No WIN Buttons

The Feds Fumble, Stocks Stumble... and Inflation Rumbles

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

The tension mounts. Investors check their stock prices, nervously.

We are coming up to a hinge point in US financial history… an Epiphany… like the climax of a major battle, when you find out who will win and who will lose…

… or that moment of truth at home, when you realize someone has lost his mind.      

So… will it? Or won’t it?

Will the Fed actually reverse its easy money policies of the last 20 years? Or, will it duck… dodge… and deny?

Here’s the Fed’s summary of its latest FOMC meeting:

“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.” 

And here’s MarketWatch:

Minutes revealed robust talk among some Fed officials around the central bank potentially moving to raise rates and also cut its current $8.8 trillion sized balance sheet sooner than expected to help tackle higher costs of living.

The S&P 500 index was trading down 1.4% and the Nasdaq Composite Index was extending to its earlier decline, down 2.7% on Wednesday.

Meanwhile, the yield on the 10-year Treasury note rose to around 1.70% after the Fed’s minutes were distributed.

You are always prepared for what you expect – at least, more or less. But few people today expect the Fed to actually follow through. If they thought differently, stocks would be falling hard… and the yield on the 10-year note would be closer to 5% than 1.7%.

But what if the Fed surprises us all? What if Fed chairman Powell suddenly channeled his inner Volcker… and actually got serious about stifling inflation?  

Let’s try to imagine it.

Ahead of the Curve

In the very early stages, it is perfectly plausible. No prudent central banker sits idly while inflation rises more than 200% above his target. He knows that price increases can be hard to contain. Because, once people expect them… they tend to spend their money faster, increasing the ‘velocity’ of money, and thereby adding to inflation.

So, he understands that he has to manage not just the money supply, but also “inflation expectations.” And that means showing the public that he is in control of the situation and ready to take appropriate measures to make sure inflation doesn’t get away from him.

He can try to manage expectations by ‘talking them down.’ But like ‘Whip Inflation Now” buttons, that only goes so far. It wasn’t the WIN buttons that squelched inflation at the end of the ‘70s. It was Paul Volcker and a genuine change of direction in Fed policy.  

Yes… we’re talking about real change… from loose… to tight, from letting ‘les bons temps rouler’… to ‘taking away the punchbowl,’ turning out the lights… and calling the cops.

Instead of following interest rates higher, Volcker moved boldly to get ahead of them – setting the Fed’s key lending rate at 20%, about 50% higher than the actual inflation rate.  

A similar move today would put the Fed funds rate at around 10% – or about 1,000% higher than it is today. Nobody expects that. Nobody. We can’t even imagine it.

But maybe the Fed will get a little breathing room. Maybe the moment of truth can be delayed a few months. The inflation figures might very well decline – thanks to a generally sluggish economy after the ‘stimmie’ effect wears off.  

Oh… that may be a surprise, too… when a softening economy (with fewer people buying things… and more people saving their money) results in smaller price increases. Then, the Fed could declare victory without ever firing a shot. It will say that its ‘transitory’ assessment was right after all; no reason to stop the party!

But while the booze flows freely on Wall Street, Main Street goes dry. And as the loose money policies continue, so will the pressure on consumer prices. Sooner or later, the Fed will have to declare itself.  

Will it or won’t it?

You know what we think already: it won’t. But maybe we’ll be surprised? We’ll take another look, tomorrow.

Stay tuned...

Regards,

Bill Bonner

P.S. Oh la la... 

Not only was it a bad day for the Nasdaq (down 3.34%) but also for Cathie Wood's Ark Innovation ETF. (Readers will recall the ‘queen of the tech underworld’ from our article, Knock on Wood, a few weeks back.) Well, that fund, based on the biggest growth stocks of the future, was down 7.09%... on the day. It's now down 44.5% from its all-time high in February of last year. 

In his weekly update to paid subscribers published yesterday, Investment Director Tom Dyson shows you why the big trade of 2022 may be out of 'growth' and into 'Old Economy Value.' 

Tom is patiently building a Bonner Private Research portfolio and will publish his first investment idea in the monthly report to be published on January 26th. 

You can join our paid subscribers here...

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And now, some mail from our Dear Readers...

Be sure to keep your vitamin D levels high when dealing with viruses, its important and helps. As usual, great writing from a consummate professional. ~ Steve K.

All these sacrifices for Covid and nothing at all has changed. The entire episode is reminiscent of our government’s attempt to bring Democracy to Afghanistan. No one in the history of the world has changed anything in Afghanistan. If we can't bring war, I suppose we'll have another whack at peace in the Middle East. ~ Denis T

According to the CDC report at the end of July 2020, 6% of "Covid deaths" were from Covid only. They said the other 94% had an average of 2.6 co-morbidities. Dr. Robert Malone just recently said that average number of co-morbidities is now 4. I've also heard from numerous sources that the average age of dying from Covid is higher than the average life-expectancy. ~ GS

To those who would control the climate: Try to adapt to the place you find yourself in. It has always been the world improvers who have made matters worse because they don't know all the factors at play or their values (which might vary in an unpredictable way). The human race has survived because of our ability to adapt not to change the world. ~ Doug H. 

Thanks Bill. Thought I was a lone voice crying in the wilderness with some of the points you make! I’m 81. Have seven grown-up kids. Grandkids and great grandkids. At last count there were 35 of us (stopped counting ages ago, so there may be more... Too much to do every day to keep track of it all). 

Anyway, 8 of the family have had “the plague” and, like you mentioned, varying degrees of severity were noted. The ones who had the worst symptoms I noticed, sadly, were the least “healthy” to start with, regardless of age. One of my grandsons, age 30, has lived, shall we say, an “addictive” lifestyle for years. He ended up in intensive care, poor lamb. Meanwhile, nearly EVERYONE in the family panics over ME all the time and I really don’t know why they waste their time. Haven’t they more important tasks to do, bless them all? ~ Jaqui S.