Monday, 10 October 2022 — Burradoo, Australia

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

1) If I were President Joe Biden, right now, I would order every barrel of oil from the US Strategic Reserve to be released to the market.

My sincere hope would be to panic the oil market with the surge in supply and crash the oil price.

This would be my way of telling Saudi Arabia and the rest of OPEC+ to shove their latest production cut where the sun don’t shine.

What an astonishingly cynical move they just pulled in the middle of an energy crisis.

I can only take comfort from the fact that this is just another nail in the coffin for the oil industry.

Any move to prop up a high price, and in such a manner, only speeds the transition to electric vehicles. Don’t sell your lithium stocks.

It won’t be long before the incantation of OPEC ministers and Saudi officials comes but will carry as much weight as Scott Morrison’s integrity.

However, right now, we are not at that happy day, and oil is still at risk of going back to more than US$100.

That’s not what we want to see to keep inflation and interest rates in check.

The problem isn’t so much petrol, but what the oil industry calls ‘middle distillates’ — jet fuel and diesel.

Diesel is in short supply, and if it spikes, it could drag crude prices back up with it.

That means, in general terms at least, we may still have more volatility in the share market in the weeks ahead.

Personally, I see any downside in the market as a chance to accumulate shares for the long term at cheaper prices.

I’ve been buying for my super fund lately, with some puts as protection from the general market distress.

2) I’m currently in Spain. It’s interesting to view the world from here. Even though Ukraine is geographically much closer, the war feels just as remote to daily life here as it does in Australia.

What about inflation?

There’s no doubt that prices are up in Spain since the last time I was here.

However, overall, the talk of a European ‘recession’ seems more urgent in the newspaper than to anyone I speak to.

It might be that Spaniards, in general, are less preoccupied with financial markets than we are.

Retirees get a guaranteed State pension, and I’m not sure the average Spanish worker has enough spare cash to dabble in the stock market, not that I think they would anyway. It’s a different culture.

(Spanish wages are not high. My parents-in-law live in a wine-growing region called the Ribera del Duero. A labourer cutting the grapes etc., just gets paid 50 euros a day.)

However, we’ve seen over in Britain how even government bonds and so-called ‘conservative’ pension funds are hostage to ructions in the markets now.

There’s so much leverage in the system, and the whole edifice is so dysfunctional and distorted, nothing is truly secure.

Proponents of Modern Monetary Theory will argue that British State pensioners can still get their money because the Bank of England can print up all that is required.

What I don’t know is how they view the exchange rate. The British pound has been flogged lately on the currency markets.

Anyone from the UK is seeing their international buying power go down, like they have for the last century as the UK’s long decline continues.

I read the most extraordinary comment last week. An American writer wrote ‘some see the UK moving to third world status’.

It’s extraordinary to me that the once mighty Great Britain, which became the world's richest and most powerful country through innovation and industrialisation, could be viewed in this way.

I love England. But it can’t be denied the UK runs at a trade deficit, current account deficit, and a budget deficit. Its North Sea oilfields are in decline.

British banks finance property transactions, not innovation and development.

The pound’s status as a reserve currency is based on history, not strength.

In other words, Britain is sliding into long-term irrelevance the same way the oil industry is.

Countries like India and China will quite rightly argue why on Earth they should give two hoots about a pissy little country off the coast of Europe with 2 cents to rub together and populated by a bunch of old fogeys drinking tea.

The future is in Asia, and Australia is well-placed to be part of this shift.

Here’s another observation from Spain: the standard of material living in Australia is, at least as far as I can tell, the highest in the world.

Every time I leave, I’m reminded of it. We are the lucky country indeed.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

YODO…you only die once. Print it out. Put it on your refrigerator.

The great bubble distorted markets. It distorted the economy. It distorted politics and government. It distorted everything. It bent spoons. It curdled milk. And it left people with eternal truths that weren’t true for one minute.   

Almost everything was weirded through the bubble prism. Money appeared to be almost unlimited…stocks always went up…the feds could spend billions…or even trillions…on any goofy project they wanted…and the US — financed by its fake money — ruled the world.

YOLO, you only live once, was the prevailing zeitgeist. You had to take advantage of this once-in-a-lifetime fantasy world: get it while the gittin’ was good.

