Friday, 28 January 2022 — Melbourne, Australia

By Brian Chu Editor, The Daily Reckoning Australia

[6 min read]

• Why is this happening?
• Monetary policy bungle, markets misread the Fed’s stance
• Australian markets brace for impact
• Return of capital a prudent strategy leading up to the federal election

Dear Reader,

The Australian markets had a rough and tumble day on Tuesday off the back of inflation levels exceeding expectations.

The annual inflation rate up to the December 2021 quarter was 3.5%, and quarterly inflation was 1.3%. Households are no doubt feeling the bite.

This figure is an official number.

You should know it’s likely understating the actual prices an average household is paying on a day-to-day basis. It’s true for me!

Markets sold down heavily on Tuesday. The ASX All Ordinaries fell almost 200 points or 2.8%.

Strangely, gold stocks tumbled even harder, with the ASX Gold Index falling 5.6%.

You would think this is counterintuitive, as gold is meant to act as an inflation hedge.

That said, mining companies are facing rising costs from labour shortages and rising oil prices. The price of crude oil is now more than US$85 a barrel or 60% higher than the price at the start of 2021.

There was no relief yesterday either. The All Ords tumbled another 1.8%. A steep sell-off during mid-day trading brought it down by as much as 3.2%.

Why is this happening?

The Federal Reserve came out with a hawkish statement. It recognised that inflation was well above their mandated target of 2%. It also referred to the jobs market as strong, signalling that it would continue to tighten its policy going forward.

The talk of a strong jobs market seemed very much out of place. The news keeps reporting about how the government is pressuring employers to terminate workers who refuse to take their vaccinations.

Then there are all those people who are unable to work because of arbitrary lockdowns in Democrat-controlled states keeping businesses closed.

Many households are on the brink of bankruptcy as they struggle to make ends meet on rising inflation and uncertain job prospects.

The Federal Reserve is very much in a world of its own.

What is clear is the Federal Reserve is rushing to try and bring the markets to their definition of ‘normal’, whatever that means.

Monetary policy bungle, markets misread the Fed’s stance

Everything rallied strongly in the hours prior to the 2:00pm press release.

It seemed like the market was hoping for a softer stance from the Federal Reserve given the sharp market decline since the start of the year.

Nice try, but no cigar.

The markets responded with a ‘what the hell’ reversal on their initial positions.

As above, gold did not escape the sell-down. It took a US$30 hit to trade back at around US$1,820 an ounce or AU$2,550 an ounce. And it seems to be heading back to US$1,800 an ounce once more.

Australian markets brace for impact

I don’t think gold will stay down for long. The broader markets, not so sure.

I know that many market commentators are saying that the bounce is overdue and the correction is over.

The Federal Reserve announcement and the market reaction following it appear to suggest this could be a little wishful.

There could be more rough and tumble ahead for the markets. After all, the real economy is in an anaemic position.

The eastern seaboard is currently under pressure from record daily cases of the Wuhan virus and its variants.

The general public has resumed their hesitation about returning to normal life in the midst of this. It may dissipate as many get infected and recover, realising that this is more like a deferred flu season. However, it will take time for people to condition to this.

The media narrative of fear and the draconian government restrictions have reduced a significant proportion of the public to cooping up at home. It will take a while to convince them to rejoin the community and work to revive the economy.

Return of capital a prudent strategy leading up to the federal election

The federal election is coming up.

Watch the federal government battle it out with state premiers to try and drag the economy up to rally their voter base. The premiers from the Australian Labor Party may be keen to keep things closed up even if it means to spite the Coalition Party.

A nation divided against itself cannot stand. The economy is now a political plaything.

It pays to be cautious than greedy in the backdrop of a more hawkish Fed and political shenanigans at home.

Take stock of your big winners from last year and consider whether you want to take a safer route in the upcoming turmoil. This year could be about return OF capital, rather than return ON capital.

Could this year finally work in gold’s favour? It could well be. I suggest you look to accumulate these stocks on weakness.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

‘Take away profits; all you have left is cool.’

A perceptive dear reader

‘Tax us…please!’

So sayeth a group of 100-plus rich people…including Disney heiress Abigail Disney and venture capitalist Nick Hanauer. Huh? Asking to pay more taxes; that’s pretty cool, isn’t it?

But why not simply let Mr Market correct them, by taking away their phony, ill-gotten gains?  

Bloomberg: ‘Market sell-off is ultimate test of what it real and what is not’.

