Prepare for a hard landing as the central bankers press the panic button

Friday, 3 June 2022 — Burradoo, Australia

[7 min read]

Dear Reader,

They say that nobody rings the bell at the top or the bottom of the market.

However, if you can read between the lines from what they say, there are telltale signs from those in the know.

It’s not as obvious as you may think, even deceptive if you don’t know how these people operate.

Make no mistake about it, things are about to get nastier. If you thought the markets tumbling over the last couple of months — be it stocks, bonds, cryptos, or various commodities — was painful, it could get a whole lot worse.

Yesterday, the editorial team at Fat Tail Investment Research gathered in Melbourne for an annual meeting to discuss our ideas and perspectives on the markets as well as our fields of expertise. I drove all the way from the Southern Highlands on Wednesday to attend.

It was a great gathering. I actually met over half the gang for the first time since joining last April as lockdowns and various restrictions meant that some of us worked remotely for much of the past year!

In between each editor taking to the floor, I was checking out what was happening with the markets and news headlines.

One headline caught my eye.

US Treasury Secretary Janet Yellen admitted on CNN that she was ‘wrong then [last year] about the path that inflation would take’.

She proceeded to explain that she thought that inflation would no longer be a problem once countries were through opening up after lockdowns. Then came the complications from the Russia-Ukraine conflict and the recent lockdowns in Shanghai and Beijing in China.

Basically, she wanted to point fault at events that occurred in the past three months on why she was wrong on something she could not see for almost a year.

A prophetess with an exemplary track record

This is not the first time Janet Yellen did not see something that was in plain sight. And she has been one of the most powerful figures in our financial system for almost two decades.

She sat on the Federal Reserve Board of Governors from 2010–18 and was the Chair from 2014–18. As the president of the Federal Reserve Bank of San Francisco from 2004–10, she was oblivious to the property market bubble until it popped in spectacular fashion, culminating in the subprime crisis of 2007–09.

Later, she took the reins from Ben Bernanke as Chair to preside over the first rate hike in December 2015, some seven years after the Federal Reserve brought the US (and the world) to a zero interest rate environment.

Then in September 2016, she talked about how asset valuations were not out of line with historical norms.

Well, she was kind of right about that.

A year later in June 2017, she declared there will not be a financial crisis in our lifetimes.

Famous last words.

After she stepped down as Chair in February 2018, the US markets tumbled heavily. It then again experienced a strong correction leading up to Christmas. The two steep declines caused the Federal Reserve to pause the rate hike cycle in early 2019 before reversing course to cut rates by mid-2019.

Let’s just say she has an exemplary record of forecasting the opposite of reality. Take what she says and expect the reverse to occur.

Brace for a perfect deflationary storm

Janet Yellen walking back on inflation is a powerful signal to those who can read between the lines. This stunning admission is not just about her.

It’s about all the central bankers, economists, and policymakers getting it wrong. You see, they operate as a collective and engage in groupthink.

Right now, the current expectation in the market is that there will be two more rate hikes in the US of 0.5%. The current US 10-year Treasury yield is sitting just under 3% and it may well have peaked early last month.

The bond yield declining could signal that the Fed may need to start cutting rates sooner than it wants to.

The reason for this is because something nasty might hit the markets and cause the Federal Reserve to backtrack.

You may ask, how so?

Economies around the world are already buckling under record inflation in over 40 years. An increasing number of households are struggling to make ends meet amidst rising oil and gas prices and central banks hiking rates. The US Federal Reserve also begins to remove excess liquidity from the market as of 1 June as it seeks to unload some of the loans on its balance sheet.

Add on top of that the sharp market falls in almost everything in early April to mid-May. The markets may be experiencing a bounce right now rather than reversing their bearish run.

The storm that’s raging is about to get worse, just as most people’s financial umbrella is either leaking or destroyed.

Finding the right shelter from this storm

Most conventional investments are inflation hedges that protect one’s purchasing power amidst currency debasement. However, few investments can withstand against deflation.

Look at what happened in 2008–09, when prices plummeted for literally everything.

Remember how oil peaked at US$144 a barrel in July 2008 only to fall to less than US$30 seven months later?

People are once again talking about crude oil reaching US$200 a barrel, even more. However, with Janet Yellen’s admission about her error in predicting inflation, this could signal we have reached peak inflation. Therefore, oil could have its last hurrah as the liquidity begins to dry up as businesses and households tighten the belts amidst record inflation and central banks take away the easy cash.

Weakening economies could lead to currencies imploding. But one country is likely to be standing on more solid ground in this game.

Not the US.

I’m talking about Russia.

Their ruble is now anchored to gold.

Could more countries join in as things turn nasty?

Even if they’re not, you should.

Deflationary storms aren’t about making big returns but to preserve yourself to fight another day. After the storm clears, you have enough dry powder to take part in the best buying opportunities on gold.

And some of these companies are well insulated against this upcoming storm because they have withstood two lean years when gold became increasingly neglected amidst the booms happening across the broad market.

There are other companies that could help you weather the storm. How about something more ‘diversified’ to cover other ‘black swans’ encircling the financial system?

The markets could get really rough in the coming months so act now to protect yourself!

