Mr. Powell: Iron Man?

Mrs. Thatcher proved her mettle when the chips were down... what about JP?

(Source: Getty Images)

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

“The Fed signals it’s not for turning,” was the headline in the Financial Times yesterday.

For now, the Fed is sticking with its rate hikes. And investors seem to be waking up to what that will mean. Ray Dalio says a 4.5% Fed rate (still nearly 400 basis points BELOW consumer price inflation) would knock stocks down another 20%.   Mark Mobius says the Fed’s key rate may go to 9%. Larry Summers says the “Fed needs big rate hikes” to control inflation.

MarketWatch:

Why the stock-market selloff could get ugly if S&P 500 falls below 3,900

Markets Insider:

Billionaire 'Bond King' Jeff Gundlach says it's time to get more bearish on US stocks, as the risk of deflation is much higher now

On Wednesday, five stocks – Amazon, Tesla, Alphabet, Microsoft and Apple – lost over half a trillion in value. But there’s still a long way to go to get back to ‘normal.’  

Getting back to normal probably won’t happen. Too much of our economy now depends on very un-normal interest rates. As real rates go up, businesses, households and the Federal government will be unable to refinance. They will go broke, default… or, in the case of the feds, print more money.

Naturally, the people who’ve made the most money from the Bubble Epoch’s ultra-low interest rates are least eager to see them go away. They are also the same people who control the media, the universities, Wall Street, the Fed and the government itself. Our guess is that they could lose as much as $50 trillion in wealth, if the Fed sticks to its program and wrings inflation out of the system.  

And as the losses mount up, they will all tell Mr. Powell what an idiot he is. They will tell him to reverse course. Will he have the backbone to resist them?

Iron Lady

“The lady’s not for turning,” was the famous line from Margaret Thatcher used in 1980, describing herself. She was not about to depart from her conservative program, she told a party conference. 

At the time, Ms. Thatcher’s approval rating had fallen to 23% – a record low. She had cut spending and fired government employees. She even took away the free milk from school children. The unions were against her, and threatening widespread strikes.  The universities were against her; she reduced government support to education, prompting Oxford to withhold a proposed honorary doctorate. The press and even many members of her own party were against her. Many expected her to do a “U-Turn.”

She did not.  

And it got worse. Unemployment rose; there were 3 million without jobs in the early ‘80s. Inflation hit 18%. An open letter, signed by 364 ‘leading economists,’ told her she was going in the wrong direction, that there was “no basis in economic theory” for her program of budget cuts and higher interest rates.

Ms. Thatcher also had to fight with the coal miners. Anthony Scargill, formerly a member of the Young Communist League, later founder of the Socialist Labour Party, was head of the miners’ union in the early ‘80s. When the Thatcher government proposed to close unproductive mines, Scargill led the union in a head-to-head confrontation with the government. The miners walked off the job, leaving Britain short of fuel.

But Ms. Thatcher didn’t flinch. She was convinced that over-spending and over-regulating were ruining the country; she was determined to squeeze them out.

A Tale of Two Cities

Our first trip to London was in 1969. It was a grim place. Our hotel was shabby.  You had to put coins in a heater to get any warmth. The bathroom was down the hall.

But the whole town seemed shabby. Almost no new buildings. The shops were as dreary as the weather. 

Britain was not a wealthy country then. Rationing was not fully eliminated until 1958. A friend of ours, who grew up in London, recalls how delighted he was to eat an orange… for the first time… in the 1950s.  

Britain’s economy had not been destroyed during WWII. But after the war, instead of removing the wartime controls, the government nationalized whole industries, introduced more regulations, raised taxes and set up an expensive welfare state. 

In effect, what Britain put in place was an extensive form of central planning and socialism. Ms. Thatcher is credited with finally getting rid of it – or, the worst parts of it. She made no U-Turn and by 1983, inflation was settling down and the economy was already on the mend. Later, it boomed. After the ‘Big Bang,’ in which the UK’s financial sector was turned loose, London became the money center of the world – rich and dynamic, where people from all over the planet came to invest, shop, and buy expensive apartments.

We had lunch with Ms. Thatcher later in life, in the 1990s. We were surprised by how small she was – delicate, almost frail. But she had nothing to prove then. She had shown the world what she was made of. She was an “Iron Lady.” And she got the job done.

And Mr. Powell? What is he made of? Iron? Or willow?  

We’ll find out. 

Regards,

Bill Bonner

Joel’s Note: Stocks were mostly muted yesterday, trading sideways after Tuesday’s massive selloff. Not exactly inspiring. You’ll recall Tuesday as the day that produced this unhappy “heatmap,” which Dan shared with readers yesterday…

“The larger the box of the company, the bigger its market capitalization,” explained Dan. “The redder it is, the bigger its loss on the day.”

Yikes!

The blood red selloff represented the biggest single-day drop in two years, with the Dow closing down 3.9%, the S&P 500 off 4.3% and the Nasdaq lower by 5.1%. In fact, every single stock listed on the Nasdaq ended the day in crimson. The proximate cause appeared to be the CPI print but, as usual, there’s more to the picture…

Bonner Private Research’s Investment Director, Tom Dyson, briefed members in his weekly market update, yesterday. Take a look…

A hot CPI print implies the Fed will need to keep raising the interest rate and draining liquidity from the system in order to meet its inflation goal. Tighter financial conditions are bad for stocks.  

A core position we hold is that we are in the early stages of a bear market. The bull market was driven by three factors – rising corporate profits, rising valuations (the multiples investors were willing to pay for profits) and a declining discount rate (which investors used to aggressively value future cash flows). 

These three factors combined to produce a gigantic speculative mania in the stock market. Now all three factors should reverse. Valuations have already started to reverse. The discount rate is rising. And corporate profits should begin to decline soon. 

Tying everything together – the debt bubble, the stock market mania, stubborn inflation and a global resource war, the outlook for stocks and risk assets in general is as terrible as I’ve ever seen it.  

Tom’s #1 priority right now is capital preservation. That’s why he’s recommending BPR members engage what he calls “Maximum Safety Mode.” It’s been the right call so far this year, even as some investors got suckered into what now appears to have been a classic bear market rally. (A 20% bounce off the June lows.) Aside from healthy stores of gold and cash, Tom has recommended a select few “tactical trades,” which have averaged a 7% gain, even as the S&P 500 is down 18% on the year.

If you’d like to follow along with Tom and Dan’s research, something of a lifeboat in these rough ‘n’ tumble seas, feel free to jump on board today…