Wednesday, 15 February 2023 — Albert Park

By Jim Rickards Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

How does one discuss Fed policy without considering the impact of that (misguided) policy on the US economy?

How does one discuss the global supply chain breakdown without considering the impact of the war in Ukraine and the extensive economic sanctions — in effect, a financial and economic war layered on top of a tragic kinetic war?

How can you consider these national and international trends without widening the aperture to weigh the impact on the role of the dollar and the future of the international monetary system?

You can’t. It’s all connected.

So that’s the frame for this set of articles. We’ll take those big-picture developments — the US economy, the global economy, supply chain breakdowns, the war and sanctions, and the future of the international monetary system — one by one, offering a detailed analysis of each, yet illustrating the thread or connective tissue that runs through all of them.

When we’re done, you’ll have the information and (more importantly) the tools you need to allocate assets, preserve wealth, and even prosper in a time that holds greater danger for investors than the 1970s, 1929, and even 1914 (when the New York Stock Exchange was closed for five months at the start of the First World War).

Let’s get started with…

The US economy

While we take a global perspective on markets, the US economy is always the best place to begin any analysis. The US is still the world’s largest economy (despite what you may hear of China displacing the US in that role).

The fact is the Chinese economy is still only 70% the size of the US economy, and that’s on a GDP basis. When you adjust those figures per capita, the US economy is more than five times larger than China’s (US$76,000 annual per capita GDP for the US compared to US$14,000 for China). The US is still the 800-pound gorilla of global economic activity.

That said, the US economy is in awful shape. That’s not what you’ll read in the media, but it’s what the data shows. The US economy contracted 1.6% in the first quarter of 2022 and another 0.9% in the second quarter. That makes two consecutive quarters of declining economic activity — which puts the US in a recession.

Pay no attention to comments from Janet Yellen and Joe Biden that there is no recession. The rule of thumb, two consecutive quarters of decline, has been used by experts and everyday observers for decades. White House and Treasury efforts to change the definition now are laughable (if politically convenient) and show just how dishonest our leadership is.

Inflation is running rampant right now, about 9.1% on a year-over-year basis, according to the latest data (note: this article was originally published in August 2022). Inflation has led to higher interest rates and a slowing residential housing market as the Fed struggles to crush the inflationary surge.

It’s from the supply side

The difficulty is that US inflation is coming from the supply side (energy, food, transportation, supply chain dysfunction) rather than the demand side (consumers pulling demand forward based on inflationary fears).

Since the Fed doesn’t drill for oil, drive trucks, or operate cranes, they can’t really affect the supply side directly. What they can do is destroy demand by raising rates so high that consumers will be drained with higher mortgage rates and excessive credit card charges.

This kind of inflation control can work, but it comes at a high cost — a severe recession. Right now, consumers are plagued with high gasoline prices. Those prices will come down when consumers stop buying gas because they’re unemployed or their businesses have failed. To paraphrase an old saying from the Vietnam War, the Fed will have to destroy the economy in order to save it.

The supply chain is disrupted in a new way

Other negative data abounds. The supply chain is still broken, but in a new way.

Early last year, distributors and retailers were short of inventory and the shelves were bare. There’s still some of that, but the delivery channels are working better now. The problem today is that distributors put in double and even triple orders to make up for shortages. Now those orders are being delivered at the same time that demand has fallen off a cliff.

This is known in supply chain science as the bullwhip effect, where small moves at one end of the whip produce huge effects at the other end. Not only are warehouses full, but new orders are drying up. Distributors and retailers don’t need more goods.

GDP is calculated based on inventories, not final sales, so this is another huge negative for GDP.

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

Dear Reader,

‘Soldiers, remember that from the top of these pyramids, 40 centuries of history contemplate you.’

Napoleon Bonaparte

What a weekend. Unidentified flying objects. The Super Bowl.  

And December’s inflation reading, previously reported as going down, was adjusted; now it’s up. From Yahoo! Finance:

‘New seasonal adjustments released by the BLS on Friday also switched December's initial reading of a 0.1% monthly drop in headline inflation to an increase of 0.1% in the year's final month.’

But all the weekend’s noise was drowned out by the news from the week before.  

Let’s begin with the blockbuster, Seymour Hersh: ‘How America Took Out the Nord Stream Pipeline’:

‘The New York Times called it a “mystery,” but the United States executed a covert sea operation that was kept secret—until now.’

A real coup

It’s not every day that the US commits an act of war — against two of the most powerful nations in the world. It’s not every day that the US attacks its own allies, either.

