- No, the inflation you’re experiencing isn’t enough for the Fed
- Rickards on the monster the Fed is trying to outrun…
- … and how it’ll succeed even on a gimpy leg
- The pointless charade of earnings season
- Jim Rogers on the next bubble
- Goldman Sachs’ paltry punishment… a reader’s book recommendation… the world’s most lucrative “nonprofit”… and more!
“Why does the Federal Reserve want more inflation?” a reader writes us after we noted yesterday that the Fed’s favorite measure of inflation is running 1.6%, well short of its 2% target.
“After all,” he goes on, “David Stockman says the average family has lost 40% of its standard of living since 2000. Earnings actually LOST ground to the inflation we have now, and they are about to lose even more as more companies shed more workers or even shut their doors due to lower demand and earnings as credit standards rise.”
Great question. The short answer is that the Fed is trying to outrun a deflationary monster. Deflation is to central bankers what daylight is to vampires.
What happens if the monster catches up to them?
“Deflation,” Jim Rickards is fond of saying, “makes the real value of debt go up and destroys tax collections (when prices and wages go down in deflation, government collects less tax). If the value of debt goes up and tax collections go down, the entire house of cards starts to collapse.”
As the summer of 2016 wears on, the monster is gaining ground… and the Fed just pulled a hamstring.
For starters, “the U.S. economy is dead in the water,” says Jim.
We told you about the miserable GDP report on Friday. But it’s not just one bad quarter.
“Annualized real growth for the past four quarters has been an average 1.23%,” Jim explains. “That’s a trend that will drive the U.S. into a sovereign debt crisis. Deficits are still running over 3% per year and set to skyrocket as baby boomers retire and claim Social Security and Medicare benefits. In effect, the U.S. economy has flat-lined at a level that cannot sustain our deficit spending.”
Let’s dive a little further into Jim’s point about “sustaining our deficit spending.”
With a few more weeks remaining in fiscal 2016, the Senate Budget Committee estimates the deficit will total $616 billion — about 3.3% of GDP.
That’s a problem if the economy is growing only 1.2% and inflation by the Fed’s reckoning is 1.6%. Add up the two and you get 2.8%. Nowhere near 3.3%. Not sustainable in the long-term.
Meanwhile, the Fed would love nothing more than to unleash “helicopter money”… but the political calendar makes that nigh impossible the rest of this year.
A quick refresher on how helicopter money works: “Basically, the White House and Congress would agree on massive spending programs and larger deficits,” Jim explains. “The Treasury would finance the deficits by issuing more bonds. Then the Fed would buy the bonds with printed money and promise never to sell the bonds.”
Helicopter money is highly likely no matter who becomes the next president in January. But for now, the current president is a lame duck and Congress is too busy trying to get re-elected. The helicopters won’t come to the Fed’s rescue for a few more months.
Back to the flat-lining economy — and the looming risk of a new recession.
“The Fed needs to raise interest rates so they can cut them when recession hits,” says Jim. “The problem is that U.S. economy may be in recession before the Fed can normalize interest rates. If the Fed cannot cut rates enough to get the economy out of recession, it could become a permanent depression, as happened in Japan.
“Economists estimate that the Fed has to cut interest rates about 350 basis points (3.5%) to offset the effects of a recession and stimulate a return to growth. Today, the fed funds rate is 0.25%. The Fed would have to raise rates 3.25% before the next recession in order to cut them 3.5% to fight that recession.
“If the Fed rushes to raise rates now, they will cause the recession they are trying to avoid. The Fed’s actual policy has been to do nothing and hope for the best, but that strategy is running out of time.”
But all’s not hopeless for the Fed. It can — and will — get a steroid shot that will allow it to ignore that painful hamstring and outrun the deflationary monster.
Jim says the Fed will resume the currency wars. “The Fed can trash the dollar and import inflation in the form of higher import prices.
“You can bet a cheap dollar will be on the agenda Sept. 4, 2016, when the G-20 Leaders meet in Hangzhou, China.”
More about the run-up to that conference over the next month. For the moment, however, you should know that yesterday, Jim and his team issued a new weak-dollar recommendation to readers of Currency Wars Alert — with the potential to double or even triple your money over the next six months. Access here — no long video to watch, either.
Not much to say about the markets today. The major indexes are in the green, barely. Treasury rates are inching up. Gold is consolidating at $1,356.
To the extent there’s trader chatter about anything, it’s about the fine the Fed has levied on Goldman Sachs for accepting leaked regulatory documents from the New York Fed — a farcical episode we described last week.
The fine is $36.3 million — which works out to about 2½ days worth of Goldman’s profits during the second quarter. Yeah, that’ll learn ’em.
Earnings season is about two-thirds over, and it can’t end soon enough for Greg Guenthner of our trading desk.
“For whatever reason,” he says, “investors seem to think that earnings ‘beats’ matter. But they don’t.
“Most companies usually top analyst forecasts. That’s how the game is played. They set the bar so low that even the weakest reports tend to beat the magic number. Ta-da!”
