Debts, Deficits... and Death to the Middle Class

Inflation to the left, housing crisis to the right, America's workers get squeezed...

(Source: Getty Images)

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

Let’s slow down for a moment and take stock.

Investors are mostly bewildered, but hoping that inflation has peaked out and the Fed will soon ease up. Easing up seems likely to us…but not decisive. There’s more to the story, which we will come to in a minute.

Consumer prices are still rising at an unacceptable rate. And workers – that’s most of us – are still losing ground. Wages are going up. But after inflation, we are poorer.  

Meanwhile, real estate, where most people keep most of their wealth, is going down. We saw yesterday that house prices may fall 30% – in line with the last bear market in real estate. Many families only have ‘equity’ of 30%...or less…in their houses. So, the expected drop will wipe out 100% of their accumulated wealth.  And most likely, the Fed will continue its ‘tightening,’ forcing those who need to refinance to pay higher rates (mortgage rates have already more than doubled since 2020).  

Hypotheses, 1 & 2…

We expect the Fed to continue its rate hikes until one of two things happen. A big bankruptcy, crash on Wall Street, or other financial emergency will cause the Fed to panic and ‘pivot’ towards lower rates. That is our hypothesis number 1: that the Fed will continue to raise rates “until something breaks.”

But there’s another possibility, hypothesis number 2: that the Fed will be forced to raise rates by the federal government. The Fed caused today’s inflation; it is trying to redeem itself by getting it under control. But the elite who control the national government are still very much in spend, spend, spend mode. No cutting back for them. They have elections to win…battles to fight…claptrap to promote and boondoggles to finance. And they are increasingly turning not just to spending money they don’t have…but also to guaranteeing credits they can’t really afford.  

Yes, the feds are running huge deficits. If everything goes well, you can expect another $1 trillion shortfall this year. In case of recession – which is likely – the deficit will be much greater. But in addition, they are steering private spending towards their favorite projects by offering an expanding system of tax breaks and credit guarantees. Homeowners are promised public money if they will put solar panels on their roofs, for example, or insulation in their walls. Buyers are given credits if they purchase an EV. Young people are promised loans (later to be forgiven!) if they submit to further indoctrination, rather than finding a job where they might actually learn something useful.

The Primary Trend

This spending, direct and indirect, has to be covered. Meaningful tax hikes are out of the question. So, the money has to come from borrowing or printing. Borrowing will drive up interest rates, thereby also increasing the cost of carrying the government’s $31 trillion debt pile. Either way – borrowing or printing – the Fed will be forced to make low-cost funds available.

Thereby, one way or another, along comes the much anticipated ‘pivot.’ And with it comes a new phase of the developing catastrophe, with the Fed supporting federal spending and the economy with lower rates, and probably more QE.

When this happens, many people will see a boom. Stocks are likely to go up. It will seem like an early spring thaw, with flowers coming up everywhere. Investors will remember how the Fed goosed up stocks after the dot.com crash…and again, after the mortgage finance crisis…and again, after the economy was shut down in the Covid Panic. They will think: ‘here we go again.’

But this time, it will probably turn out much differently. In our view, the Primary Trend is what counts. And the primary trend…

…for stocks
…for bonds…
…for real estate 
…for the US empire…
…for the dollar-dominated currency system
…for western democracy
…for Congress and the administration
…for the economy
…for standards of living

…is down. That’s the ‘cluster’ we’ve been exploring, when many things go wrong together. Night follows day. Bust follows boom. A young man becomes an old man. And a church warden sneaks into a brothel. You get the idea.

In ‘n’ Outta Whack

The Primary Trend is merely the process by which that which was out of whack gets back into whack…and then goes out of whack again. In the bond market, for example, we have seen only two major course reversals in our entire lives. Bonds fell in price from the late ‘40s until the early ‘80s. Then, the primary trend turned…and they rose for the next 4 decades.  The second turn only happened in 2020, when they finally topped out, and yields (which go in the opposite direction) began to rise. Since then, the 10-year Treasury bond, the most common brick of the whole modern financial edifice, rose from barely one half of one percent in July 2020, to 3.7% – seven times as much.

We pay attention to the primary trend because 1) it is almost impossible to make any real money by trading in and out, trying to pick winners or anticipate the markets’ moves, 2) primary trend changes destroy fortunes as well as make them, and 3) when you invest in the primary trend you don’t have to pay so much attention to Wall Street.

We should probably add that the primary trend also brings us in contact with the ironies and disappointments of real life. ‘He that did ride so high doth lie so low,’ we say, with the gravitas of a sage, after a crash. What goes up must come down.  The last shall be first. The chambermaid will be queen. And the jerk, who gets elected to Congress, eventually gets what he has coming.

So many opportunities to say “I told you so!”

But wait…how can the ‘primary trend’ be down…and yet, after the Fed pivots, the economy may boom and stocks may go up?  

Stay tuned…     

Regards,

Bill Bonner     

Joel’s Note: After the great housing bonanza of the past couple of years, the US real estate market is finally coming back to earth. Here’s the unhappy headline from Fox Business:

US suffering from the second biggest home price correction of the post-WWII era

According to the 2022 Housing Affordability Survey, conducted by CATO Institute, “55% of Americans say they cannot afford to buy their home in today's market.”

How could this be? With so much of the fed’s free money sloshing around, isn’t everyone as “rich as an Argentine”? Well, yes… and that’s not a good thing.

As usual, Bonner Private Research’s macro analyst, Dan Denning, was on the case…

“[L]et's remember the Fed pumped $1.3 trillion into the housing market by buying mortgage backed securities during the pandemic,” recalls Dan. “This coincided (caused, led to, created) a 40% increase in median existing home prices across the country over 24 months. Median home prices are now over $450,000 in much of the country.”

Take a look at the following chart, which Dan sent to the BPR team this morning. You can see clearly the massive liquidity injection spiking at the end of the recession (gray area) on the right…

(Source: Federal Reserve Board of Governors, fred.stlouisfed.org)

Of course, what goes up must eventually revert to the mean… but not before overshooting in the opposite direction.

According to the National Association of Realtors, existing home sales fell 1.5% in December, marking the 11th straight month of declines. On an annual basis, home sales were down 34%, the largest calendar year drop on record… and that’s despite mortgage rates easing slightly for the month.

Goldman Sachs reckons prices could keep falling for another 6 months before things turn around. But even that may prove to be optimistic…

“As much as the Fed wants to blame fiscal policy for underlying inflation (which is true),” cautions Dan, “the asset bubbles they created and which are now bursting will do just as much to wipe out middle class wealth. Bursting bubble with the left hand. Inflation with the right. Over and over.”

How do you avoid the worst of the fallout? How do you zig from inflation and zag from the real estate crisis? And how do you preserve the purchasing power of your savings through it all? Dan and Tom are on the case, constantly revising and updating their investment strategy as the situation evolves (or devolves, as the case may be).

If you’re not already receiving all of Dan and Tom’s paid research, consider becoming a Bonner Private Research member today, here…