The young, restless, and reckless bought cryptos or ‘the next Apple’ or ‘the next Google’ or the next something.

Older, more cautious investors followed Warren Buffett. They thought they could buy-and-hold their way to wealth. They were in ‘stocks for the long run’, expecting to make money simply because they were wise enough to stay ‘in the market’.

All for naught

Both young and old, aggressive and cautious, were wrong. Over time, stocks don’t become more valuable. What really happens is that money becomes less valuable, making higher stock prices look better. In terms of real money, gold, prices are about where they were in the boom of the 1920s — a century ago. You could have bought the 30 Dow stocks in 1929 for 18 ounces of gold. And what are the Dow stocks worth today? About 18 ounces of gold. 90 years later…no gain. All of that hullabaloo — the Crash of ‘29…the Great Depression…the Second World War…the Nifty Fifty…the Oil Shock…Inflation…LTCM…Ben Bernanke…the COVID Panic — for nothing.

But in the dreamtime of the Bubble Epoch, the Fed was pumping in money…and the yachts were rising.   

Our message today: the gittin’ ain’t good no more. Ante-2022, every pullback in the stock market was an opportunity to ‘buy the dip’ and make money. Losses were temporary; they lasted only for a few months, the time it took for the Fed to get more money into the system. The Fed was backstopping investors for many years.

Now it’s backstabbing them. And now, when the knife goes in your back, it stays there. Because the Fed can’t bring up the ambulance, not without also bringing more inflation.  

Last week, we looked at why the Fed can no longer be counted on to raise stock prices.      

First, because the momentum of a recession is likely to drag stocks down anyway. A ‘pause’ by the Fed is likely to make little difference.

Second, because the Fed is famously trapped. It can continue inflating…or it can let the Bubble die. It can’t do both at the same time. A U-turn now will mark the beginning of the next phase of inflation. However much asset prices may go up, inflation is likely to cut them down even more.

Don’t think once, it’s all right

The lurid history of inflation should cause policymakers to think twice before pivoting away from inflation fighting. In France, high rates of inflation in 1787–88 led to the bloody French Revolution and the Terror. In Russia, 1917, inflation set the stage for the Bolshevik Revolution. Germany, 1921–23 led to the rise of Adolf Hitler. In Argentina, Brazil, Zimbabwe, Venezuela — there are no inflation stories with happy endings. All end in misery, poverty, war, and/or revolution.

But the elite don’t even think once. And they’re already egging the Fed on…to go back to inflating.

Here’s a typical ‘think piece’ on Substack:

‘Raising interest rates is a blunt means to fight inflation. It worsens living costs and job losses, while tax cuts mainly benefit the rich. Instead, the rich should be taxed more to enhance revenue to increase public provisioning of essential services, such as transport, health and education.’

And here’s Markets Insider dusting off a Nobel winner: ‘Nobel laureate Paul Krugman warns the Fed risks going too far in fighting inflation — and predicts a return to rock-bottom interest rates’:

‘The Nobel Prize-winning economist has also predicted an eventual return to near-zero interest rates once price increases are brought under control.’

And here’s the UN with its own high-minded thoughts. Common Dreams:

‘A United Nations organization on Monday joined critics of the U.S. Federal Reserve and other central banks across the globe hiking interest rates with the goal of reining in inflation.

‘“Not only is there a real danger that the policy remedy could prove worse than the economic disease, in terms of declining wages, employment, and government revenues, but the road taken would reverse the pandemic pledges to build a more sustainable, resilient, and inclusive world,” the document warns.’

Closer to home, analysts think the recent falloff in job offerings will harm the poor and put pressure on the Fed to do its U-turn sooner rather than later. They say inflation is temporary, or that it is caused by ‘supply chain bottlenecks’ that can be solved by ‘policy changes’.

Of course, the concern for the poor is as fraudulent as the dollar itself. The poor don’t care if Amazon shares go down; what they care about is the price of milk and gasoline. And as for the policy changes, the only ones that would reduce inflation — cutting spending and regulation — are the ones the policymakers are least likely to make.

But the elite rule the world. And it is just a matter of time until they get their way.

YODO.

Stay tuned...

Regards,

Bill Bonner,
For The Daily Reckoning Australia