- Ukraine’s fallout: Europe IS the crisis
- Chinese demonstrators protest zero-COVID policy
- A global liquidity crisis gains steam
- Will Social Security keep up with inflation?
- Raining silver in India (hmm)… “I prefer property taxes over income taxes”… “Alice’s Restaurant”… and More!
Doesn’t feel great: The S&P 500 closed at a year-to-date low yesterday… as earnings season is set to begin tomorrow.
As we head into the stretch run of 2022, Paradigm Press Group’s macro maven Jim Rickards anticipates three financial flashpoints.
“An overview at this critical time seems most useful,” says Jim, “especially with key elections on the horizon and the coming winter, which will bring some of these adverse trends to a head.”
Begin with the U.S. economy — and the looming recession.
We won’t rehash the competing definitions of a recession here. Suffice it to say the Commerce Department reckoned the U.S. economy shrank during the first and second quarters of 2022. And while a rebound appears likely when the third-quarter numbers come in, Jim cautions “there’s less than meets the eye.”
“A lot of that growth is in the form of inventory accumulation,” he explains.
“Counting inventory is fine as long as the goods are feeding into final sales. They’re not. The inventory is piled sky-high in the warehouses. Demand has collapsed thanks in part to Fed tightening and to declining real wages due to inflation.
“The combination of huge inventories and diminished demand means higher financing costs, slashed prices, sales, dumping and lower profits. This points to a much worse recession in late 2022 and early 2023.”
Then there’s the fallout from the Ukraine war for Europe’s economy.
“Germany is almost beyond hope at least in the short run,” Jim assesses. “The U.S. attack on the Nord Stream pipelines removes any chance of a rapprochement between Germany and Russia (that was probably the point of the sabotage). Liquified natural gas supplies cannot arrive in time or in sufficient quantity to supply Germany’s energy needs this winter.
“Industry will be shut down, exports will evaporate, GDP will crash and German citizens will be freezing in their own homes.
“This result was 14 years in the making under Chancellor Angela Merkel who shut down nuclear plants and coal-fired plants in pursuit of a hopeless bet on solar and wind turbines (plus lots of Russian natural gas).
“This will end in tragedy. Germany is the fourth-largest economy in the world. As it goes, so goes Europe and the world.”
The third flashpoint is China — where, incredibly, Shanghai and Shenzhen are going back into lockdown.
The two cities “have ramped up testing for COVID-19 as infections rise,” reports the Reuters newswire, “with some local authorities hastily closing schools, entertainment venues and tourist spots.”
Depending on who you want to believe, protests might be breaking out in Beijing ahead of the big Communist Party Congress that starts Sunday. “Images showed two protest banners on a bridge in the northwest of the city,” reports the BBC.
One of the banners reads, “No COVID test, we want to eat. No restrictions, we want freedom. No lies, we want dignity. No Cultural Revolution, we want reform. No leaders, we want votes. By not being slaves, we can be citizens.”
Per the Beeb’s reporting, the protest was quickly shut down.
“The clownish zero-COVID policy cannot stop the spread of the virus but it does stop economic growth,” says Jim Rickards. In addition, “the real estate finance collapse is just getting started as social unrest about stolen mortgage payments and unfinished housing projects grows.”
Nor does the trouble end there. “The U.S. cutoff of high-tech equipment, increasing decoupling by U.S. companies and investors and a slow-motion demographic disaster that will result in a loss of 600 million people over the next 50 years are all adding to the dynamic of Chinese economic and political collapse.
“The full collapse will take time, but the immediate effect is to add to the global economic recession unfolding.”
And there’s a fourth, bonus, flashpoint Jim is eyeing.
“As if there were not enough economic problems coming from the U.S., Russia, China and Germany, there is strong empirical evidence that a global liquidity crisis is developing. This is revealed by inverted yield curves in both Treasury securities and Eurodollar futures.
“Liquidity and banking crises are different from economic recessions,” Jim says. “They can happen separately but they can also converge as happened in 2008. The potential for another 2008 combined recession and financial crisis is real.”
Thus the outlook: “Investors should expect the ongoing stock market crash to continue and for stock prices to move much lower,” says Jim.
“Even if stocks find a bottom next year, don’t expect them to rally quickly. The Fed will keep rates on pause after they stop raising them. There will be no recovery or potential rally until early 2024, if then.
“All things considered, investors should reduce equity exposure, increase cash holdings and diversify into gold, real estate, agriculture, energy and Treasury notes. This creates a portfolio that will be resilient in the face of inflation, deflation or a financial crisis. None of those outcomes can be ruled out.”
[Ed. note: Much of the preceding analysis was published yesterday for readers of Rickards’ Insider Intel. As Jim explained, “This report is based on information from our confidential sources and the use of our proprietary predictive analytic software to give you the best insight on where the world is heading.”
Last month, using a proprietary trading algorithm called I-3, Jim and his team led readers of Rickards’ Insider Intel to gains of 102% in only six days. In fact, there’s a patent underlying the I-3 algorithm: Jim shows you how it works when you click here.]
