The Courage Not to Act

Title of a memoir the Feds will never author

(Summer Solstice in Europe. Source: Getty Images)

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

It was the longest day of the year. The sun rose here at 5:11 AM. It set at 9:55 PM.  It was a glorious, stretched-out midsummer day… the solstice… with flowers in bloom…birds singing in the trees…and a warm breeze off the Atlantic brought the temperature here up to a delightful 68 degrees.

In the morning, before US markets opened, we drove a friend back to the airport in Shannon, admiring the hills, valleys, and towns along the way. We were cutting through Tipperary, with its lush fields, fat cows and antique stones.

“They’re trying to get Irish farmers to stop raising beef,” says a neighbor. “The idea is to reduce greenhouse gasses. But the Germans don’t stop eating beef. They just buy it from South America instead. They chop down the rainforest… and then send the beef 4,000 miles in a refrigerated ship. How does that make sense?”

We stopped to fill up the tank. It’s a large tank. Still, the cost – 197 euros ($206) – was a shock. But we’re getting used to big price increases. We saw them coming years ago. Now they’re here. So are big price decreases – for cryptos, techs, junk bonds, and stocks in general. And today’s cogitation is, broadly, about when all this price commotion will settle down.  

Not anytime soon, is our guess. And to give you a peak at what lies ahead…

Decision of the Century

…now taking matters into his own hands, Mr. Market is deflating the price of assets, correcting mistakes made by Yellen, Powell et al. As the corrections go deeper, pressure on the Fed to ‘do something about it’ will increase. Then cometh The Decision of the Century, when the Fed will have to either let Mr. Market finish his house cleaning… or burn the house down completely with more money-printing.

We think we know which way it will go… but we don’t want to spoil the story. So let’s read on…

And here comes POTUS, doing his part to whip inflation now. According to our sources (Bloomberg), today, the president will announce a suspension of federal taxes on gasoline:

President Joe Biden will call on Congress to enact a gasoline tax holiday, a person familiar with the plans says, as he looks to cool soaring pump prices heading into summer.

Biden will make a statement Wednesday calling on Congress to enact the pause, the person said, speaking on condition of anonymity ahead of an announcement. 

Gasoline taxes are the best kind of taxes. They tax drivers to get the money to maintain highways. Canceling the tax doesn’t make the expense go away. It just shifts it to other people – including those who don’t drive.  

And since the feds have no extra tax revenue lying around, the money will have to be borrowed… adding further pressure to interest rates and/or to the Fed to print more money.

So, this is just another jackass political move, shifting the cost of highway maintenance from a user tax to an inflation tax.   

But yesterday, investors seemed confident; they seemed to think that the Powell-Yellen team would win the battle with inflation… without ever having to draw blood. Big talk. Small rate hikes. Letting their bonds ‘run off’ without renewing them. Piece of cake, right? 

Dow 33,000?

Then, the Fed could go back to doing what it does best – making Wall Street richer while destroying the Main Street economy. When prices settle down, in other words, it can ‘bring back the punchbowl’ and let the good times roll again.

By the close of business, the Dow had gained 641 points.

Does this mark the crest of the inflation wave… and the beginning of a rebound in the stock market? The old-timers say that if a market can bounce back and recover 50% of its loss, it is a sign of a recovery. If the bounce fails to reach the 50% market – which would be Dow 33,000 or so – the bear market will probably continue.

You can take that for what it is worth – which is not much.

But remember, Mr. Market is in control now. He’s doing what he always does at the end of a bubble – bringing prices back down to earth. And like a cat, he plays with his food before he devours it.

So far, he has whacked asset prices. But just as asset price inflation produces a ‘wealth effect,’ asset price deflation engenders a ‘poverty effect.’ People have less to spend. Sales, profits, wages, tax revenues – everything goes down.

From assets to consumer prices, deflation seeps into everything. And the main source of leakage is housing. The fall in stocks and bonds leaves most people high and dry. But when the housing market takes on water, almost everyone gets drenched. Households drown as mortgage payments rise.      

And now, says Bloomberg, the leakage has begun:

“We’re already seeing the stock market selloff spin into the housing market.” 

Yes, dear reader, left alone, inflation will take care of itself. Mr. Market will get the job done. The economy will go into recession. People will have less to spend. Businesses will make less money. Prices will fall.

But will the Fed have the courage not to act?

We’re as curious as you are.

Regards,

Bill Bonner

Joel’s Note: Just a quick one today to say the transcript of your Sunday Sesh with Bill, recorded at his Irish country residence this past weekend, is up on the BPR website. Check it out here…

It takes a little while to edit these things for readability, which can be tricky when you’re jumping on and off buses, planes, trains, undergrounds, ect. So thanks for your patience (and cheers to Dan for adding some photos!)

We aim to keep as many of these conversations as we can free (including the audio/video recordings and the transcripts)… but some we do keep behind a paywall. Dan’s recent conversation with Jim Rickards, for example, whom Bill referenced many times during our own chat.

Dan and Jim covered a lot of ground during their hour long session - currency wars, inflation, gold, where the market’s heading - and we highly recommend you give it a listen.

As you might imagine, Bill has built up quite the network over his 40-plus years in the financial publishing industry, including some of the most connected, well-informed folks in the game. If you’d like to gain access to these kinds of insights, it’s never been easier (or cheaper!)

For just ~$2/week… less than half a cup of coffee… you can become a Bonner Private Research member. In addition to private Zoom calls, you get access to all Dan and Tom’s research, too… including special reports, twice-weekly market updates and in-depth monthly investment issues. Check it out, here…