Dem Fiddlin' Feds

Inflation bites as debts and deficits pile ever higher...

(Source: Getty Images)

Joel Bowman, checking in today from Buenos Aires, Argentina...

'Cause it's a bitter sweet symphony that's life
Trying to make ends meet, you're a slave to money then you die

~ The Verve, Bitter Sweet Symphony

“Giant distortions need to get resolved and trillions of losses need to be realized,” Tom Dyson warned BPR members in Wednesday’s research note. “How?”

We’ll return to Tom’s musings... and the reckonings that are fast coming due... in a moment. But first, a quick look back over the markets this past week...

US stocks ended with mixed results. The Dow Jones Industrial Average closed the session up 0.4% yesterday, while the S&P 500 fell 0.3% and the Nasdaq dipped 0.6%. Nothing much to see there. 

For the week, the major indices were equally uninspired, one way or the other. The Dow slid 0.1%, its third straight weekly decline. The S&P 500 ended lower by 0.3%. The Nasdaq rose 0.6%. Ho-hum. 

Year to date, the Dow, S&P and Nasdaq are up 2%, 6.7% and 13.5% respectively. 

One reason for the, ahem, flaccid mood in the markets: inflation. 

One Nation, Under Inflation

Tuesday’s Consumer Price Index report, published by the Labor Department, showed monthly prices increased at a 0.5% clip...a sharp acceleration from December’s (upwardly revised) 0.1% increase. Annualized, that’s over 7%. Core CPI (which excludes food and shelter... ‘coz, who needs those?) was up over both three and six month trends. 

Not the direction the Fed wanted to see prices headed, in other words, and “more red meat for inflation hawks,” as one poetic wonk put it. 

Then came Thursday’s Producer Price Index (PPI), commonly seen as a leading indicator of prices still to “come down the pike.” That data showed wholesale prices accelerated by 0.7% last month, the sharpest increase since the summer. 

Whoopsie!

Higher producer prices were driven, in part, by a 5% surge in energy costs. But fear not, comrades… the president re-upped his commitment to green energy this week, restarting a $10 billion tax credit plan for producers of solar panels and windmills.

Back in the real world, a (WTI) barrel of the world’s preferred energy source was trading around $77.50 last we checked on Friday afternoon.

For its part, gold is sitting pretty around $1,850/oz... while that other free market money, Bitcoin, took the fed’s inflation news particularly well. 

The lead crypto rallied hard this week to take out the psychological $25k barrier, last seen in June of 2022. Bitcoin is up almost $3,000 (or ~13%) over the past five days and was last seen hovering around the $24,700 mark. Bitbugs have seen their favorite digital currency rally almost 50% ytd. 

Meanwhile, dem fiddlin’ feds continue to pile the nation’s debts and deficits ever higher... 

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Bonner Private Research’s macro analyst, Dan Denning, underscored a few of the “lowlights” in this week’s report from the Congressional Budget Office.

Here, a few takeaways from yesterday’s research note to members:

1. America’s national debt will rise by $20 trillion over the next ten years. For perspective, total federal debt for the country’s entire history didn't hit a TOTAL of $20 trillion until the third quarter of 2017. It's now over $31 trillion. Why do Republicans and Democrats hate America so much?

2. Nearly 200%. By 2053, if the country still exists in its current form and the Federal government is a going concern, the growth in mandatory spending and net interest costs will drive the debt to 195% of GDP.

3. Interest expense on the rise. Net interest costs could double in the next 10 years to $1.4 trillion. And that’s at relatively tame average interest rates. 

What does this mean for the Health and Wealth of the Empire, you ask? And what of those trillions of losses that need to be realized, as Tom pointed out, above? How do they get resolved? Here’s Tom, from Wednesday’s note to BPR members...

Gradually is the answer. I fear it’s going to be a brick-by-brick demolition… a mixture of money debasement, politically-approved bailouts and asset write downs… a mixture of soft default and hard default… to gradually extinguish the mountain of malinvestment and bad debt and restore long term balance to the economy. 

I call this swing between debasement and price declines “inflation volatility” and I think it’ll take years to play out. To help our readers preserve purchasing power through this gigantic bubble deflation, it’s my job to build a practical investment strategy using publicly traded securities.

So I spend every waking moment of my life (and often in my dreams too) trying to figure out how to do this. I think about stock prices, recessions, inflation rates, wars, energy markets, government policies and property prices. 

And I look at hundreds of potential indicators and time series.

Right now, it’s hard to know what the immediate future holds. The financial authorities are simultaneously debasing currencies while raising interest rates. A recession seems likely. But it’s taking much longer than I expected. And I’m impressed by the resilience of the stock market and the refusal of investors to back away from risk even though Treasury bills pay 5% now.

If history is any guide, we’re in more of a “hard default” period than a “currency debasement” period, just because interest rates have risen so far, so fast and that must be hurting all those people who relied on cheap leverage. As we’ve said many times, modern American capitalism doesn’t work well in reverse. 

But I don’t have absolute conviction in that.

So I prefer a hedged strategy… or a barbell approach.

At one end of the barbell, we can make 5% by simply holding Treasury bills. Is 5% a good return? I’d call it “neutral.” It’s not going to grow our purchasing power much, and it’s not going to hurt our purchasing power much, either. 

Then, we can wait and see. We have a sort of free option. If there’s any kind of sell off or crash, we’ll have liquidity to buy some of our favorite ideas and gold at much cheaper prices. If not, well, we’ll just keep treading water. 

At the other end of the barbell, we hold a lot of physical gold and silver. While our cash hedges us against nominal price declines, our gold and silver hedges us against currency debasement. It’s essential to hold both. 

In the middle of the barbell, we collect big dividends and option premiums from our special situations and value stocks.

Just on those special situations Tom’s referring to... as of Wednesday’s update, the Bonner Private Research Official Watchlist held eight (8) open positions, with an average gain of 23.7%. If you’d like to follow along with the stock watchlist, as well as all Dan and Tom’s paid research, simply choose a membership plan that works for you here...

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And now for Bill Bonner’s missives from the past week...

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And that’s it for your Weekly Wrap, dear reader. We’ve got a special treat lined up for tomorrow’s Sunday Session, too. Recently we spoke with energy and resource expert, Byron King, about the escalating geopolitical tensions vis-á-vis the US-Russia-China etc... and what that could spell for energy markets, precious metals, BRICS de-dollarization, supply chains, national security and much, much more. 

As usual, Byron brought his wealth of knowledge to bear on the discussion. He also generously offered to make available a special essay he penned for Strategic Intelligence, a paid newsletter which he co-authors with Jim Rickards. Check it out in tomorrow’s issue.

Until then...

Cheers,

Joel Bowman