The public is on to the Fed’s inflation game! The Fed called it “transitory”. Baloney! The Fed announced:
“…it is accelerating its removal of monetary support for the economy, citing a rise in inflation that has seen the biggest jump in prices nearly 40 years. In a move to cool growth, policy makers also said they expect to hike interest rates three times in 2022.” (Emphasis mine)
John Williams (www.shadowstats.com) calculates inflation the same way they did 40 years ago. Using the 1980 calculations, inflation is over 14%.
Jared Dillian writes:
“I don’t have much in the way of ideas or investment themes for the New Year, other than the Fed is going to hike rates into an uncomfortable orifice. If that was your base case, for 2022, what would you do? Buy stocks? Buy commodities? Buy bonds?
You would buy none of the above. And that is the predicament I am in. I write a couple of investment newsletters with trade ideas, typically long trade ideas, and nothing looks especially attractive.
…. Will 2022 be different? It’s hard to beat the index when the index is basically 5 stocks, and you don’t own any of those five stocks.”
“…51% of all market gains from April through December were just from the five most popular tech names – AAPL, MSFT, NVDA, TSLA, GOOGL – Sundial Research notes that a near-record number of tech stocks have plunged by some 50%, a number that was only surpassed by the March 2021 crash and the global financial crisis.”
The investor challenge? Earn 14% after taxes just to keep up with inflation.
Who do you trust?
Richard Maybury’s January issue of the “U.S. & World Early Warning Report” asks:
“…. Socialism/Keynesianism assumes governments can be trusted, while Austrianism asks, where is the evidence for this faith?”
|“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” — Henry Ford|
Do you believe the Fed is serious about taming inflation? Are they willing to see bond prices tumble and a major market correction? Remember, the Fed that told us the 2008 bailout and low interest rates were “temporary” and would soon return to normal.
40 years ago, Fed Chairman Paul Volcker needed double-digit interest rates to do the job. Today the Fed is owned by the biggest investment houses in the world. If Fed Chairman Jerome Powell raises rates, it will negatively impact casino bank profits, while adding trillions in interest cost to US government debt.
Time to go to our Fed expert Chuck Butler for help.
DENNIS: Chuck, once again, thank you for your time for the benefit of our readers.
The casino banks bailouts continue. Jeff Clark recently discussed the 2022 “potholes” and remarks, “US debt continues to not only grow, but according to Treasury data it increased in December, by 50% of what had been seen in all of 2021.”
Chuck, as a long-time Fed watcher, what the Fed announces, versus what happens doesn’t always match up. Powell announced his inflation-busting plan. How do you see it being implemented?
CHUCK: Dennis, once again thank you for inviting me to opine for your readers, I truly appreciate this opportunity.
I feel the current edition of Fed Heads will attempt to tackle inflation with 25 BPS rate hikes… The Fed has mentioned that they will be hiking rates 2-3 times in 2022… Well, if my thoughts are correct, that would only bring our base rates to 1/2% – 3/4%… How’s that going to tackle 14% inflation? It won’t… Meanwhile Main Street will continue to scramble.
The Fed will get a little traction. Each time they hike rates, they’ll tell the markets that they intend to continue, and that will keep the markets on key; feeling more help is on the way… Of course, they’ll be wishin’, hopin’ and prayin’, the Fed backs off.
|“The Federal Reserve is a cartel – it’s a banking cartel. And like all cartels, it only has one purpose – and that is to serve the benefit of the members of the cartel, period.” — G. Edward Griffin|
I could be wrong. The Fed could aggressively go after inflation with BIG rate hikes of 50 BPS or more while tapering their asset purchases… Given what you’ve seen from these knuckleheads since 2008, what do you think the odds are for an aggressive Fed? (Slim and None, and Slim left town)…
DENNIS: Continuing the fiddling while Rome burns…
If interest rates were to rise even 1%, how much affect do you feel it would really have in taming inflation? Would it have any effect on out-of-control government spending, particularly in an election year?
