Wednesday, 16 February 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

These are certainly interesting times that we live in. In today’s Daily Reckoning Australia, Jim Rickards starts to look at the good and bad of these interesting times.

As investors, it’s vital you understand both sides and determine what this means for you, by focusing on real data rather than the news of the day.

Today, Jim introduces you to how we can help you protect and prosper your wealth in these very interesting times. Perhaps key to this is making sure you don’t fall victim to the biases that can cloud your understanding.

Read on to find out more.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t forget to check out our podcast on Spotify. Yesterday, I spoke to software engineer and quant trader Mathew Verdouw. Wall Street hedge funds use his product. Find out why!

By Jim Rickards Editor, The Daily Reckoning Australia

Friends sometimes offer the old intention, ‘May you live in interesting times’. After taking a beat, they quickly add, ‘That’s not a blessing, it’s a curse’. Of course, it’s not intended as either; it’s an ironic take on the news of the day. However intended, it’s certainly true. We are living in most interesting times.

And that’s a challenge for investors. On the one hand, we can recite good news, such as positive economic growth, low unemployment, low interest rates, strong gains in home prices, a strong dollar, and declining new cases in the pandemic.

On the other hand, we can offer a litany of bad news, including the US’s humiliation in Afghanistan, an out-of-control US southern border, declining labour force participation, a market meltdown and slowing growth in China, and increased tensions with Iran, North Korea, and Russia.

Which is it?

We could easily expand both the good news and bad news lists. That’s the point. Most analysts pick sides and beat the drum, shouting either that it’s all good or the sky is falling. Investors can’t be blamed for being confused at best or deeply frustrated at worst. ‘Which is it?’ they ask.

Obviously, if the good news case were the prevailing trend, investing would be easy. You’d buy stocks, real estate, and corporate bonds, use leverage, and sit back and enjoy the ride.

Likewise, if the bad news case were the prevailing trend, investing would also be easy. You’d buy Treasury notes and gold, lighten up on stocks, reduce leverage, and increase your allocation to cash. Then you would wait out the storm and come back into the market to pick up bargains when the smoke clears.

Of course, investing is never that easy. You have to take the data as it comes and put it into a broader context. It’s not good enough just to pick sides in the growth versus slowdown debate and shout your opinions into the nearest microphone. That approach is for amateurs and TV talking heads.

The more rigorous approach is to ask why conflicting data appears, what the data is really saying, and, most importantly, put all the data into a single dynamic model to determine which trend will prevail in the intermediate- to long-term time frame that investors really care about.

Putting together a puzzle

In using our dynamic models, we work hard to avoid cognitive biases — especially confirmation bias. That’s when you embrace data that agrees with your thesis and discard data that doesn’t. It’s a great way to miss what’s really going on and get blindsided when the data you discarded turns out to be the most important clue to the puzzle.

Instead, we keep all the data in front of us and try to reconcile what first appears anomalous. This can lead to new insights and even revisions to the model if that’s needed to properly gauge what’s going on.

At The Daily Reckoning Australia, we’re not day traders and we’re not trying to scoop up nickels and dimes in front of a moving bulldozer. We’re trying to see which way the bulldozer is going and what will get crushed in its path. We’re also trying to see what will remain once the bulldozer (the real economy) has moved on.

In my coming editions of The Daily Reckoning Australia, we’ll review the main factors driving the economy today. These include the lingering pandemic, recent Federal Reserve announcements, the inflation narrative, and the trainwreck in Congress as the House and Senate fight about spending priorities and as progressive and more moderate Democrats fight among themselves about ‘going big’ on the US$3.5 trillion spending proposal.

Of course, this political infighting is set against a backdrop of the approaching 2022 midterm elections, in which Democrats could hang on to razor-thin majorities or Republicans could come roaring back to take control of the House and Senate.

Finally, we’ll look at the global macroeconomic and geopolitical situation including a credit crisis in China, humiliation in Afghanistan, the border crisis in Texas, and the return of King Dollar. These events are not just headlines in the usual news cycle.

They’re historic turning points that will affect investor portfolios for years to come.

This is one of the most complex and demanding palettes of events we’ve ever seen. Fortunately, we have the tools to make sense of it all. Sit back, relax, and enjoy the trip.

Make sure you stay tuned to my next editions of The Daily Reckoning Australia for all this and more.

Regards,

Jim Rickards,
Strategist,The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

By Bill Bonner Editor, The Daily Reckoning Australia

‘The heart is devious above all else;
‘It is perverse…
‘Who can understand it?
‘I the Lord test the mind
‘And search the heart
‘To give to all according to their ways,
‘According to the fruit of their doings.’

