The Eye of the Storm

That feeling you get when you know the worst is yet to come...

(Source: Getty Images)

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

Elon Musk has a “super bad feeling” about the future.  

Jamie Dimon says he thinks a ‘hurricane” is coming… We imagine it is all swirling around in his brain – the Fed’s ‘tightening cycle’… soaring gasoline and diesel fuel prices… federal deficits out the wazoo… war… sanctions… God knows what else.

Already, Americans – especially those who live in trailers – are putting up plywood and checking their toilet paper supply.

The LA Times:

Americans at the low end of the income spectrum are once again struggling to make ends meet.

A confluence of factors — the expiration of federal stimulus checks and surging inflation on staples such as gas and food — is driving an even bigger wedge between the haves and have-nots.

Although wealthier shoppers continue to splurge, low-income shoppers have pulled back faster than expected in the last two months. They’re focusing on necessities while turning to cheaper items or less-expensive stores. And they’re buying only a little at a time.

And, of course… there’s “The Great Baby Formula Crisis”. Charlie Bilello:

Baby formula shortage continues to worsen, with 74% of stores across America out-of-stock (a year ago the rate was less than 5%). 10 US states now have out-of-stocks rates that are 90% or higher, including the most populous state (California).

Hopefully, measures taken to increase supply will soon take effect, as 75% of babies use some formula by 6 months of age.

Don’t worry, Charlie. Babies grow up. Then, they’re able to eat hamburgers.

This Wicked World

As we explored yesterday, most problems are self-correcting – including inflation.  The cure for high prices, in an honest world, is high prices. Price increases inhibit buying… which means less demand. They also motivate producers to bring more product to market, which means more supply. This is the opposite of what causes inflation. The result should be de-flation.  

But is that what “ought to happen?”

Well, yes. 

But it is not an honest world we live in. It is a wicked one. And one in which the deciders – the ruling caste – seem to have an almost miraculous stupidity. If they were weathermen, you wouldn’t want to rely on them for their forecasts.

“Hey, Lael” says Jerome Powell to one of the other Fed governors, “Look at this.  What’s that big mass of clouds out off the coast?”

“I don’t know, Jerry. Looks like they’re wheeling around a calm spot in the center.  And headed for Boca Raton.”

“Probably nothing… let’s put it into the model; see what it says.”

A few minutes later…

“Just what I thought. It says… well… just another sunny day in South Florida.”

Mo’ Money

Even in an honest economy there are booms and busts, prices increase and decrease. But the storm on the horizon is not a normal weather event.  

Instead, it’s what you get when you print $8 trillion…. and then stifle output with regulations, sanctions, shut-downs, and phony interest rates.  

More money. Fewer goods and services. What ought to happen is inflation, a tempest of price increases and shortages. 

The Fed, meanwhile, is packing its picnic basket. Its ‘baby step’ rate increases measure only a half a percentage point each. Even if they did this every quarter, it would take nearly 4 years before their key lending rate pulled even with inflation.

We predict that the storm will hit long before that happens.  

Even if the Fed really were in inflation-fighting mode, it would still take stiff measures – and time – for the storm to pass. MarketWatch:

Investors may be in for a rude surprise: History shows inflation can take years to return to normal even when the Fed hikes interest rates above 10%

That risk was highlighted on Thursday by BofA Securities strategists Vadim Iaralov, Howard Du and others, who point to the period between 1974 and 1988 as the most comparable time in which the annual headline U.S. consumer-price index was rising at a pace similar to the U.S.’s pandemic era of 2019-2022.

In 1980, with the Fed’s main policy rate target already above 10% for most of that year, the annual headline CPI, also in double digits, still did not fall back below 3% after 36 months “even on the back of unprecedented rate hikes enacted by Fed Chairman Paul Volcker,” they said.

Out of Control

What really ‘ought’ to happen?  

It will only be clear after it has happened. In the meantime, we guess: The persistence of inflation… at perhaps even higher levels… is likely to stiffen the Fed’s backbone. Fed governors won’t want to let inflation get ‘out of control.’  They will express their determination to bring down inflation. And some people will take them seriously.  

Investors will panic. Businesses will pull back. Households will hunker down. Prices will fall! Like Elon Musk, they will have a ‘super bad feeling’… which will lead to the hurricane Jamie Dimon fears.  

And then, hallelujah… the Fed governors will be spared. No need to hike rates, after all. No need to endure the wrath of a desperate nation. No need to try to undo what they have done.  

If they are lucky, they may even be able to retire in the eye of the storm… before the wind knocks them down.  

Regards,

Bill Bonner

Joel’s Note: This kind of “inflation volatility” is exactly what you’d expect while the Fed is running its tightening program. And that’s not all, as investment director, Tom Dyson, wrote to BPR subscribers in last Wednesday’s market note:

It’ll cause the major stock market averages to fall. 

It’ll cause the spreads between junk bond yields and investment grade bond yields and government bond yields to widen. 

It’ll cause inflation volatility to rise.  

It’ll cause speculators to seek safety and abandon risk. 

It’ll raise doubts about the solvency of borrowers, up to and including the solvency of the United States Treasury.

How do you play this stormy forecast?

“Maximum Safety Mode,” says Tom… plus a handful of select “tactical trades.”

Tom’s got seven stocks on the BPR watchlist at present, plus the longer-term “Trade of the Decade.” Find out more, here…