Economic Predictions Archive
BlackRock’s Jean Boivin just said there are not apparent signs of stagnation — just inflation. What Bovine foolishness:
Prices have climbed around the world, with commodities prices surging and U.S. inflation hitting a 13-year high. It’s the first time since the 1970s that a supply shock is the main culprit. This is where the comparison ends. There’s no risk of 1970s-style stagflation, in our view. Economic activity is increasing briskly and has room to run.BlackRock Weekly Commentary
How dense do you have to be as an economist to see so much of the following so well and, yet, not see at all what it is you’re looking at:
We have long held that inflation was one of the market’s most underappreciated risks. Now it’s here. This year’s surge is primarily driven by a major supply shock: the vaccine-driven restart of economic activity from the pandemic’s shutdowns. Producers have struggled to meet resurgent demand, clogged ports have increased shipping costs, and surging commodities have added to price pressures. These dynamics mark a sea change from the environment many of today’s investors know best: decades of low inflation on the back of deepening globalization and technological advances.
This reminds me of how only a tiny handful of economists could see the Great Recession coming when it was already here. Most economists could not see the recession when they were already standing in the middle of it. What abject failures at their own profession they were. So, let me point out the obvious, just as I had to do back then.
First, let me note that BlackRock even manages to see the most obvious correlation with the stagflation of the seventies (a condition that isn’t even necessary but that has suddenly risen all around the world to be as strong now as it was back in the seventies):
The last time a major supply shock drove up inflation was in the 1970s, when an oil embargo by producers triggered a spike in oil prices. Today’s oil price surge naturally raises the question of whether the economy is headed for 1970s-style stagflation, a period of high inflation coupled with weak growth.
The oil/energy crisis is already massive and global: (Just because it has not fully hit the US yet, does not mean it is not very bit as huge as what was seen in the seventies … or even worse.)
Power shortages are turning out streetlights and shutting down factories in China. The poor in Brazil are choosing between paying for food or electricity. German corn and wheat farmers can’t find fertilizer, made using natural gas. And fears are rising that Europe will have to ration electricity if it’s a cold winter.
The world is gripped by an energy crunch — a fierce squeeze on some of the key markets for natural gas, oil and other fuels that keep the global economy running and the lights and heat on in homes. Heading into winter, that has meant higher utility bills, more expensive products and growing concern….
It’s hitting the Italian food chain hard, with methane prices expected to increase sixfold and push up the cost of drying grains. That could eventually raise the price of bread and pasta at supermarkets, but meat and dairy aisles are more vulnerable as beef and dairy farmers are forced to pay more for grain to feed their animals and pass the cost along to customers.
“From October we are starting to suffer a lot….”AP
The article above goes on to lay out manifold problems throughout the world in supply chains that will result in diminished food and supplies of all kinds already certain for months to come. While some dimwits claim the problem is purely due to high demand (to put a grand spin on it), other writers are smart enough and honest enough to state most of the problem comes from people being unwilling to return to work at ports and in transportation even after extended and enhanced unemployment benefits ended, and due to foreign ports being closed down, and especially due to a longtime and growing shortage of truck drivers.
With energy now in a global crisis, all the ingredients of the last stagflation are solidly in place, except for declining business in the US, according to BlackRock. However, hold on a minute! If you look at US GDP, as I did in my last article, you’ll see that even business is ALREADY rapidly plunging, too, leaving BlackRock’s statement that we don’t have stagflation because business is booming a projection without the support of a trend:
As a reminder, here is what I wrote about the actual trend last week,
To see proof that we are entering the stagflation I said this would turn into, let’s look at how Goldman Sachs has also revised its predictions for economic growth (annualized as what it would be if it held at that quarterly rate for a year):“This is Stagflation, and Here is an Easy, Practical Idea to Prep for it“
- Prior to July, GS’s forecast for the second half of 2021 was +9.5% for Q3 and +6.0% for Q4.
- In late July, GS revised its forecast down to +8.5% for Q3 and +5.0% for Q4.
- On August 18, GS revised its forecast down to +5.5% for Q3 but raised its Q4 prediction to +6.5%.
- Last weekend, they revised Q3 down again to +4.5%, and decided their previous upward revision for Q4 was bassackwards and dropped Q4 to +5.0%.
- Finally, this weekend GS cut its GDP growth forecast to +3.25% Q3 and +4.5% Q4.
Plunging week to week by that much, it seems Goldman’s number runners just can’t keep up with the nation’s speedy decline. The Atlanta Fed predicts much worse. Now at a pre-recessionary 1.3%, the Fed’s predictions have plummeted continually as you can see:
Merely a nip above recession.
With so much evidence that GDP is declining faster than one can keep up with the fall, BlackRock is without excuse for failing to see the decline. In fact, a much broader array of bad conditions is in place than existed in the seventies. Yet, BlackRock predicts central banks will (and should) help save the day, even as they admit there really isn’t anything central banks can do about all of this:
We believe central banks with credible inflation frameworks will largely look through the restart price pressures – and avoid a premature tightening that hurts growth but does nothing to address the bottlenecks.
The fact is, nothing central banks do can address the bottlenecks, and the fact is, as I also pointed out in that last article, the Bank of England and European Central Bank have already started tightening, and the Fed has already indicated it will start to reduce the amount of slack it is creating in the system in November or December.
BlackRock’s ability to see everything around them but completely inability to understand what it all clearly means almost implies something darker than mere opacity of thought. Do they have a book of goods they need to offload to retail investors whom they need to energize in order to have a ready market to sell into? I don’t know, but I cannot explain, otherwise, how their economists can fail to see rapidly sliding GDP projections that others in their profession are reporting. Even if you grant them excuse for that particular blindspot, they cannot be excused for believing business will continue to boom just because demand is remaining solid! Continuing solid demand in the face of failed delivery of goods and services only assures that inflation will continue to boom, not GDP and not business. You cannot sell what you don’t have! You cannot sell what you cannot transport to market either.
On the basis of this obvious and rapid deterioration in GDP due to globally gargantuan supply-chain troubles and clear evidence that there is little to no hope of that reversing for months to come (for the reasons I and the videos below are about to remind people of), I predicted “What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.“
The winter of our discontent is already forming
Winter’s business chill is already here and is being reported everywhere. There is no excuse for being oblivious to something so obvious.
We all know at this point that supply-chain problems are increasing, not shrinking. That is what I claimed without hesitation over a year ago we would most certainly see. We also KNOW central banks can do NOTHING about that. Creating money won’t solve the supply-chain issues, it will only increase the prices for scarce goods. One of the big broken links in the chain is enough truckers, but President Biden already made absolutely certain that thousands of truck drivers will be fired in December for their refusal to get vaccinated, and truckers overall are not likely to be strong-armed by liberal presidents.
BlackRock notes the problem but denies its significance:
Supply capacity has been slow to come back online, resulting in bottlenecks and price pressures. Second, growth has room to run, we believe, with global activity well below its long-run potential. Supply will eventually rise to meet demand, instead of the 1970s experience of demand going down to meet supply.
Sure, supply will eventually come back online to meet demand, but when? As the last video above notes, if everyone does their best in a perfect world, the problem will not be resolved until the second quarter of next year! That is in an ideal world, best-case scenario. What likelihood of that is there in this new COVID world a a plague of surprises every quarter and in which politicians are deliberately adding to the wreckage with new vaccine mandates that will shut down hundreds of thousands of individual workers?