Jeremiah, 17:9

‘Science advances one funeral at a time’, said Max Planck, who meant that a heart had to come to a dead stop before new data could be properly appreciated and new paradigms accepted. It is the mind that moves science ahead. But it is the heart that rules scientists and everybody else.

‘Over my dead body’, says the scientist, his heels dug deep into ‘the science’ he helped to discover. ‘OK’, sayeth the Lord, ‘that’ll work’.

At least in science and technology death leads to an accumulation of knowledge. In the rest of life, knowledge comes and goes, as if we’re all reincarnated, doomed to repeat the failed experiments of the past. All lovers rehearse scenes of Antony and Cleopatra. All politicians relive the challenges of Abraham Lincoln and Pontius Pilate. And all central bankers eventually channel William McChesney Martin or Gideon Gono.

Lessons are learned…forgotten...and then relearned again.

A brand-new spanking

And so, today’s inflation readings must be coming as a shock to the 1,000 or so PhD economists at the Fed. ‘How about that’, they must be saying to each other. ‘Printing money really does cause inflation.’

They’ve added US$8 trillion in brand spanking new money over the last 20 years. And their absurdly low interest rates created an unprecedented debt bubble, with US$64 trillion added since 1999.

So, what do you know? Inflation!

And now, practically every news item covering the inflation numbers leads with the same idea — that the Fed made an old error and now is under pressure to make a new one. The Hill: ‘Why the Fed overstimulated the economy’.

CNBC asked Mohammed El-Erian what he thought:

‘…they didn’t take the foot off the accelerator early enough.’

And here’s the Financial Times:

‘The US consumer price index rose 7.5 per cent last month compared with January last year, its fastest annual pace since 1982, heaping pressure on the Federal Reserve to act more aggressively to tame inflation.’

And yes…the Fed is bound to act. Its credibility is at stake.

And yes…it will act boldly. Here’s MarketWatch:

‘A firestorm of hawkish Fed speculation erupts following strong US inflation reading.

‘Fed watchers are talking seriously about an “emergency” interest rate hike before the Fed’s next formal meeting on March 16.’

Markets Insider:

‘After the inflation reading, St. Louis Fed President James Bullard, a voting member of the Fed’s rate-setting committee, said he’s become “dramatically” more hawkish. He now wants a rate increase of 100 basis points — a full percentage point — by July.’

Wow…a whole percentage point! Let’s see, that will leave the Fed Funds at MINUS 6.4%. Wow.

Paragons of prudence

Our bet is that Fed economists are about to relearn another lesson — last rehearsed 50 years ago. In the early ‘70s, inflation rates were rising. Then falling. And then rising again.

In 1970, prices were already going up at a 6% rate. Then, inflation dropped to just 3% in 1973. Back up to more than 11% in 1976, the rate then again fell — but only to about 5% — before heading up again. Prices were rising at a 13% clip by 1980.

Arthur Burns is frequently criticised for letting the ‘70s inflation get out of hand. But compared to his present-day successors, he was a paragon of central bank prudence. His timing might have been off, but the idea was right. When inflation was 6%, his Fed Funds rate rose to 10%...then, the Fed’s key rate went to more than 12%. Overall, the bank lent to its members at a rate that was generally positive — by about 3%.

Paul Volcker took over in 1978. He dilly-dallied for a couple years, and then got serious. Trading punches with inflation didn’t work. He needed to deliver a knockout blow. He put the key rate at nearly 20% — seven full percentage points over rising prices…and the monster was soon flat on its back.

A 1,000-point uppercut?

Today, the Fed is already on the ropes. First, it told the world that it wouldn’t have to raise rates until 2024. Here it is, the beginning of 2022 and it is already conceding that it will have to do something now.

Then, when inflation began to make the headlines, the Fed reassured the nation that it was only ‘transitory’. There would be no reason to react to the higher prices, it said, because they were simply a little blowback from the COVID shutdowns and stimmie cheques. Wrong again.

And now the Fed is concerned about protecting its ‘credibility’, perhaps with a full 100-basis point (one percentage point) increase. And yet, the lesson of the Volcker era was that a 100-basis point jab would do nothing; from today’s ultra-low rate, below 1%, it will take an increase of at least 1,000-basis points. Does the Fed still pack that kind of punch?

The most amazing thing to us is that it still has any credibility to protect. It plainly doesn’t know what it is doing.

But is the Fed really as incompetent as it appears? Tune in tomorrow; we’ll take a look.

Regards,

Bill Bonner,
For The Daily Reckoning Australia