To the markets, where it’s all about the September inflation numbers…
The Consumer Price Index rang in hotter than expected this morning — jumping 0.4% month over month and 8.2% year over year.
The internals of the report are terrible: Energy costs fell (mostly owing to falling gasoline prices), which means nearly everything else rose anyway. (Energy is an input into the price of nearly everything.) Food jumped 0.8% during September, shelter 0.7%.
Worse is the “core” rate, stripping out food and energy prices. At 6.6% year over year, it’s the highest since August 1982 — when E.T. was the big box-office draw and Survivor topped the charts with “Eye of the Tiger.”
So much for any hopes the Fed will “pivot” to looser monetary policy.
Lest we forget, there’s the real-world inflation rate from Shadow Government Statistics — which runs the inflation numbers the way the government did 40-odd years ago. The ShadowStats inflation rate is 16.4% — the lowest since February. Yay?
Wall Street’s knee-jerk reaction on the open was to “sell”… but on further reflection, Mr. Market is staging a rally.
The S&P 500 closed yesterday at 3,576 (again, a year-to-date low)… tumbled first thing this morning to 3,501… and has since rallied to 3,633. The movements in the Dow and the Nasdaq are similar.
Do healthy markets act this way? Just asking…
Bonds are selling off, the yield on a 10-year Treasury note now 3.94%. Precious metals are off slightly — gold at $1,665 and silver at $18.85. Crude is up and back within a buck of $90 after the Energy Department’s weekly inventory numbers.
The hot inflation number translates to the biggest cost-of-living adjustment for Social Security recipients since 1981.
Next year’s monthly payouts will be 8.7% higher than this year’s. For a typical recipient, that’s another $145 a month — for a check totaling $1,814. (Whether that’s actually enough to cover the rising cost of living is another question altogether.)
However, there will be no rerun of this year’s staggering 14.5% jump in the typical Medicare Part B premium. In fact, it stands to fall 3% next year to $164.90 a month. A fair chunk of that decrease can be attributed to Medicare’s decision not to pour money down a black hole paying for Aduhelm, the Alzheimer’s drug from Biogen that doesn’t work.
➢ The downside for “high earners” still in the workforce: The income level at which Social Security taxes are no longer collected jumps nearly 9% — from $147,000 to $160,200.
The news from India is “It’s raining silver coins!” Our reaction is “Pictures or it didn’t happen!”
Yeah, that’s a stock photo. And that’s all we’ve seen to illustrate this story from the state of Uttar Pradesh — in which “as soon as the wall of an old house was broken, it started raining silver coins,” according to India’s News18 channel. “The demolition had to be stopped as people present there started scavenging the coins.”
So far the demolition crew has — allegedly — collected 160 coins. Each weighs about 10 grams or about a third of a troy ounce… and is worth roughly 1,000 rupees or $12.15.
Which seems like a lowball figure to us if another report we encountered is accurate and the coins date to the 1890s. Sketchy, sketchy, sketchy…
“As a lifelong Texas resident, I am well aware of high property taxes in Texas,” a reader writes after a brief remark at the end of Monday’s edition.
“That said, I think the overall tax structure here is often misrepresented in the media. Let me offer a few points of clarification.
“The state of Texas does not levy or collect property taxes. Property taxes are solely the domain of the counties and cities. The state has a sales tax, gas tax, fees for various things like auto registration, etc., but no property tax.
“The property tax rates here vary considerably depending on where you want to reside. Where I reside the rates are reasonable, but there are areas with much lower rates and areas with higher rates. If I want to lower my rates, I can. I just have to move.
“I prefer property taxes over income taxes. Unlike income taxes, everyone in Texas pays property taxes. Homeowners, renters and businesses pay regardless of income. Even if you live under a bridge, anything you buy is going to have the cost of property tax built in to what you pay. Therefore, everyone pays for the right to have a say in how the state and local government operates.
“I have some advice for those considering moving here. The school district taxes are by far the largest portion of the property tax. Pick a location with a smaller school district. City property taxes can also be high, so live outside of the city limits (I do). Also note that when you turn 65, most of your property tax gets capped, which helps protect you from future insane real estate values.”
The 5: Thanks for the insight. The Tax Foundation has an interactive county-by-county map of median property tax bills nationwide. Woe be to Texans who live in Fort Worth, Denton or pretty much anywhere in metro Austin…
“The cartoon you ran in Monday’s 5 is right out of Arlo Guthrie’s ‘Alice’s Restaurant,’” a reader writes.
“He said, ‘What were you arrested for, kid?’ And I said, ‘Littering.’ And they all moved away from me on the bench there, and the hairy eyeball and all kinds of mean nasty things, till I said, ‘And creating a nuisance.’ And they all came back, shook my
hand and we had a great time on the bench.
“You may be a little young to be familiar with ‘Alice’s Restaurant,’ Dave, but it still
has relevance. Luv The 5.”
The 5: Strictly speaking, I am — but listening to it is nonetheless a Thanksgiving-week pastime for my wife and me. We’ve also watched the movie and the 50th anniversary concert!
Best regards,
Dave Gonigam
The 5 Min. Forecast