Even if those mandates do not make the problem worse (extremely unlikely), you’re going to see more empty shelves, more restaurants that cannot cook meals for lack of a few key ingredients; and the problem will not resolve until the second quarter of next year, at earliest, leaving businesses in the red well beyond “black Friday” if they cannot deliver the goods. Demand remaining strong will not solve the problem of more businesses failing because they don’t have enough products on their shelves or enough key ingredients for dinners to put on their tables. It will exacerbate it. It will make those things that are available cost a lot more, but it won’t do a darn thing to get more truckers vaccinated and on the road or more trucks built for them to drive, and more containers unloaded from ships at the docks and more ships moving away from ports.
In fact, when the president and the Port of Los Angeles announced a deal to start running the port around the clock, I could only say, “Well, that sounds nice, but where are you going to get all the extra workers needed to fill those extra shifts when you cannot fill the shift you already have, and where are you going to get all the extra truckers to haul those extra loads that are processed if you do miraculously fill entire extra shifts, and HOW MUCH extra are you going to have to pay in order to entice so many people into those newly created positions, amplifying the cost of goods sold? Especially when you are about to vaccination vacate nearly 10% of the workers you already have???
Is there no sense left in this world at all?
These vain promises are just like our pledge in the US to change to all electric cars by 2025. Where is the all-electric electricity going to come from with California going into brownouts already due to wildfires, hydro reservoirs running critically low already in the West due to drought, and Texas going into brownouts due to a single pipeline shutting down in a cold winter. Add to that the energy crisis building all around the world already, and how are you going to power those cars? Much electricity still takes oil. It sounds to me like our central planning means we are going to have a lot of cars that cannot move off the car lots due to electrical brownouts becoming blackouts once those cars start hitting the roads in greater numbers.
So, you have to think brighter than the low-wattage bulbs that put the “black” in BlackRock. The supply-chain breakdown all over the world not only raises prices due to shortages, it also assures that “booming business” will rapidly implode, not due to lack of demand, but due to inability to get things produced and inability to get the things that are produced to market. It doesn’t make any difference how strong demand remains if you cannot produce to fill that demand or cannot ship what you do produce to customers in order to make money off that production.
All you have, in that case, is costs and backups, so production will quickly be turned back down because product cannot be moved out of factories, nor resources moved in to make products. Sales will decline rapidly for lack of supply, which is already so apparent on shelves in numerous stores that it is stunning that someone at BlackRock cannot see it coming when it is ALREADY HERE! I suppose that is because they have people who do the shopping for them. Obviously, their name speaks to their opaque nature.
The result is clearly that the economy stalls because things are not MOVING. And “not moving” is the very definition of “stagnant” — “having no current or flow.” When blockages to flow all happen on the supply side, as is now already the case, that is also the very formula for high inflation, especially if central banks do as BlackRock says would be wise to do, which is to keep up their financial largesse! Too much money chasing too few goods! Great! Let’s print even more of it, knowing full well it cannot solve the core problems. What it really all adds up to is a GUARANTEE OF stagnation because nothing is moving, so nothing can be sold. And you have guaranteed inflation. That’s STAGflation by definition.
If you think it isn’t already building all around you in ways that far exceed the seventies, you need to get out more often or look beyond your narrow enclave because some shelves are already going bare in stores everywhere, and the holidays haven’t even begun. How many businesses will rapidly close down if they cannot get the goods to sell? How many producers will cut back production within a quarter if their production from this quarter doesn’t MOVE?
How can the people of a major investment company miss the writing on the wall when it is writ so large? It has to be denial, at best, or outright deception at worst. I’ll let you decide what BrainRot’s excuse is. I claim no knowledge of that; I only point out that it looks terrible on their part either way.
To the extent that you don’t see inflation information in the bond market, ignore the bloody bond market!
The bond market knows nothing right now. It has been rendered brain dead by central-bank lobotomy even though people in the market know exactly what to expect with inflation. That is because the Fed’s interference has chopped the bond market’s head off. So, the thinking part in the market gives no direction to what the flailing body does. Here its how that works and reason to believe a lot of horror will strike sometime after Halloween, especially as we observe with BlackRock how the big boys don’t have a clue about the obvious:
The Fed wholly owns the treasury bond market. Period. It currently buys up more than half of all US bond issuances, and it has been doing that for a year-and-a-half across the full maturity spectrum. As I have pointed out repeatedly, that makes the Fed THE price-setter of the bond marketplace. It means treasuries have NO ABILITY to convey accurate inflation pricing information because they sell at the yield the Fed determines for each maturity level by soaking up whatever it takes from each maturity level to maintain the yield curve within a range the Fed wants to allow.
That’s called “yield-curve control,” and it’s something I warned my patrons we’d see coming from the Fed many, many months ago. The Fed began, not long after that warning to engaged in yield-curve control without any overt word about it, which it has done for well over a year. If the Fed doesn’t like the yield on bonds at one point on the maturity curve, it will buy more bonds at that point and less at others. Simple. It doesn’t have to announce it is controlling the yield curve in order to do it.
WHEN THE FED TAPERS ITS US TREASURY PURCHASES, it will also be tapering its control over treasury pricing. Treasury pricing has a strong impact on all bond pricing. So, as the Fed relinquishes its control over US treasury pricing by backing out of that market, ALL bonds will start to more accurately price in inflation. For now, the Fed is holding back the tide, and it is big enough to do that; so, there is no true price discovery in the bond market. However, real inflation, regardless of what bond yields/prices say, is forcing the Fed to pull away. As it does so, the game is going to get real again over the next half year, and that is going to be UGLY!
Prediction: To the extent the Fed actually follows through with pulling out of the treasury bond market, the whole bond market is going to get ugly. However, to whatever extent the Fed chickens out because of how ugly things are getting, it assures inflation will keep getting worse. We’ll likely start to see that struggle by the end of this year and certainly by the first quarter of 2022, BlackWatt’s dimwits not withstanding.
While some of those in deep denial of reality said last spring that inflation could not possibly be happening in any significant way because bond prices were not falling (yields rising), those same restricted thinkers said last spring that inflation couldn’t possibly be happening for another reason, too, much less run hot, because copper prices stopped rising in the late spring and started to fall (put in a top).
I responded at the time that there is no straight line to anything in either economics or markets, and copper was merely taking a rest after a dizzying climb. Nearly all commodities, copper included, have been on a tear ever since. Once the Fed stops controlling bond prices, they will plummet as yields rise to reflect the inflation that is really happening in commodities, which go into everything, affecting consumer prices down the road. For now, bonds are in bondage, held there by the Fed.
My next patron post will go into greater detail on the specific shortages that are already developing and what to look out for.
The economic gurus and magic-chart advisors who told you inflation was going to be transitory or that it wouldn’t amount to much or even the dimmest of all who proclaimed it wasn’t happening at all could not have been proven more foolish and blind to the obvious all around them. Now they are revising themselves faster than I can write about it.
Before talking about what you can do the easy way to protect yourself a little, let’s review the track-record of some of the so-called experts who couldn’t see what they don’t want to see by looking at just one major bank’s predictions for inflation this year and how they have had to revise their prediction skyward month after month.
The great and squidly Goldman Sachs has struggled all year to catch up to where I have been saying for the past year inflation was clearly headed this year, and its latest forecast is still lower than where I believe inflation is headed, but the experts at GS will get there as their trail of errors demonstrates. Just look at how they have revised their forecasts for 2021 from month to month as inflation has become more clearly NOT transitory and more clearly NOT a mere “symmetrical” move above the Fed’s target of 2%: (In fact, GS’s starting position early last spring was well above the Fed’s target.)