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

Dear Reader,

A quick word of warning. Yesterday was the day the Fed began ‘running off’ its balance sheet. That means it is no longer buying bonds. From MarketWatch:

‘In a nutshell, “quantitative tightening” is the opposite of “quantitative easing”: It’s basically a way to reduce the money supply floating around in the economy…It’s seen as likely to drive up real or inflation-adjusted yields, which in turn makes stocks somewhat less attractive. And it should put upward pressure on Treasury term premia, or the compensation investors need for bearing interest-rate risks over the life of a bond.’

It was the Fed’s quantitative easing that ballooned its balance sheet and set the stock market dancing. My colleague Tom Dyson believes quantitative tightening — not the Fed’s baby step rate hikes — will bring the party to an end.

Most likely, we’ll see some scary and exciting days on Wall Street as tipsy revellers find their cars, head out onto the highway, and end up in a ditch.

But we left you hanging yesterday, didn’t we?

You wanted to know how ‘the law’ could end up on the wrong side of ‘the people’, didn’t you? You probably also wondered what damned difference it makes.

We’re not interested in political philosophy either. We’re just connecting the dots to get a clearer idea of what’s ahead. We look at one…and then another. Gradually…then suddenly…a picture appears.

Decree and flimflam

For example, yesterday came word of a new ‘law’ — actually, a whole set of regulations, edicts, and proclamations. Reuters:

‘The Biden administration will announce on Wednesday more than $2.1 billion in funding to shore up weaknesses in the country's food supply system exposed during the COVID-19 pandemic and the aftermath of the Russian invasion of Ukraine.

‘U.S. Agriculture Secretary Tom Vilsack will unveil the new funding, designed to enhance competition in food processing and distribution, increase access to healthy food, and expand markets for farmers, during a speech at Georgetown University.’

Translation: Mr Vilsack, whose department grows no grains, delivers no milk, and neither sows nor reaps, will take US$2.1 billion from ‘the people’ who do and distribute it to his pet projects, friends, favoured clients, and other well-lobbied insiders. The result: farmers and the public will be poorer…and less able to buy food.

That is how the ruling elite rolls — by decree and flimflam. And it’s why their new ‘laws’ are almost always on the wrong side of the people they’re supposed to serve. Unlike the consensual ‘rules of the road’, the new laws do not make it easier for ‘the people’ to get where they want to go. Instead, they force them to detour in a different direction.

Jumping to a conclusion, here’s what we see: the entire global ruling caste, led by the upper 0.001% who gather at Davos, Switzerland, is like a group of heirs to a vast fortune who have no idea how the money was made.

Just look at the US’s jefes. Most have spent their whole lives in politics. Now they appear to be almost preternaturally dumb, with a stupidity that is somewhere between sublime and miraculous. Ms Yellen didn’t see the price increases coming — even though she is a PhD economist; she thought inflation was too low. How was that possible?

The President’s ‘sanctions war’ against Russia is undermining the dollar-based world financial system, raising prices of food and energy, risking nuclear war, and threatening millions with famine. (Admittedly, Joe ‘the Big Guy’ Biden knows much more about the Ukraine than we do; his family earned big money from Ukrainian payoffs.)

‘The people’

And the US Congress voted overwhelmingly — with no debate! — to give US$40 billion to Ukraine, even though it has no dog in the fight and no money to give to anyone. Didn’t Congress know that ‘the people’ have no interest in who misgoverns the Donbass? And didn’t Ms Yellen tell them that the money is needed at home? Washington Examiner ‘New budget numbers show the US careening toward calamity’:

‘The Center for a Responsible Federal Budget, a respected nonpartisan group, reminded us yet again Tuesday that federal spending plans and debt levels are unsustainable. Lawmakers should get serious about debt reduction now — before it’s too late.

‘Counting only debt held by the public — which is some 20% lower than total government debt, including intra-governmental transfers — CRFB says that absent strong corrective action, the federal debt is likely to reach 125% of gross domestic product within a decade. ‘Most nations are in a serious danger zone for economic collapse when debt exceeds 100% of GDP.’

Where did all that debt come from? Since 1999, the feds have made US$25 trillion in new ‘investments’ (the increase in Federal debt); nearly every penny has been lost.

They promised that debt and money printing would stimulate the economy; instead, real wages are falling…and the economy staggers from one crisis to the next.

They promised more equality; instead, the rich are richer than ever and the gap between rich and poor has grown much wider.

They promised peace and security; instead, they’ve entered one pointless war after another…including risking a nuclear war with Russia.

And now their inflation tax makes almost everyone poorer and brings millions more of the world’s poorest people to the edge of starvation.

So what do they do? Admit failure and retire? Send out a confessional tweet?

‘Alas, you can’t make people better off by tricking up an economy with phony money and fake interest rates. Or by bossing them around with laws and edicts. Sorry.’

Nah…they never do that.

Instead, they double down. They get tough. They find new enemies. Russians! White supremacists! Climate change deniers! They use propaganda and censorship to build support…and advertise their own corruption as virtue. After all, they’re fighting for democracy, for equality, for zero-carbon emissions and a virus-free world! And when BS fails, they turn to brute force to stay in control.

But force and chicanery are enemies of wealth. The more the elite tries to control ‘the people’, the less real wealth they produce.

Hold on to your hat. Next week we’ll connect more dots…and look ahead to poverty, chaos, crime, and the decline of Western civilisation. Whee!

Regards,

Bill Bonner,
For The Daily Reckoning Australia