepared for this.

You should be!

On The Lighter Side

For over a century the West Side Nut Club in Evansville, Indiana has hosted a week-long fall festival. According to the news, it is the second-largest food festival in the country. Several blocks of Franklin Street are cordoned off and lined with over 100 food booths, all manned by local organizations raising money.

Family and friends all were assigned “booth duty” and had a shift or two at various organizations where they are members.

There is a main stage with events every evening, a carnival section with plenty of rides and a huge parade on Saturday. Grandson Brock was proud that his grade school took all the honors in the 8^th grade tug of war. They got a trophy which will be on display at the school.

I took this shot in the late afternoon on Tuesday, wanting some good daylight for the photo. An hour later, as people got off from work, the boulevard was jammed with wall-to-wall people.

It’s customary for locals to get a “Munchie Map” outlining all the food available and the appropriate booth to find it. It didn’t take Jo and me long to get with the program, joining the family, heading to the booths of our choice, then reassembling to dine together. It is lots of fun. The food was pretty good.

A major highlight is their 50/50 raffle. The jackpot has surpassed $1 million several times. We have our tickets and will go online Sunday morning to check the winning numbers.

The festival is always the first full week in October. I questioned whether it was fall yet, then walked out the door at daughter Holly’s.

A week earlier, all the leaves were green. We are beginning to bundle up for football games. Fall is upon us here in the Midwest….

Quote Of The Week…

“What has been holding this Wall Street house of cards together this long is the New York Fed’s willingness (even eagerness) to throw trillions of dollars at the problem at the earliest sign of a hiccup.

The fly in this ointment is that the New York Fed is literally owned by these same Wall Street mega banks while simultaneously creating emergency bailout programs and then outsourcing the work to the banks being bailed out. If ever there was the perfect design for a replay of the Hindenburg, this is it.”

— Pam and Russ Martens, Market Bubble Set to Explode, June 21, 2021

And Finally…

Facebook echoes my sentiments in “Ten things I am no longer interested in.”

• Wearing clothes that don’t stretch

• Caring about what other people think

And my favorite:

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

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