Actual inflation ran ahead of their forecasts about as quickly as they could revise them, and it will do so again. To see proof that we are entering the stagflation I said this would turn into, let’s look at how Goldman Sachs has also revised its predictions for economic growth (annualized as what it would be if it held at that quarterly rate for a year):
- Prior to July, GS’s forecast for the second half of 2021 was +9.5% for Q3 and +6.0% for Q4.
- In late July, GS revised its forecast down to +8.5% for Q3 and +5.0% for Q4.
- On August 18, GS revised its forecast down to +5.5% for Q3 but raised its Q4 prediction to +6.5%.
- Last weekend, they revised Q3 down again to +4.5%, and decided their previous upward revision for Q4 was bassackwards and dropped Q4 to +5.0%.
- Finally, this weekend GS cut its GDP growth forecast to +3.25% Q3 and +4.5% Q4.
Plunging week to week by that much, it seems Goldman’s number runners just can’t keep up with the nation’s speedy decline. The Atlanta Fed predicts much worse. Now at a pre-recessionary 1.3%, the Fed’s predictions have plummeted continually as you can see:
Put all of those rapidly deteriorating predictions together (inflation and GDP), and you have stagflation — rising or high inflation in a decelerating economy. In fact, you have rapidly rising inflation in a rapidly decelerating economy. It is, of course, when you get into an actual recession (negative GDP “growth”) that you have true stagflation.
Prediction: What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.
In fact, I think Q4 growth will prove to have been negative when we see the numbers in print next year. If not, then very close.
The descent in GDP toward actual recession is happening quickly. The shortages talked about in my recent posts are spreading like a flood tide across a wide, shallow beach. People are not returning back to work in near the numbers some predicted they would (not I) when enhanced unemployment ended for the reasons I laid out months ago. Soaring inflation will now curtail spending and result in more businesses closing and rising unemployment.
This is stagflation — going down the drain hole where you have that dichotomy wherein prices rise even though people buy less (demand is falling) because they cannot afford as much. Prices rise because supply is already falling faster than demand. (Remember the formula for price inflation is too much money chasing too few goods.) What happens in such dire return to rising unemployment during high inflation is often the opposite of what helps. Government leaps in with rescue money so the unemployed can keep buying, in spite of the high prices, which results in everyone bidding up the prices of scarce goods even further. It rapidly becomes a vicious vortex if you try to solve shortage-induced inflation with more money because that doesn’t get to the heart of the problem and create more goods.
The scariest thing this Halloween
As hard as higher prices will make things, the real scare this fall and winter will be the shortages that push prices upward. You can make moves to save money and can prioritize your spending to create room for the expensive essentials, but what if you can’t even get the essentials?
I foresee a winter at some times and places where you’ll feel for the first time in American life like you have slid down the rabbit hole and ended in a version of the USA that looks and feels more upside-down than the old USSR where stores have a lot of empty shelves, and complaining can do nothing to fill them.
I think we can all share some of the foreshadowing that we’ve already seen in our own locales (and it might be interesting if you do in the comments). My latest experience was to walk into a Rite-Aid drugstore to look for some Halloween decorations for the school kids and find the selection unusually thin because the store is having a hard time getting seasonal items shipped to it in time.
But it wasn’t just the seasonal stuff. I also wanted a basic computer cable, and found Rite-Aid’s computer supply section had half an aisle with the shelves removed from their supports and posters all along the support saying the space was empty due to the chain making stock adjustments to serve you better in the future. In other words, stock was out for the present, and they’d try to find some way in the future to secure similar supplies from other sources.
I expect Christmas decorating supplies will be equally lacking this year, as well as availability of gifts. So, shop now for Christmas gifts and consider buying your frozen turkey for Thanksgiving now. There might be enough turkeys, especially at Goldman Sachs, but not enough rides to get them to market so we can eat them.
We can all handle a lack of large seasonal stock. In fact, we can pretty easily handle no decorating supplies at all; but do you really think it is going turn out any different for food and fuel and other essentials?
Easy evasive moves that might afford some protection
You cannot prepare for it all to make yourself bulletproof to stagflation. If fuel runs low, for example, having an extra barrel of gasoline laid away in your garage is risky and won’t get you very far down the road for long anyway, and gasoline doesn’t store well through the winter because it deteriorates. So, you can’t easily prepare for everything, but I’m going to lay out a really simple plan that will help with exactly what you really need and will use that costs you nothing extra over the course of the winter.
Since you cannot do much about the energy shortage, other than make sure to lay away plenty of firewood if you have a wood-burning option, food is your biggest concern. Everyone has heard the preppers’ advice to “store lots of canned and dehydrated goods” that you never really want to eat that will stay good for a decade or longer, but I’m talking about something more practical and with no net cost as a form of insurance.
When you are encouraged to store all kinds of emergency-shelter goods that you can dine on for the next ten years because they last almost forever, you may be like me and think, “What if the shortages don’t materialize, and then I have to eat all this dehydrated crap?” There is a better way that provides a buffer, and here it is:
Each time you go to the store in the weeks ahead, buy 2-4 times more of the things that are on your normal grocery and household-supply list than you need to restock the kitchen and other parts of the house. However, buy extras only of those things that will last through the spring. Put the normal amount of restocked items in your kitchen, bathrooms, etc. as you normally would, and then store the rest away in your garage, basement, or whatever works for you, and leave it alone.
When you run low again in the next week or two and would normally go shopping, don’t go to the basement and use your stash, make another grocery run like you did when you didn’t have the oversupply. Treat the extra supply like a rainy-day fund in the bank that you don’t touch until you actually find that the things you need or want are not available. Each time you restock rooms in your home this fall, buy 2-4 times more than of those things that will preserve through the winter (depending on what your cash flow can manage) so long as they have shelf lives that will take them through the spring.
You’re not planning for the apocalypse or a take-over of the USA by the Chinese. Thinking that catastrophically defeats many people from preparing at all. You’re planning for a hard winter that may likely have shortages, and you simply don’t know what items will run short in the nation. So, you stock up on all of them that will keep Here is the beauty of this simple plan. You are buying only the things you like and that you will be using and normally purchasing anyway. So, if I’m wrong, and there are no shortages at all, you can stop shopping for a couple of months in the spring and slowly use up the stock of items you squirreled away in the fall. No harm done.
You don’t wind up doing any extra work or spending any extra money, and all you have stored away is the things you like and eat or use regularly. In fact, because inflation is a certainty, you will have saved yourself money by purchasing items now. You do it a little at a time so it’s not some huge effort or cash-flow burden and doesn’t strip the shelves bare for others. It’s just a little extra effort each time you go to the store while supplies last. Never dig into your cache, even when prices rise to horrible levels, until you can see the problem with shortages is fading in the rear view mirror or until things are getting a little too close to their shelf life.
It’s a buffer, not a Mad-Max end-of-the-world-living-in-a-bomb-shelter plan.
To prepare financially, I’m avoiding stocks and bonds and moving out of cash somewhat and into commodities and real-estate-investment trusts that are not too heavily into commercial real estate (and I’m going light on the real-estate trusts because the whole real-estate market could tip sideways when all the forbearance programs are finally ended; but for now prices are still rising). I would consider investing our 401Ks in energy and mining stocks, but ours don’t have options that are tilted heavily toward those sectors.