The Washington Post: ‘Crypto collapse erases more than $1 trillion in wealth’.

In the modest decline so far, the world’s stock owners are down about US$9 trillion. All they need is another US$40 trillion in losses and the correction will be complete.

Today, in addition to mocking the cool, earnest rich, we explore the whole scammy plot. The financial system has become corrupt…here’s how well-meaning do-gooders make it worse.   

We left you yesterday contemplating ‘cool’. We noted that when you have a lot of money, an additional dollar has little value. ‘Declining marginal utility’, it is called. One piece of apple pie for dessert is a delight. By the third piece, the pie loses much of its appeal.  

Today, we take the contemplation a little further, by looking at those who say they feel a little sick.    

Front-running of the bulls

Profits are the only measurable way of knowing that you are making the world a richer place. You take resources and labour…you work them up into finished products and services…and then sell them for more than you invested to make them. You make a profit. And your customers get something they want. Is there any other reliable gauge of ‘doing good?’.

Of course, there are exceptions. There are phony, contrived, and connived profits as well as honest ones. You can make a lot of money, for example, by selling drugs to people who don’t need them…especially if the feds are picking up the tab. 

You can make money by front-running the stock market, as Fed Governor Richard Clarida did…putting in his buy orders just before the Fed made a major announcement. 

And, today, we lay the whip — again — on a very dead horse. Yes, as Richard Clarida…Nancy Pelosi…and Larry Fink all illustrate, you can make a lot of stock market gains when the Fed is rigging the market…and you are in on it.

In the last 12 months almost no infirmity — neither financial, moral, or intellectual — prevented a person from getting rich. Speculators sold NFT squiggles for millions. They sold joke cryptos for millions. They sold money-losing, zombie companies for millions. Surely it was the late stage of a very empty-headed market, when the dumber and less experienced you were, the more money you made!

But cometh now rich people, like Larry Fink and Abigail Disney, whose excess dollars turn their stomachs. They would gladly exchange them for a little street cred. And a little cool. Commondreams.org with the headline, ‘100+ Ultra-Rich People Warn Fellow Elites: “It’s Taxes or Pitchforks”’:

‘A group of more than 100 millionaires and billionaires on Wednesday presented fellow members of the global economic elite with a stark choice: “It’s taxes or pitchforks.”

‘“For all our well-being—rich and poor alike—it’s time to confront inequality and choose to tax the rich,” the letter reads. “Show the people of the world that you deserve their trust.”’

What the queasy millionaires seem most concerned about is holding onto their cool rich status…and protecting the elite’s authority:

‘“How do we work together and restore trust?” the letter reads. 

‘Gemma McGough, a British entrepreneur and a founding member of Patriotic Millionaires U.K., reiterated that case in a statement Wednesday.

‘“It’s time we right the wrongs of an unequal world,” McGough added. “It’s time we tax the rich.”’

Fairness, say the millionaires, is what it’s all about. But fairness, like coolness, is a matter of opinion. Is it fair for one group to pay a higher rate than another? It is fair to transfer trillions of dollars to the richest Americans…and then let them impose their agenda on the rest of us?

And what’s fair about printing up trillions of dollars and passing it to them in the first place? Neither Ms Disney, nor Ms McGough, nor Mr Fink mention it.

Gorging on FedFare

In the course of this century, the Fed has created…and spent…approximately US$8 trillion. Its artificially low interest rates spun off trillions more. And the federal government has added US$23 trillion to the ‘national’ debt. What happened to all that money? Did it buy bread from the bakers? Old jalopies from the used car lots? Did it raise the wages of the labouring classes?

No, it did none of those things. Instead, almost the entire wad was funnelled to Wall Street where it increased the prices of stocks and bonds. In the stock market alone, that represented a gain of US$24 trillion. Who owns stocks and bonds? Abigail Disney. Nick Hanauer. And Larry Fink.  

Over the course of a whole generation — 40 years — the elite have added about US$1 million in stock market wealth for every man, woman, and child in the top 10%. Since 1978, executive salaries have increased 1,000% — 100 times faster than employee pay. During that same period, in real, inflation-adjusted terms, the typical working stiff has gained just 32 cents per hour.

Is that fair?

And now approaches the grand rip-off finale. The feds ran up US$30 trillion of debt — much of which went, directly or indirectly, to the richest people in the country. Who will pay that debt? How?

Regards,

Bill Bonner,
For The Daily Reckoning Australia