- An impertinent question: Let inflation rip?
- The Fed’s target inflation is like “stealing from Mom to buy candy”
- A key indicator signals recession is in the bag
- The resilience of oil’s price (despite politics as usual)
- “Banning Ye from Chase” (or was it the other way around?)… Breaking up with PayPal: “a personal experience”… and More!
This morning’s New York Times is paging Captain Obvious on Page 1, above the fold…
Gee, what’s Paradigm’s macro maven Jim Rickards been saying here for months? The Fed is committed to jacking up short-term interest rates as long as inflation remains “sticky” — even if it crashes the stock market, the economy or both.
But just how committed is the Fed? When might the Fed let up?
Jim joins us today with a preview of what the Gray Lady will be putting on Page 1 next February or March. Heh…
Let’s begin with a cheeky question: Why wouldn’t the Fed want to just let inflation rip — seeing how that’s the fastest way to ease Uncle Sam’s crushing debt burden?
After all, America’s $31 trillion national debt is now a staggering 130% of GDP. Economic historians have demonstrated that anything over 90% is a drag on growth — a lead weight on the leg of the economy.
As Jim explained it in his 2019 book Aftermath, “The debt itself causes reduced confidence in growth prospects partly due to fear of higher taxes or inflation, which results in a material decline in growth relative to long-term trends.”
At 130%, America’s debt-to-GDP ratio isn’t too far behind terminal basket cases like Portugal and Italy.
So why wouldn’t the Fed want to “inflate the debt away”? Let inflation run its course for a couple of years, slash the dollar’s purchasing power and voila — the debt-to-GDP ratio falls to a much more manageable 60–70%. That was America’s debt-to-GDP ratio during the booming 1990s. What’s not to like?
To answer that question, Jim invites you to “imagine a mom has $50 in her purse in small bills.
“A 9-year-old child wants to steal the money from Mom to buy candy. He knows that if he takes all $50 he will be discovered and punished. Instead, he takes $3 on the view that Mom won’t notice. That might work.
“It’s the same with inflation. If inflation is 8% or 9% everyone notices, politicians lose elections and central bankers get hounded out of office. But if inflation is, say, 2% then hardly anyone notices.
“So central bankers and politicians are not against all inflation. They are fine with inflation of 2–3%, which will destroy the value of the debt. It just takes time. But they are not fine with inflation of 6% or higher because people notice and there are adverse consequences.
“Current efforts by the Fed to reduce inflation should be understood not as eliminating inflation, but merely reducing it to the point where Mom (and voters) won’t notice.”
So… don’t expect the Fed to let up anytime soon. As Jim’s said before, the Fed probably won’t let up until the fed funds rate (currently 3.25%) is higher than the “core PCE” inflation rate (currently 4.9%).
A postscript to Jim’s analogy here: Bear in mind the Federal Reserve has an inflation target of 2%.
Again, that might not be noticeable in the short term. “But the effect is still devastating over time,” Jim says. “An inflation rate of 2% per year will cut the purchasing power of the dollar in half in 36 years. It will cut the purchasing power in half again in another 36 years. So the purchasing power of the dollar is destroyed by 75% in 72 years (about an average lifetime) with only 2% inflation.”
That’s despite black-letter law mandating the Fed to pursue “stable prices.” Stable means they don’t change meaningfully over time. Losing more than half your purchasing power during 40 or 45 years in the workforce? Nothing stable about that.
And unfortunately, the law doesn’t spell out punishment for Fed officials who fail to meet the mandate. Funny how that works…
[Ed. note: Here’s a good way to stay ahead of inflation, and not by a little — the trades in Rickards’ Insider Intel. Just this morning, readers collected another 50% gain playing call options on the defense contractor Lockheed Martin. That’s on top of previous gains playing LMT of about 50% and 100%.
We’re offering special access to Rickards’ Insider Intel for a limited time only: Check out this urgent message from our publisher Matt Insley.]
The big story in the markets today is a guaranteed recession warning light that just flashed red.
Well, that’s what the big story should be. The media are focused instead on things like Netflix’s rising subscriber count and an upbeat outlook from United Airlines.
In contrast, there’s very little chatter about the most important part of the yield curve inverting. The yield on a 10-year Treasury note is now lower than the yield on a 3-month T-bill.
Whenever this happens, a recession is in the bag. That is, every time the line on this chart dips below zero, a recession sets in no more than 24 months later. The vertical gray bars represent recessions here…
And just in case you’re wondering about the impact on stocks, “I ran a backtest on S&P 500 performance after a 10-year/3-month inversion,” says Paradigm Press Group’s research chief Jonathan Rodriguez. He ran the numbers going back to 1960. His conclusion? “Stock returns will likely be trash on the whole for the next two years.”