I’m not a financial advisor, and I don’t write an investment blog. This is an economics blog. I can tell you what I’ve done, but those are just ideas for you to weigh on your own. I believe most stocks and bonds are ultra-high-risk right now, and even cash is nothing but a planned loss due to inflation. Bond funds that invest in inflation-protected bonds may provide a safe parking lot, but that is all. Cryptocurrencies could rise by more than enough to help you through this winter, but they can (and often have) just as easily crashed by 50% like the stock market, so don’t use crypto as the resource you can depend on for the winter. It may rise after it crashes, but that won’t help you if supplies are short when crypto comes up short, too. From a retirement standpoint, the crypto currency you’ve invested in may not even exist when you’re ready to retire — so I’d keep crypto a side bet.
There are lots of stocks you might individually pick if you have that acumen, but I am speaking mostly to those who have 401Ks they seek to protect and who have limited options in those plans that only allow them to choose between major types of funds because that is the only plan their employer provides.
This is all for you to weigh, but those are moves I’ve made in our 401Ks where options are limited. (Of course a service like Perpetual Assets, which advertises in my sidebar, can help you convert everything to a self-managed IRA where you have a huge range of options, but I am neither recommending them with this article nor not recommending them, as I have no personal experience with their service. I am just saying there is a path there that one can work out on his or her own or get some help with setting it up right legally to keep the tax man quiet.)
Outside of 401Ks, I’m not someone who invests in stocks at all. Our investment, other than retirement funds, has been real estate. For example, investing in the home you’re going to live in for years by owning it as close to free-and-clear as you can is a good safe-haven investment because it is something you will always need and have to pay for anyway. Though rents could drop in bad times, saving you money, while a payment on a home your buying remains the same, rents have usually been a drain hole and have usually risen, making them generally the riskiest option in the shortterm and always the worst over the longterm. Usually rents rise and mortgage payments, at least, remain stable for decades to come. Secure the home front.
Those are simple low-risk, low-energy things you can do to help yourself weather through this long, cold, energy-short, possibly food-starved (for some) winter that cost you nothing over a period of months but can save you money and hardship.
Storm clouds blanket the entire global economy right now. In the articles I’ve written over the last ten days, I reported extensively on the following prevailing winds that are assailing all economies, and in this article and the next, I’ll reveal how our governments are actively making them much worse:Read the remainder of this entry »
I’ve said inflation will rise much higher than the Fed believes and will persist much longer and that it will eventually kill the latest stock market bull and the economy. If these inflation predictions prove wrong, I’ll stop writing my blog. Simple as that. That is how firmly I believe what I am saying and how much I’d rather be accurate than convey false information or bedevil people with failed predictions of doom, even though doom makes great clickbait. I won’t continue writing economic doom if I am wrong.
The last and only time I made such a bet was in 2017 when I bet the stock market would plunge in January of 2018, then hit worse troubles in the summer, then crash much worse in the fall. It did all of that. The Dow experienced its worst January plunge in history (started in January, 2018, and continued through February). Then the long-leading FAANG stocks got their teeth busted off in the summer, falling as much as 40%! And, finally, the worst part of the crash happened in the final quarter of 2018 when the market fell so severely and relentlessly through the fall that it broke several daily records. It even forced the Fed to lose face in order to arrest the fall by reversing itself entirely on its promise that tightening would continue for a couple more years and would be as boring as watching paint dry. (And, of course, the Fed’s tightening schedule was exactly what I based all of my 2018 predictions on.)
Having brushed off hyper-inflation rants in prior years, I started giving inflation a lot of coverage in the last year because I believed inflation was likely to become the driver in our economic malaise in the months ahead. High inflation is a task master that will not be ignored, not even by the Fed, which tried ignoring inflation in the sixties and seventies to the great detriment of all.
As testimonial evidence that inflation is going exactly as badly as I said it would, numerous overly respected economists are finally catching up with me:
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.The Wall Street Journal
Economists are still lagging economic indicators, though, refusing to believe inflation will run as hot as I’ve been saying for the past year. So, I also predict they will be catching up with more in the months ahead as they slowly raise their tepid predictions to where mine said a year ago we’d be heading. Just you wait and see. The only reason they are now adjusting their predictions upward from where they were is to catch up with reality, which has passed them by. Revision has been thrust upon them. They are predicting nothing. They are merely telling us what is already obvious.
We cannot expect economists to see what is coming further down the road with any clarity because, you have to remember, many of these same experts are the blind leaders in global economic thought who never saw the Great Recession coming, obvious as it was to some of us at the time. That was a major fail on the part of nearly all economists, which happened because their brains are fused with theories.
The Federal Reserve saw it least of all as Ben Burn-the-banky infamously said there was no recession anywhere in sight while standing knee deep in the middle of one. Yet, these are the blind leaders everyone turned to for answers after the Great Recession wiped us out, leaving the nation, as Speaker of the House John Boehner proclaimed, “broke.” After all, who better to tell us how to solve the catastrophe than those who foisted it upon us because they could not even see it when it was developing?
Yet, I also predict in the slightly more distant future, everyone will turn to them again. How dumb is that? (Why? Credentials over thinking. Always. People who cannot think for themselves or even recognize clear thinking when someone shares it with them rely on credentials, even when the highly credentialed people fail miserably at their primary task. As I’ve said before, we never learn. I keep writing hoping someday we will, but I think, at this point, it is an exercise in futility.)
You have to take a time machine to the seventies to find a time like the present
As an example of how flaccid the thinking among economic experts is, look at the graph and commentary near the start of the following video by the nation’s leading economic newspaper. It points out that inflation is not as high as it was in the seventies and says it will not get that high now. The brilliant economists in the video (and the commentator) entirely miss the fact that inflation already is that high because inflation in the seventies was measured much differently than it is now. We’ve already reached the double-digit inflation I predicted if inflation were measured honestly. (More on that after the video.)
The video is worthwhile, however, as a reminder (especially to any who were not alive in the seventies) of the degree to which inflation came to dominate political thinking and the public psyche for years. It shows how important inflation can become. It also shows you just how much inflation has already come to dominate this year’s news (as I have been saying it would):
As they were ridiculed for doing in the video, the Fed today is still saying, “Trust us, trust us. Inflation will not be that bad.” What I find striking in the video is how the stated causes of inflation back then are so similar to today, yet the economists in the video are still saying things won’t be as bad this time (even though they already are if measured the same way!). They argue that things are different now than during that time even though the video shows they are not different in the least! Here were the causes given in the video for what became known as The Great Inflation. See if they are different than today (other than being worse today):
- First, a rise in government spending under LBJ (which pales to utter insignificance when compared to the explosion in government spending in Trump’s final year and Biden’s first year).
- The government’s final move off the gold standard by President Richard M. Nixon. (Did we suddenly go back on the gold standard, and I missed it? And soon we’ll be going off Nixon’s paper standard and onto the digital standard, likely as our answer to economic collapse that is coming.)
- Pressure by the executive branch on the Fed to push more money into the economy and to keep interest rates low. (My gosh, those guys were pikers compared to today! Wow! Could we ever school those neophytes on how to print more money and keep interest rates low!)
