Big Loss Ahead

Inflation up, rate cut expectations down, Magnificent 7 in doubt...

(Source: Getty Images)

Bill Bonner, reckoning today from Cherbourg, France...

St. Valentine’s Day…and Ash Wednesday, the first day of Lent

The latest news:

(Reuters) - …hotter-than-expected consumer inflation readings smashed market speculations of an early start to interest rate cuts this year.

A Labor Department report showed the Consumer Price Index (CPI) rose 0.3% on a monthly basis in January, above the 0.2% increase expected by economists polled by Reuters. Annually, it increased 3.1% versus the 2.9% estimated growth. 

Excluding volatile food and energy components, the core figure rose 0.4% month-on-month in January, compared with the estimated 0.3% rise. Annually, it gained 3.9% versus the estimated 3.7% increase.

Counting on a rate cut this spring? Well, you can forget it. Inflation is not going down as fast as speculators hoped. The fix was not in, or at least not as firmly as most people thought.

The biggest danger most investors face is the risk of a Big Loss…a loss so big they’ll never recover from it. And the most likely source of a big loss now is the bubble in the Magnificent 7. Nvidia, for example, is thought to be worth more than the entire energy sector. The Magnificent 7 are worth more than the entire output (GDP) of China, the world’s second largest economy.

When these facts change, many people are going to take the Big Loss.

The Debt Balloon

Meanwhile, the whole economy is headed for a Big Loss, too. Earlier this week, we looked at the “most predictable crisis ever,” the ballooning US debt.  

Today, we put it in perspective. 

As we saw yesterday, a society inevitably faces challenges. It has to protect itself from other societies. It runs out of parking spaces. Its farmers are upset with low prices they get from their corn and wheat. One thing after another.

The elites try to solve these problems…inevitably fixing them in a way that increases their own wealth and power…and sets up the next problem.  

They station troops all over the world, for example…like staking lambs out in a clearing in order to get a good shot at the wolf. Then, they need to ‘protect their troops’ and show the world that they are not to be trifled with. 

Or, seeing the world confronted by a climate crisis, they send money to their friends with ‘green’ solutions…while restricting the ability of honest energy producers to provide the juice their customers want.

All the fixes impose costs. Some of the costs show up in the form of higher prices (and even higher taxes). Other costs are largely invisible – shrinkflation on an economy-wide scale. The quality and quantity of goods and services declines.  People get less for their time and their money.

Lost Earnings, Lost Output

Thoughtful economists have wondered for years why the working class has had no real pay increase in half a century. How was it possible? The US economy had every advantage – capital, skilled labor, abundant engineers and entrepreneurs.  Why did labor rates/hour stop rising after 1975?

The answer is in front of us – in the ‘flation’ we’ve been describing: higher costs (the Fed has actually tries to keep prices rising by 2% per year)…and a shrunken real economy, where more and more output is directed, by the feds, to activities that don’t really pay off. Output goes down…along with quality.

The most costly of all peace-time fixes in history took place in 2020-2021. In response to the challenge posed by a virus (which turned out to be insubstantial), the Trump administration and state governors closed down much of the economy…and then handed out trillions in newly-created money, for a total cost (lost earnings and output as well as direct federal outlays) of $14 trillion. Fortune:

The economic toll of the COVID-19 pandemic in the U.S. will reach $14 trillion by the end of 2023, our team of economists, public policy researchers and other experts have estimated.

Big Loss Ahead

Almost all of that was imposed on the economy (unnecessarily). Some of it was passed along in the form of higher consumer prices, which consumers will pay for many years into the future. Much of the rest is now embedded in the US debt. In other words, the US debt represents the attempts by the elites to solve problems – real and imaginary – by shifting money and power to themselves in the present…while pushing the real costs onto future generations.  

Known collectively as ‘the Swamp’ or the Deep State in America…’the Blob’ in England…Milei in Argentina calls them the ‘political caste’ – whatever you call them, they are the deciders who solve the problem, whether there is one or not.

And now, in most countries in ‘The West,’ they have solved so many crises that the whole system staggers under the weight of their solutions.  

Big Loss coming soon.

Regards,

Bill Bonner