In this case, blowing up the Baltic pipeline was directed, not only against Russia, but against Germany too. Germany got its energy from Russia. It’s what fuelled the German economy. Germany is also a US ally…and a member of NATO.

The report from Seymour Hersh, a renowned investigative reporter, came out early last week. Hersh is no stranger to controversy. He won a Pulitzer Prize for blowing the whistle on the Mai Lai massacre. He also reported the torture of prisoners at Abu Ghraib. In both cases, the feds denied it.  

Later, Hersh was proven correct. Where this story will go — revealing an illegal, unconstitutional act of war by a sitting US president, clearly cause for impeachment — we don’t know. Probably nowhere. By Friday, there was still no mention of it from the mainstream press, neither The New York Times, The Washington Post, nor The Wall Street Journal.

But what a bold move! What audacity! How proud of themselves the elite foreign policy ‘experts’ must have been. Victoria Nuland, Anthony Blinken, Jake Sullivan, and the ‘Big Man,’ Joe Biden; pulled off a real coup, so to speak. With one swing of the sabre, they cut Germany off from Russia…making it dependent on US sources of fuel, and they cut Russia off from its export revenue, effectively hobbling and humiliating them both.

Lest we forget

It must have been like the rush of pride felt when George W Bush invaded Iraq. Jack Wheeler called Bush a ‘geo-political genius’ because he had planted a US-style democracy right in the heart of the Muslim world. Jack must have imagined that the grimy coffee shops of Baghdad would all become Starbucks, with budding entrepreneurs working on their laptop computers…and housewives (wearing shorts and t-shirts) taking money out of ATMs and going to malls to have their nails done.

The thought of it made all the think-tank war fighters giddy with joy.

Pity the way it turned out.  

And then, there were the ‘experts’ on the Wehrmacht staff. By invading Russia, they said, Hitler could seize much-needed resources for Germany…and deny them to its Bolshevik rival in the East.

Shame how that worked out too.

And don’t forget Napoleon’s Egyptian Campaign. He thought he could capture the key supply line from the Mediterranean to the Red Sea and thus be able to menace Britain’s possessions in India. What a stroke of genius that was too...until Horatio Nelson’s fleet intervened, cutting the French off from their own supplies…and their line of retreat.  

Napoleon was famous for his audacity…and for losing armies. He misplaced them…putting them in harm’s way while attempting a bold move. Spain, Egypt, Russia…he lost them all. Finally, he lost France.

Here, we’re only interested in politics and foreign policy as a source of entertainment…or insofar as it affects the economy. Watching Congress in action is a little like going to an insane asylum and gawking at the half-wits and nutjobs. It may be amusing; but it is a sick pleasure. They are, for the most part, morons; but it’s not their fault.     

Necessary but not sufficient

Sadly, stupidity isn’t enough to make a good member of Congress. It also requires a preternatural ability to lie…and it helps to be blind.

As a member of the elite, there are two things you’re never supposed to see…or discuss. Those are the things that are likely to do the most damage — war and inflation.

The US Constitution clearly gives the people’s representatives the exclusive authority in both matters. Congress is supposed to control the money. Yet, the Fed brought about the worst inflation in 40 years — with nary a word about it in Congress. As for blowing up the Nord Stream Pipeline, a clear act of war, the peoples’ elected representatives, such as they are, were never consulted, never debated it, knew nothing about it…and don’t want to know anything about it.

So the bold move was undertaken by the White House on its own say-so alone...  

The great English writer, GK Chesterton, once wrote up a clever report on ‘Twenty Ways of Killing a Wife’. One was hung. Another decapitated. And so forth. It was no doubt great fun for him…a real triumph of the imagination. But God forbid he actually put it into practice. By treating it as an intellectual exercise, rather than a business plan, he was able to enjoy the challenge, while still retaining the affections and services of his good wife, Frances. Had he tried to carry out the plans, on the other hand, he would have had the trouble of disposing of 20 corpses…and almost certainly ended his days in prison.

Alas, our ‘foreign policy’ jefes put into practice…in real life…something that should have remained a James Bond fantasy. They blew up the pipeline. And now the US will have to answer, in one way or another, sooner or later, for a remarkably obtuse act of aggression against two nations that had done it no harm.

And what would we say if our internet connections mysteriously failed? Suppose an ‘accident’ suddenly crippled the power grid? Imagine the banking system…and all the nation’s ATMs…going dark?

Is all the world’s infrastructure now at risk?

Regards,

Bill Bonner,
For The Daily Reckoning Australia