- Strikes by workers for higher pay as a result of inflation, causing a vicious circle in unemployment that eventually reached 10%! (Are not 6,000,000 – 14,000,000 unemployed people today, depending on who you include, refusing to go back to available jobs unless they get much higher pay and other conditions they want? What difference does it make if the strikes are organized by unions or financed as a general strike by government provision under both Trump and Biden? Except that a general strike is bigger and worse, regardless of the cause.)
- As wages went up, companies started raising prices even more, creating “a game of leapfrog.” (Hello! Already in full swing!)
- The Fed being blind to the inflation that was happening and not willing to commit to price stability, allowed it to get even worse. (Ahem! This is different today only in that blindness doesn’t get to be recognized by nearly everyone until well after the fact when everyone finally wonders how the fools could have been so blind, as economists argue to save face, “No one could have seen this coming.” Yeah right! I am here to say you can see this coming and COULD see it coming all of last year!)
That looks as close to an exact repeat as you can get between two different time periods. Only, this one is firing up faster. The video even notes that consumers protested rising meat prices back then. (Have you seen the cost of meat lately??? My gosh! It’s gone through the roof! I had to downgrade my last group barbecue plans to a cheaper cut because the cost of meat had more than doubled from last summer!)
The coup de grâce came in the seventies under Carter when oil prices soared and fuel lines became commonplace. (Fuel lines at the pump due to production shortages are not here yet, but oil prices have certainly been on a tear with OPEC at the center of the news cycle just as it was back then, so today is not all that different from back then. With transportation bottlenecks everywhere, fuel lines could develop quickly, too.)
The economists in the video are blind to their own blindness because the comparisons the video gives between the seventies and today are obvious and everywhere in the evidence this Wall Street journalist lays down! You can check off every box, except the fuel lines, and they may well be coming soon to a gas station near you, depending on what OPEC does and whether transportation bottlenecks start to impact oil tankers, as they most likely will!
You have want to disbelieve inflation could be that bad and have to be willing to trust the Fed again based solely on its credentials in order to not see that we are already reliving the seventies. We just haven’t been living it long enough for everyone to catch on. Economists will be the last to catch on because they are looking at it all through theory, not through daily experience at the meat market and at the gas station like you are. Even their theories are messed up.
Fed and the Bureau of Lying Statistics cooked the books
Because inflation became so heated and hated in the seventies, the government and the Federal Reserve found ways to reduce official inflation numbers (which, coincidentally, helps the government reduce the increases it has to give in Social Security benefits as well as other things the government pegs to inflation) and improves the appearance of GDP by lowering the downward adjustment for inflation. All administrations appreciate that.
The biggest change in the calculous was to reduce the impact of fuel prices and to reduce the impact of housing prices — both of which are currently the most intense areas of inflation, now ruled out of consideration by revisionist thinking. All of which means, if we ever nominally hit the double-digit numbers of the seventies, we will be way worse off experientially than people were in the seventies.
If housing costs were realistically included in inflation, we’d already be at double-digit inflation because housing is weighted at about 30% of CPI, and national housing prices have leaped upward about 25%. However, CPI’s housing component is calculated by the best guesses (yes, just guesses) of ordinary home owners via a survey that asks them what their house would rent for. The CPI housing costs for homeowners are then pegged at that rent equivalent.
Need I point out that most homeowners, not having been in the rental market for years, have no idea what their homes would rent for! This means that home ownership costs in CPI are entirely provided by the least knowledgable people. (And there is no adjustment inputted for the ignorance factor!)
As much as those best guesses by many people who haven’t rented a house for a decade or more tend to downplay inflation, numbers are skewed even more right now due to an anomaly: The government has artificially frozen the rental market all across the nation with moratoriums on evictions and freedom from even paying rent. So, rents have been iced over. That means the rental portion of housing costs in CPI (as opposed to just the guessed homeowner portion) has also been frozen! Unless the government institutes further price controls when moratoriums come off at the end of this month, rental rates are likely to soar in the months hereafter as they catch up with skyrocketing housing prices.
That means ALL housing prices in CPI this year have been based on frozen rents. In spite of all of that, housing prices are already one of the biggest contributors to today’s rise in CPI just due to the number of people who did not opt for forbearance or who are guessing their houses would rent for more.
In my next article, I’ll lay out where inflation has gone since my last recent update because there is too much to include here just from the last two weeks. I can hardly keep up with the number of ways in which inflation is soaring and the reasons it looks to be more persistent than the Fed claims, even after upping their forecast last month from “transitory” to “possibly persistent.” You’ll see more adjustments to their projections, too, as they stumble to catch up with what is already happening.
Please don’t let them off too easily when their easy-to-foresee failure smacks them in the face and clobbers all the rest of us because of them.
I’m not saying nothing else can do the job before inflation fully gets here, just that the kind of inflation I’ve been writing about certainly will do it if nothing else does. That’s what terrifies the market and for a very good reason that may not be the first one that comes to some investors’ minds.
Many talk about the “risk premium” of investing in stocks. As inflation rises, bond yields rise to offset what will be lost to inflation. As bond yields rise, stocks become less competitive.
That’s a problem, but it’s not the big problem. Not this time.
The big problem is that we all know where the money for stocks is coming from — the Federal reserve and the US government by borrowing and distributing the money the Fed prints. So, the big problem is the Fed.
The Fed is getting tangled in a mess of its own making
Having made the case in a number of previous articles that high inflation is now already a given, it won’t be long before the Fed is caught in a trap where it needs to continue creating money in order to keep the market rising and to keep stimulating the economy, but it won’t be able to because it will be blocked by the inflation monsters it is creating. That’s why we hear the Fed talking incessantly about how inflation is “transitory” right now. The Fed NEEDS to have all investors believe that the rapidly dawning period of inflation will be short so it can be ignored. The Fed needs the market to believe it CAN and WILL keep printing money.
However, the Fed is just fooling itself. The longer it claims inflation is temporary so that it can ignore the rapidly rising numbers, the more inflation will move out of control because the Fed and the federal government keep the money printing and the armored cars for transporting it to the masses running around the clock. (Figuratively speaking, of course.)
The Fed may fool itself to its (and our) longterm harm, but it is not likely to fool the market much longer because the inflationary numbers will be coming in too high for the market to ignore. We saw that on Wednesday in how the market responded to news of the highest inflation in years — a number annualized at 4.2% in April, which is well below the level of inflation we’re about to see this summer. That’s just the wind-up for the strike-out pitch.
How inflation will fight the Fed and win
The danger inflation imposes is that, if it rises as high as I am certain it is going to rise (double digits), then the Fed will be forced to raise its interest targets because the market will shove interest up regardless, making the Fed look dumb for claiming an interest target it cannot hold. The Fed won’t be able to what it takes to hold interest down without creating massively greater inflation through its creation of new money.
However, it is not just that the bond vigilantes will wrest control of interest out of the Fed’s hands, it’s that the stock market will force the Fed to deal with inflation by fearing it whether the Fed says it should or not. Consumers will also press congress to press the Fed to deal with inflation. The longer it delays, the more massively the Fed will have to raise interest rates, just as Paul Volker did in the 80’s to get inflation under control.
This conundrum is starting to materialize now at a time when the stock market is at absurdly perilous heights. Faint realizations of inflation are no longer so faint, which is why the market is running out of momentum. Investors are starting to believe the Fed will lose control of interest rates. Investors are starting to doubt the Fed’s words of confidence.
Of course, to crash, momentum has to turn downward, and that won’t likely happen until the market is certain the Fed is going to lose control; but that can happen slowly at first and then quickly as it did in 2018.