CHUCK: Any rate hikes of any size will put the kyboshes on the more than 20-year rally in bonds… If the Fed hadn’t been the #1 buyer of Treasuries these past few years, that bond rally would have ended long ago…
The Fed stated that they are no longer in the bond-buying business… Remaining investors will demand higher yields. If you bought a 10-year Treasury at 1.75% yield, and the Fed hikes rates, new 10-year Treasuries will pay more. If you want to resell your current bonds, you will sell them below par value – or you must hold them to maturity.
The stock market bubble has been searching for a pin for longer than anyone has imagined. That pin will be the announced rate hikes. No matter what size the rate hike, I expect the market correction Dillian referred to.
Gov’t curbing deficit spending? I doubt it, especially in an election year. The public views the ruling party as responsible for this rising inflation which puts a major dent in their disposable income… So, expect the ruling party to jump in with more Stimmy checks, aka deficit spending…
DENNIS: Recall the old line, “I’m not trying to get rich; but rather trying to avoid getting poor!” Fixed-income investments are losers with high inflation. The market is fraught with risk. How do baby boomers protect their nest egg with some margin of safety?
CHUCK: Yes, this is a very frustrating time; safe places to invest are so limited… The one true and tried way to protect one’s investment portfolio in times of rising inflation is Gold (or Silver). Real Estate can help, but the problem is that it’s not as liquid, as Gold.
My humble country boy opinion is that you had better get Gold while the getting is good… Long time readers of my newsletter: A Pfennig For Your Thoughts, (a shameless plug) have read my thoughts on Gold price suppression for years… I’ve consistently told them that there will come a day when the physical buying of Gold (and Silver) will overtake the short paper trades at the COMEX, and the price suppression will end.
I feel this run in Gold will occur in 2022, when inflation goes wild, the Fed tries to react, bonds get sold, stocks get sold, and everyone turns to Gold once again… And it’s at that time, that all those naysayers to Gold, will find that they can’t find a dealer to sell them physical Gold… Uh-Oh!
DENNIS: How do you feel about gold stocks? The large, established mining companies pay minimal dividends, but every little bit helps.
CHUCK: In the run-up of the Gold price in the ’70s to combat Carter years inflation, the Gold Miners made huge profits, making their stocks very profitable. So, if history repeats, we could very well see the Gold Miners’ stocks rise again… I’m talking about the Gold producing companies, not the exploration miners… Despite paying minimal dividends, gold price increases could pave the way for dividend increases, adding icing to the cake.
DENNIS: During the Volcker years, buying and selling real estate was tough as interest rates were at record levels. Using the premise that the Fed will take baby steps, do you feel any different about real estate this time around?
CHUCK: The other day, I saw a commercial on TV, for a mortgage lender, who said that he could rush a closing to 3 weeks… OK, so let’s say you get a phone call from your broker, and your margin account is down and needs a cash infusion by the next day, or face selling of positions… But you won’t get your cash from your real estate holding for 3 weeks?
To answer your question, that would still be more liquid than the Volcker years.
DENNIS: One final question. High inflation means no one wants to hold a particular currency and investors move to other, more stable currencies.
Are there certain currencies that you would recommend to readers as a hedge?
CHUCK: Historically, in inflationary times, commodities do well… When a country is a commodity exporter, their currency becomes more valuable.
Commodity exporters are Russia, Australia, New Zealand, Canada, Norway, Brazil, and a few others. There is a reasonable chance their currencies will rise, helping offset the ravages of inflation on your portfolio.
When I was at EverBank (1-800-926-4922… I don’t get a thin dime from them if you do call them), I created what was called the Commodity Currency Index CD… It still exists and has probably been improved upon. You may also want to ask your financial advisor about Exchange Traded Funds specializing in foreign currencies.
Dennis thank you once again for this opportunity… I’m also glad to hear that your health has turned a corner, and that you’re felling much better these days… to health and happiness in 2022…
Dennis here. Thanks again to Chuck for his candid opinion. Inflation is scary and we all need to take steps to protect our accumulated wealth.