After the Party

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

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

The party’s over.
~ Carl Icahn

All right so far…

Stocks are down about 15%. And the two-year Treasury note is now yielding over 4%. And to think… it was just 0.16% in June of last year.   

If we’d only refinanced everything back then… and locked in those ultra-low, once-in-a-lifetime rates from here to kingdom come! 

But we don’t have $30 trillion of debt to refinance. The federal government does.  And therein hangs a tale… the most important tale in finance: how and when it will default.

Yesterday, we were looking at the political dynamics behind the Fed’s tightening program. Inflation is always and everywhere 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.

And right now, the politicians of both parties agree – they want more of it. Inflation is the source of their wealth and power. 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.  

The Pain Part

No, we don’t believe the feds have thought this through. No, we don’t believe it’s a good idea to do it. And no, we don’t read the newspapers before you do. This is just a ‘model’ for trying to understand what’s coming. We guess about the motivations of the deciders, and about their likely consequences.

First…an update. MarketWatch:

The central bank on Wednesday raised a key U.S. interest rate that influences the cost of borrowing for the fifth time this year. The rate hikes are meant to slow the economy enough to bring down the highest inflation in 40 years.

In a major speech last month, Fed Chairman Jerome Powell warned the public it would experience “some pain” as a result of the bank’s more aggressive effort to roll back inflation.

It was only this week and last that investors began taking the ‘pain’ part seriously.  Now, they’re all wondering where they put the OxyContin. MarketWatch again:

Ray Dalio says stocks, bonds have further to fall, sees U.S. recession arriving in 2023 or 2024

“Right now, we’re very close to a 0% year. I think it’s going to get worse in 2023 and 2024, which has implications for elections,” Dalio said… 

Some analysts are urging the Fed to move faster and get it over quicker. Markets Insider:

"The Fed knows what the destination is… why not just rip off the Band-Aid — let's get there in one day."

But there is no way to shorten this trip. It takes time… for policies to distort the markets… for businesses, investors and consumers to react to the new prices… and for people to be misled by them.  

The only way to reduce the pain would be by doing the very last thing the feds would ever do. They would have to admit that they can’t really improve the economy… and butt out. They’re not going to do that. Instead, they’ll do what they always do, try to manage the situation… and make it worse.

Boondoggles Galore

The US government added $24.5 trillion to its debt so far this century. The ‘war on terror’…. stimmie checks… unemployment boosters… PPP non-repayable loans… deficits… aid to the Ukraine… bailing out Wall Street – all these things cost money. Boo-coo money. In an honest economy, where the feds had to borrow real savings, interest rates would have gone up, and they would have quickly asked some questions. “Is this really necessary?” would be at the top.

But in a world where money appears to be free, even the nuttiest projects get funding. Besides, as the Fed drove down interest rates, the government could borrow more… and its interest expense went down. Debt paid.  

Yes, the Fed was on the case… ready to enable the most absurd programs. It put its key lending rate at “effectively, zero,” making all sorts of shenanigans possible – trillions of dollars’ worth of debt traded at negative interest rates; NFTs were supposedly worth millions; the crypto market went to $3 trillion. Zombie companies roamed our streets – eager to feed on our precious capital.  

And then, there was the 20-year misadventure in the middle east… and hundreds of billions more to be spent trying to dial down the earth’s thermostat… and billions more for boondoggles galore, including giveaways to US chip manufacturers and the defense industry.  

Everyone now knows how the game is played. Breitbart:

Ukrainian President Volodymyr Zelensky will be the keynote speaker at a top defense industry conference in Austin, Texas, later this month.

Zelensky knows where his bread is buttered. So do defense industry chiefs. Low rates enabled spending on ‘wars of choice’ (those that didn’t need to be fought).   They were losers for almost everyone – but not the defense industry.

But the feds weren’t the only ones to sup at the Fed’s all-the-credit-you-can-eat buffet table. Households and corporations wolfed down the EZ money too. And now, between the three of them – government, corporate, household – they are all so overstuffed with debt… a total of $90 trillion… they can barely move.

But the party’s over.  

And today, the question is not how they will repay the debt; that’s no longer possible. It’s how they won’t pay that matters.  

More to come…

Regards,

Bill Bonner

Joel’s Note: Big news yesterday was the Fed’s third consecutive 75-basis point rate hike. The increase brings the central bank’s benchmark interest rate, the federal funds rate, to a new range of 3.0% to 3.25%… the highest it’s been since 2008. Investor sentiment promptly soured on the news, sending stocks sharply lower. The Dow ended the day down more than 500 points. The S&P 500 and Nasdaq fell 1.7 and 1.8%, respectively.

And yet, as ugly as the situation appears, with inflation running at a stubbornly non-transient 8.3%, the real rate remains deeply negative. (3.25 minus 8.3 still equals -5.05… at least that’s the case using the old school, colonialized math we learned in college. Who knows what that means in a “2 + 2 = 5 world”?)

In any case, there’s a lot further to go before the Fed gets itself “ahead of the curve,” as they say. Thus the central bank’s primary predicament. As Bonner Private Research’s Investment Director, Tom Dyson, explained in his weekly market note to members yesterday…

Here at Bonner Private Research, we subscribe to the “inflate or die” theory of the stock market. The economy is saturated with so much malinvestment and unproductive debt, unless the Fed keeps inflating the bubble, the whole system implodes.

There’ll be a panic on Wall Street. Many banks and shadow lenders will collapse. Then the chaos will spread overseas to foreign exchanges and foreign currency markets. 

Indeed, in characteristic “you heard it here last” style, Jerome Powell warned main street Americans there would be more pain to come, this time in the housing market. The newswires were on the spot…

(Reuters) Federal Reserve Chair Jerome Powell on Wednesday said the U.S. housing market will probably go through a "correction" after a period of "red hot" price increases that have put home ownership out of reach for many Americans.

"There was a big imbalance ... housing prices were going up at an unsustainably fast level," Powell said at a news conference following the Fed's decision to raise its policy rate by another 75 basis points. "For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place."

After the party comes the cleanup. And the hangover…