Inflation is a time bomb on the Fed’s back. My thesis is that every month now the Fed is going to find it harder and harder to maintain the illusion that it can keep creating money, pumping it into mom-and-pop investor hands (retail investors, the Robinhood crowed, etc.) through government stimulus programs (at the government’s demand) and keep trying to maintain low interest to pump money into the stock market via corporate stock buybacks funded on loans. Inflation will crush easy money. It rule. The Fed can rule over it, but only by taking away money and crashing markets that are utterly dependent on that money.
The plate spinner is starting to lose control of all the plates it has to keep twirling on the ends of little sticks. Today’s action in the market shows the market is starting to pay attention to the clatter of falling plates as inflation shows up worse than investors feared. The real fear — the deep paralyzing fear that is only now being foreshadowed — is not competition from rising bond yields (certain as that is to come) but that inflation will become hot enough that the Fed will be forced to turn off all of its go juice.
Inflation has the power to suddenly turn market sentiment on its head because, well, follow the money back to where it is coming from.
Stocks headed sharply lower as inflation jitters percolated again, following a report showing U.S. inflation in the year to April rose at its fastest pace in about 13 years, amid the recovery from the COVID pandemic.MarketWatch
Inflation jitters will become inflation panic when it becomes clear that the rise to 4.2 is not just a blip but the first step on the consumer side of many steps to come. Hopefully none of my readers were paying much attention to economists who were forecasting a meager 3.6%.
“Inflation destroys wealth. Period,” said Patrick Leary, head of trading at Incapital, in an interview with MarketWatch. “We see inflation showing up in markets. If it’s indeed transitory, markets can live with it. But if it’s not transitory, that’s when it is going to become troubling for stocks.”
The destruction of wealth is one concern, but the bigger concern, I believe, is the loss of the Amazon-scale, easy-money stream into the market. This is why the market went up when the jobs report was truly horrible. The report of slackening employment eased feelings of concern about inflation causing the Fed to turn off the flow. Its why the market plunged today on solid news to the contrary of higher inflation than many were expecting.
The Fed’s hand may soon be forced by reality; and if you’ve been reading here — particularly the Patron Posts that focused intensively on inflation, you’ve had a good idea of what is coming. One won’t have to wait until the Fed tightens to stop inflation, however; one only has to wait until stock investors become convinced the Fed will have to tighten, regardless of what the Fed claims to assure investors it won’t.
As MarketWatch noted yesterday,
Tuesday is looking dicey for stocks, notably the technology space, as inflation jitters continue to ripple across markets. The sector has been bearing the brunt of concerns that higher inflation may prompt an early end to the Federal Reserve’s COVID-19 pandemic-driven accommodative stance. After last week’s downside jobs surprise, some fear Wednesday’s consumer price data could also deliver a nasty shock.
The market is top-heavy and jittery under its own load to such an extent that it will crash if it merely believes the Fed will be forced to tighten. That’s why it jolted as a foreshock today, but it wasn’t a shock at all if you’ve been reading here. It was expected.
Inflation is the “worst-case scenario” for this ticking-time-bomb market full of complacent investors, warns our call of the day from Thomas H. Kee Jr., president and chief executive of Stock Traders Daily and portfolio manager at Equity Logic.
And here’s the key:
“Arguably, the ONLY reason stimulus has even been possible is because there has been no inflation. If inflation comes back, all of the safeguards investors have been given (free money from stimulus) will be dissolved and won’t be able to come back to save the day,” Kee told MarketWatch…. He said recent jobs data indeed suggest price rises will be “more serious than previously thought….”
“The declines can be much worse than 25% and if the FOMC [Federal Open Market Committee] is handcuffed because of inflation, the swift bounce back that investors have been used to will not happen either,” said Kee. “The fair value multiple on the SPX SPX (^GSPC) is not 30 – [to] 35x. It’s more like 15x….”
What would bring that down to earth is the return of natural-risk perceptions among investors — severely lacking right now. “They have been given free money by the government, stimulus programs are in full effect, and investors don’t perceive any risk at all. That is the most dangerous thing!” Kee said….
“When the big buyer is not there … that is when natural perceptions of risk come back, and if that happens … watch out below!!”
You see, rising inflation has the power to cut the Fed off at the knees. The kind of inflation I’ve been writing about can suck the mojo right out of the Fed, and that is why Powell is already doing his best to convince financial markets that the Fed wants higher inflation and convince them that the higher inflation it wants is temporary before it even begins.
Notes Lance Roberts,
There is no way this bull market doesn’t end very badly. We all know that is the reality of this liquidity-fueled market, but we keep investing for “Fear Of Missing Out.”Seeking Alpha
How much does all that stimulus money from Fed and Feds pouring into the market create the cashflow that made the past year’s insanity possible?
Over the past 5-MONTHS, more money has poured into the equity markets than in the last 12-YEARS combined.
Do the math and ask yourself what happens if the money HAS to be turned off because inflation forces the Fed to stop creating to much new money in an environment of to few goods due to previous COVID-shutdown shortages and the continuing problems they’ve set up.
And, if you don’t think the market is precariously riding high on easy money, look at how much it is rising on rising margin debt (money owed to brokers):
When the Fed is pressed hard to raise interest rates and stop printing money, brokers aren’t going to be so free in lending money. Right now, it’s easy money at almost free rates. More to the point, though, when the market does start coming down because of concerns about the Fed cutting off easy money, all that margin debt starts unwinding in a hurry as people are forced to sell assets and reduce their margin debt.
As you can also see, huge, rapid spikes like this in market debt tend to happen right before severe crashes:
In the short term, fundamentals do not matter. However, in the long term, they matter a lot.
Sentiment can cause investors to overlook economic fundamentals for a long time, but a sudden change in perception of fundamentals long overlooked in an environment of high margin debt and bring a rapid correction of one’s frame of reference.
Currently, investors are overlooking fundamentals on the expectation the economy and earnings will improve to justify the market overvaluation.
That is not likely to happen. Even if it does, perception of the financial landscape (the core value of of money) has been far too optimistic in most circles, as seen by the shock today; but you could see this coming from a year away.
The Fed talks as though it still doesn’t see what is coming, but that’s the same Fed that talked about how easy tightening was going to be. It appears it had no idea that it didn’t have an exit plan that wouldn’t send sentiment sharply south and crash the market. Yet, that, too, could be seen from years away by those who were not worshipping at the feet of Father Fed.
When, or if, expectations of recovery are disappointed, the market will begin to reprice itself for its intrinsic value. Given that the market is currently trading more than twice the level of underlying economic growth, which is where corporate profits come from, such suggests a significant risk.
That’s why the Dow fell 682 points (2%) today, and the S&P fell 2.14% and the NASDAQ, 368 points (2.67%). There wasn’t much of a safe space to be found in stocks.
Don’t tell me inflation doesn’t matter to this market. Worst day in six months. More on this in another Patron Post.
Now let me, once again, do the kind of corrective reporting I said was going to be essential at this time. First, the fake news:
One big reason for the acceleration was base effects – at this time a year ago, the economy was hit with the worst of the Covid pandemic and inflation was unusually low.CNBC
That isn’t accurate. As I said in my last Patron Post, wherein I also laid out the statistical facts and source to back up my statement,
Food prices and many other prices rose like they normally do last March, in spite of the pandemic. In fact, after March, they rose worse than normal with every month in the remainder of 2020 coming in between 3.5% and 4% on an annualized basis.“Inflation Tsunami Sirens Are Screaming!“
I noted in particular one economist who said groceries and fuel were now just making up for last time:
So, like groceries, gas is catching up to get back to where we would actually expect it to be….