But from Greg’s perch, that’s not the biggest problem: “The worst part of earnings season is the problems it causes with trading. You could have a nice little uptrend on your hands that hits a brick wall because investors decide they don’t like something about the company’s revenue growth or how the CEO answered a question on the conference call. It’s downright maddening.”
And so he’s holding off on new recommendations for our high-end Microcap Millionaires service. “I’m seeing some very compelling action in the microcap market right now. But I don’t want you to get sucked into a new play that fizzles because it lays an earnings egg right after you add the stock to your portfolio.”
Sometimes it pays to wait…
“You wait for the next couple of years. It’s going to get a whole lot worse,” says adventure capitalist Jim Rogers.
Our trend follower Michael Covel recently paid a call on Jim Rogers in Singapore — Rogers’ home base since 2007. On his mind is a stock market bubble that might grow far bigger — making the inevitable collapse far worse.
“There’s only one thing [central bankers] know to do and that’s more of what they’re already doing. The Japanese are already buying shares [because the] central bank has bought all the government bonds. The European Central Bank is running out of bonds and government bonds to buy. The Japanese are now buying shares. The Europeans are starting to buy corporate bonds. Why can’t that happen in America too? Why can’t the Federal Reserve do it?
“Once upon a time, Bernanke said, Well, if we have to, we’ll buy anything. We’ll buy shares of gold mines. Bernanke said this when he was head of the central bank, so they can do that too. If the central banks all over the world buy shares, there’s no top [to the stock market].”
Not that Jim is buying U.S. stocks — at least not yet. “I’m not very good at buying bubbles but we may have one in the U.S. now, so I’ve got to do something about my shorts. I own Chinese shares. I own some Japanese shares because [Prime Minister Shinzō] Abe recently… won an election, which says he can do whatever he wants to boost the stock market and the economy. I own a few European shares. I own some gold and silver. I’m not buying gold and silver now.”
Jim’s thinking has helped sharpen Michael’s thinking going into his next live conference call for readers of Trend Following With Michael Covel. It’s tomorrow at 9:00 a.m. EDT, and the topic is Has the Next Financial Crisis Already Started? Not a subscriber? You can sign up here.
“Your ‘reprint’ of the ‘A Rising Tide… Oh, Never Mind’ graph seems to confirm info I found in an interesting old book called The Truth in Money Book, which I found hard to put down,” a reader writes after yesterday’s episode.
The Truth in Money Book provides lots of evidence to support its assertion about the source of inflation and the best way to right the wrongs created by the Fed.
“The thing that struck me most was the reality that in our current money system, loss of property is a foregone conclusion, not just a possibility, for many who decide to take out a loan. Here’s a quote that I found most telling, which once again is supported by the graph you shared: ‘The rules of our present money system cause poverty.’
“Looks to me like the system is working perfectly for those who designed the system and are in a position to profit the most.”
The 5: We confess the title, while nearly four decades old, is new to us.
The authors, Theodore Thoren and Richard Warner, don’t have a financial background per se — just a passion to connect some dots. Reminds us of another book from the same era, Dying of Money, which had an upsurge of popularity a few years ago.
“This is clickbait,” an irascible reader writes after a sales message we sent on Monday. “I don’t subscribe to get this bovine stool!”
The 5: We can almost get your ire.
But the fact is our income specialist Zach Scheidt has put himself in the cross hairs of some very powerful people… because he’s exposed information that everyday people aren’t “supposed” to see.
The threatening letter is for real. Zach tells the whole story right here.
“Don’t worry, Dave — my feelings weren’t hurt,” a reader writes. “I did not know about the taxpayer subsidy on Ford Field. My comment was meant to illustrate the Ford name on the stadium did not negatively influence attendance.
“As for the new Red Wings arena… the 60% handout is a pity to us taxpayers considering that the owner, Mike Ilitch and family, of Little Caesars pizza fame, Detroit Tigers baseball franchisee, Motor City Casino owner and major Detroit real estate developer, can more than afford to do his own financing. Can you blame the guy for taking the subsidy? It’s the old case of don’t ask… don’t get.
“Personal note: Following high school, an in-law once worked at Ilitch’s first-ever pizza store in the ’60s. Being an ambitious, hardworking young man, he was asked by Ilitch to join forces and help him expand the business. The man’s father discouraged him by saying don’t fool yourself, there’s no future in pizza… you go down the phone company and get a real job like me… needless to say, the rest is history.
“Thought you’d be amused.”
The 5: Thanks for passing that along. Another reader wrote in to say most of Ford Field’s modest subsidies came in the form of tax abatements — which we’ll allow aren’t quite the same as, say, a sales tax increase to finance Jerry World for the Dallas Cowboys.
“Are you forgetting the NFL is a nonprofit?” writes our final correspondent. “You expect a nonprofit to pay for a billion-dollar stadium? They need donations for that!”
The 5: Ah, but the mask has fallen: The NFL dropped its nonprofit status last year. As if it made any substantive difference…
The 5 Min. Forecast
P.S. What we described in today’s episode is a slow-motion destruction of the dollar, an evolutionary next step in the currency wars.
There’s also the possibility of a sudden collapse, brought about by an alleged “ally” of the United States.
Jim Rickards has been tracking this story all year, and it’s about to come to a head. Check out his exposé right away.