As for today’s stock-market action, all the major indexes are in the red — the Dow by a little over a half percent, the Nasdaq by 1.1%. The S&P 500 is off 1% at 3,683. It sits more or less at the midpoint between its lows and highs so far this month, so there’s not much clarity about where stocks are going in the short term. But long term? Eek…
Meanwhile, precious metals are getting clobbered — gold down $22 to $1,629, not far from the $1,620 low it notched late last month. Silver has shed 33 cents to $18.41.
One economic number of note: Housing starts tumbled 8.1% last month — way more than expected. But the number of permits issued rose 1.4%, and that’s a better indicator of future activity. Still, permits for single-family construction are down 17.3% from a year ago.
The other big story in the markets today is the resilience of the oil price — again, not that the mainstream is framing it that way.
It turns out there was a catalyst for oil’s 3.5% drop yesterday: Rumors started spilling out from Washington that the Biden administration planned to drain another 15 million barrels of oil from the Strategic Petroleum Reserve — bringing the total released since last March to 180 million. The president is supposed to make it official in a speech sometime today.
Blatantly political, three weeks before Election Day? Yes, but it’s politics as usual.
“The SPR has been regularly toyed with to affect oil prices over the years, and its impact has at times been substantial,” oil-industry journalist Jim Norman wrote in his 2008 book The Oil Card. Reagan, Clinton, both Bushes — they all did it.
Thing is, oil has already recovered a substantial chunk of yesterday’s losses: A barrel of West Texas Intermediate is up 2.3% to $84.73.
That’s because the announcement is pure theater: It won’t push more oil into pipelines and it won’t translate to more gasoline coming out of refineries.
The pumps lifting oil from the SPR can’t produce flat-out. “Pumps cannot last more than a few days doing that,” says Paradigm energy expert Byron King. “My understanding from oil industry insiders is that the typical throttle is set at about 50%.
“All in all, the Biden administration is releasing oil at about the max rate SPR managers can prudently lift it” — just under 1 million barrels a day.
Meanwhile, “U.S. refining is maxed out,” says Byron. U.S. refinery capacity is about 17.9 million barrels a day — down from a peak of 18.9 million just before the pandemic hit in early 2020.
Lockdown rendered many refineries unprofitable, so they closed their doors. Some have been demolished, while others are converting to biofuels — which means they’re not available to process crude oil.
“While several refineries are closed and up for sale,” says Byron, “who wants to commit to buying such a facility when the cultural-political trend is so deeply anti-oil? You might be regulated out of business in the next five–10 years.
“Even fixing up an existing refinery is problematic. Ordering steel pipe, pumps and valves makes for long lead times — one–three years. And environmental permits are always a quicksand, with some NGO or environmental law group out there to file suit.”
So no, whatever dog-and-pony show the president’s advisers stage today will make little difference. Oil traders have already figured it out, and they’re bidding crude higher.
“Dave, you did not do your due diligence regarding banning Ye from Chase Bank,” a reader writes. “There is evidence to suggest that Ye is the one who initiated the termination with JP Morgan.
“On Monday, Oct. 12, Candace Owens posted a tweet that seemed to corroborate Ye’s statement that he was ‘officially kicked out of JP Morgan Chase bank’ for his verbal attacks on the Jewish community — something Ye has gladly doubled down. However, Sara Eisen replied to Owens’ tweet stating that Ye ‘announced on CNBC during our interview he was pulling his money out of JPMorgan and switching to Bank of America because Jamie Dimon didn’t call him. This was several weeks ago, Sept. 15. This letter appears to be an acknowledgment of his breakup.’ His comments did not get [him] kicked; it’s a falsehood.
“It was Ye’s fault that he stated Chase Bank cut ties with him over antisemitism. He chose not to work with them over his enormous ego. While I admire and support Ye’s challenge to the BLM movement and the damage they, along with our cities, [did] I do not help and admire his choice of scapegoating the Jewish community when he was clearly at fault.
“Please do not spread your utter nonsense. You are just as bad as the liberal press when you don’t do your homework correctly.”
The 5: We were explicit that JPM’s letter did not state the reasons the bank was cutting him loose and that furthermore the letter was dated Sept. 20 — before Ye went on his antisemitic tirade. What more do you want?
Still, we thank you for the additional backstory. Given the limitations of time and mental bandwidth, our daily news intake generally doesn’t include the panoply of right-wingers who are famous mostly for stirring s*** up on social media.
“Just a personal experience with trying to close my PayPal account,” a reader passes along.
“If you do try to close your account and have a PayPal credit card you have to call them to terminate that relationship as well.
“I do not have any balance with them. However, the implication of closing the account is that your credit rating takes a hit. Removing the PayPal available credit from your report changes the percentage of utilization, thus lowering your score and changing the chances of receiving replacement credit sourcing.
“The rules of the game get more convoluted and ridiculous every day.”
The 5: The world will be a better place if (when?) everyone recognizes FICO scores as the joke they are. They don’t consider your income, or how your debt load compares with your income. But that’s a rant for another day…
Best regards,
Dave Gonigam
The 5 Min. Forecast