What predominantly happened last year was that fuel prices plummeted due to nothing being transported and lack of vacationing and lack of commuting, but groceries? Come on!
“Catching up” may be true for gas if you look back to where prices were in 2018, but it’s total horse manure when you embrace groceries in the comment. Groceries have no catching up to do whatsoever. The average rate of inflation for food for all of 2020 was 3.4%, which compares to rates that 0.3%-2.5% for every year going back until 2011 where the average for the year was. 3.6%.
And while overall inflation was less than normal for April through June last year, what does that have to do with this year? [Overall] prices still rose last year; so, it is NOT as if you are comparing to an anomalous year where overall prices fell in those months, meaning some of this year’s gain was just making up for last year’s unusual loss. Then you could truthfully say there was a base effect.
So, inflation is coming in much hotter than the Fed led people to believe; and, as my recent Patron Posts have laid out, there is plenty more inflation already baked in on the producer side that will certainly be passed through. I noted you could expect to see that starting to show up on the consumer side now, and you just did. It’s going to be an inflation-hot summer, which can sour sentiment, so stocks won’t take well to that. To be sure, there is a lot of testosterone still determined to press stocks up no matter what, but a hot and humid summer will zap that sentiment, as it did today; and it will keep zapping it no matter what the charts readers are prognosticating based on current sentimental trends. Trends can change quickly in the face of facts if the facts crash in with enough vigor. I think high inflation is the much-feared fact that can break through by stopping the Fed’s plans from moving forward.
If the Fed does keep moving forward with the same kind of blind ignorance and stubborn resolve to prove itself right that led it to keep pursuing its economic tightening regime (as I claimed it would do for too long in 2018, contrary to good judgment), it will really be making things worse for itself and harder to tame. I think that is not unlikely.
“There are people who think the Fed is not just behind the curve, they’re maybe missing the point and by the time they start to play catch up, it’s too late,” Wall Street veteran Art Cashin said WednesdayCNBC
As one economist noted,
“We doubt this report will change the view of officials that inflationary pressures are ‘largely transitory,‘” wrote Michael Pearce, senior U.S. economist at Capital Economics. “It’s just that there’s a lot more ‘transitory’ than they were expecting.”CNBC
Indeed. A lot more. What will they do when they run out of a fake base effect to blame it on?
After each year closes, I typically grade myself on the predictions I made for that year. My last set of predictions were written near the end of June, during our reopening from the COVID lockdowns, for the second half: “2020 Economic Predictions: This Series of Unfortunate Events Guarantees the Epocalypse.”
I led off with this economic overview of what was still to come:
Many people are living right now in the delusional hope of a V-shaped recovery from the recent Coronacrisis lockdown…. That is the most unlikely possibility imaginable.
Half a year later, that overarching theme has been realized. Even though the economy reopened, we still have millions and millions of unemployed people who are surviving off of various stimulus programs. Without those programs millions would be bankrupt. We even had to renew forbearance programs for mortgages and rent that were set to expire at the end of the year even though that termination date was originally set because congress hoped we might be past the worst of this by then. Clearly we are not.
I believed it was absurd to think the disease would be settled by the end of 2020. As it has turned out, we are going down economically again due to viral resurgence and more economic lockdowns in various parts of the country, making unemployment worse again even as much of the damage from the first lockdown has become permanent or remains unresolved. So, we are building lockdown damage upon lockdown damage.
From there, I went on to say the following:
During this time of economic crisis, most of the predictions listed below are current events that are almost certain to continue as the major trends of 2020 and are likely to even worsen, plunging us into the chaos of a deep economic collapse, worse than 2008:
- The social unrest of BLM will become even more widespread and intense. [That prediction was easily right for the summer, but toward the end of the year BLM actually fell off the radar screen as Trump “Stop the Steal” protests took center stage.]
- Additional social unrest over forced social distancing will reappear around the nation as distancing measures return. [We did go back to extreme social-distancing measures in numerous parts of the nation in the fall, and many of the “Stop the Steal” rebellions have expressed a buildup of fiery rage fueled by those dictates. Again an easy prediction.]
- Social unrest over corporate bailouts is likely to begin as the Federal Reserve and government stack up mega bailouts for the rich. [The corporate bailouts were mostly accomplished by July, and there was almost no social unrest over them during the remainder of the year. So, didn’t happen.]
- Tearing down of monuments and other acts of violence will certainly create backlash against BLM. [I think a lot of the rage in the “Stop the Steal” rebellions is a backlash by people who feel their culture is being taken away from them. Thus, you hear a lot of “take our country back” statements by those who are rebelling and those inciting rebellion.]
- So, social unrest will beget more social unrest. [My statement here meant that rage will just snowball, becoming worse and worse as people counteract the cultural dismantling from BLM and as protests become increasingly angrier. Things cooled down a little in the early fall, but rage exploded after the election. The “Stop the Steal” rebellion became more and more intense with every protest until it finally became an insurrection at the start of 2021.]
- All the turmoil of a likely-to-be contested election with all the accusations of Russian tampering and other hacking … will cause even more social unrest. [Some of the rage when Trump bas based on claims that voting machines were hacked. The hacking claim, however, was not the main concern of the voting-machine allegations. The legal claims focused more on allegations that the machines were rigged by their operators. Yet concerns were expressed that the machines were hacked by the CIA’s operations out of Germany, and an office in Germany was even raided to try to prove that. So, this prediction was right on in it’s main statement of a contested election, which was easy to predict, but may have overemphasized “hacking” as part of the concerns.]
- All those social conflicts will negatively impact some local businesses already hurting badly from the COVID-19 lockdown because they will be unable to reopen due to the protests at a time when we cannot afford anything that causes further damage to business. [I don’t think we’ve seen that. While the resurgence of lockdown has hurt businesses, protests in the latter part of the year had less and less harm on businesses than they had earlier.]
- Social distancing being ignored entirely by BLM protestors, will increase the spread of COVID-19 as will reopening, ending the stock market’s fantasy of a V-shaped recovery. [Here I meant economic recovery. BLM protests died down a lot after I wrote this, so whatever spread happened through them was already happening at the time I wrote this. As the year moved on, few BLM protests diminished, and the rallies held by Republicans who refused to wear masks became the suspected super-spreader events instead. This one was half-right, though, because reopening definitely resulted in the disease starting to rise again in the second half of summer, and it exploded when people started getting together more in the fall, especially the holidays.]
- Travel and hospitality will certainly remain in deep depression as COVID-19 stages resurgences. [An easy prediction, but certainly dead on.]
- Lack of travel assures a continued rise in bankruptcies in the oil and gas industry. [Dead on! Eleven refineries are scheduled to close, including the nation’s largest refinery, Royal Dutch Shell in Louisiana. The nation’s largest U.S. refining company, Marathon Petroleum, is closing several refineries. In terms of actual bankruptcies from all businesses in the oil industry, the industry passed a milestone in October of over 500 bankruptcies, making 2020 its worst year ever.]
- Shutdowns of major summer events will depress local business and government revenue as will shutdowns of sports events and concerts. [True. Almost all summer events were cancelled.]
- Local governments will be forced to downsize staffing quickly and cut back projects of all kinds due to hugely diminished tax revenue caused by all the troubles listed here, causing a new wave of job losses…. [Didn’t happen to the large degree I expected. I believe it will still happen, but so far most local and state governments appear to have found ways to make it through with only minor adjustments, and government downsizing has been fairly quiet in the news or in job statistics so far.]
- Diminished policing will result in a huge crime wave across America … because police officers resign and no new people want to become police in the present atmosphere. [Did happen. A number of cities have struggled to find sufficient numbers of police officers because of public rage against police in some cities and defunding, and their crime rates have soared.]
- Business uncertainty due to the continuing trade wars and to additional COVID-19 border lockdowns, as well as inability of businesses to get parts across borders even for products produced and sold within the nation, will act like gravity on the hope of economic lift. [This has happened in the background of our economic troubles that have come from COVID shutdowns, BUT these aspects have not developed into a significant part of the economic news. The main problems have been from businesses locked down that never reopened and the resulting unemployment.]
- We all know the federal debt will keep growing at an exponential rate because of reduced taxes that were supposed to be paid for by a rise to 4% or better GDP growth. That’s now a distant dream… The Federal Reserve [will] monetize the debt to the moon and back. At some point that will call into question the current US credit rating. [Fitch downgraded the US credit rating outlook to “negative” a month after I wrote this due to the exploding debt, but the government’s credit rating retained its overall AAA status. So, it got a nick.]
- So many bonds sliding toward junk because the weak business economy will force all kinds of already risky credit to become riskier and become downgraded. [As it turned out, most of this was already in when I wrote this. Some city’s and states like New York were downgraded late in the year, but there was not not as much worsening of the situation, as I was actually anticipating with this statement.]
- Forced offloading of that debt by institutions that are not allowed to carry junk bonds, will cause huge bond market problems and defaults by those who can no longer refinance by issuing new bonds. That will force the Fed to continue to soak up ever larger amounts of junkier debt, moving further down the junk spectrum, even as it also has to fund the federal government’s exploding debt plus the new exploding debts of local governments via new “special vehicles.” [The Fed has silently soaked all of it up, and the news has been silent about it, making it hard to ascertain how bad this problem really has been.]
- The stock market, being utterly dependent on the Fed continuing to print money while also utterly dependent on COVID-19 keeping its head down, will go down hard again, likely this summer and probably again in the fourth quarter. I predict it will ultimately fall lower than its nadir in March. [MASSIVE fail. It did go down at the end of Summer and again in October by about 10% each time, but nothing like it went down in the spring, and it more than fully recovered since.]
- That will cause more wealth evaporation, leading to more natural economic tightening across the financial and business spectrum. [Nope.]
- The second wave of COVID-19 will be worse than the first when the fall flu season hits or maybe even this summer. [Definitely. The second wave from the fall is still rising and went well above the first wave.]
- Some major banks and other financial institutions in Europe, such as Deutsche Bank, and in other nations will crash. US institutions will get pulled down by their associations…. [Fail.]
- Many businesses will never reopen even though the economy has been reopened legally. Many others that do re-open will close for good before long because partial reopening is not enough to sustain them. [Extremely accurate. Numerous business remained shut after the reopening that had begun when I wrote this. Many of those that struggled through the reopening, shut for good during fall’s return in some areas to lockdowns.]
- More shopping malls that were already marginal will close forever after reopening because of the number of businesses that do not return or that fail during the partial reopening…. [Numerous malls shut forever, and the buildings are being repurposed for all kinds of other uses or have just been left vacant.]
- That, in turn, will have a knock-on effect for other surrounding businesses that now experience less traffic…. [Hard to say so far.]
- Due to the continuing sweep of all the problems listed above, we are in for a deep, longterm jobs depression…. [Definitely. Unemployment remains horrendous, and is now getting worse again.]
- That means housing and commercial real-estate will crash again as longterm unemployment and business losses result in mortgage defaults…. [Massive miss! Housing prices have soared. I TOTALLY did not see the COVID migration coming that resulted in a huge housing surge. My only comfort is that I don’t think anyone else back in June saw it coming either.]
- The resulting deep slowdown in construction will mean even more job losses…. [For the reasons just given, way off!]
- That means some US banks will crash…. [It didn’t happen at all. We may get there, but it did not happen in 2020.]
- Add to all of these near certainties, the growing possibilities of more international wars that we already see rising in risk…. [Didn’t happen. Maybe some skirmishes, but no big new wars of the kind I talked about.]
- Civil wars within various nations are more likely because of the rising economic troubles and social strife listed here as well as continued growing strife due to immigration pressures that developed under globalization. [Well, it looks like the US may be plunging into one — the tensions of which began to seriously build in the last two months of 2020, which exploded into insurrection in the first week of 2021 in an event that is the worst of its kind since the US Civil War.]
- I won’t predict the US dollar will collapse, BUT … this is the FIRST year in which I’ve ever said that is a reasonable possibility.… I am certain the indomitable dollar will finally start to experience struggles of its own…. [That has been the news of the past few months. How far it goes, nobody knows.]
- Add to all of that the normal economic crises from major exogenous events, such as earthquakes, volcanism, hurricanes, tornadoes, floods, droughts, pestilence, wildfires, and, oh, an asteroid or two. The difference this year is that those big catastrophes will be hitting badly crippled economies and stressed societies wherever they hit in this world. (We cannot know what will hit or whether the number of such events will be lighter or heavier than other years because these are black-swan events — things we know CAN happen but have no knowledge of the specific likelihood of any particular event in a particular area in any given year. What we do know is that nations struggling under an economic crisis and an emergency health crisis will be less able to manage those events when they hit. Organizations like FEMA will be stretched way beyond their capacities.) [We dodged a bullet in the US. We had some bad catastrophes, such as wild fires that turned out after I wrote these predictions to be our worst season ever, but overall the natural disasters proved manageable and did not seriously strain our economy, except, of course, the local economies of those areas hit by the massive wildfires; but nationally it did not strain the system.]
From there, I concluded:
That’s a long list of finger-in-the-wind economic predictions. I’m not saying all of them will be dominant trends this year, and I can’t say when or in what order each one will happen; but I am certain 80% or more of my 2020 economic predictions will play out as stated above, and that is more than enough to assure the deep economic depression I’ve named “The Epocalyse.”
Counting only those items above that were largely or entirely correct and not those that were minimally correct, I come up with 16 solid positive scores out of 32 items. That’s my worst ever. So, I gotta give myself a “C” for getting only half right. However, I think 2021 will still bring around many of the things that didn’t happen this year. So, for some those that I didn’t score on, it’s really a matter of slower timing, not that they won’t happen. I’ve usually scored myself with a “B,” sometimes even an “A-.” Not this past year. I’ll blame it on COVID. Why not? Weirdest year in my lifetime.
I may have overstated the economic bad news for 2020 because we’ve weathered through economically better than I expected so far; but the social train wreck piled into the station only a minute late, blowing up in the first week of 2021. The economic strains listed above that didn’t happen or barely happened probably will not turn out to be a miss because the end of this train is still piling into the station on top of the cars that have already crashed. With lots more economic strain piling on and social strains that look like they could become worse than 2020, we are still barreling toward Epocalypse.
The big talk among economists and central banksters and some politicians in 2020 has shifted toward how the Coronacrisis will (or “must”) result in a global financial/social reset. I’ve said for years we can anticipate central bank digital currencies (even before that term existed) to happen in conjunction with a global financial reset. Now we are in that era, and I’ve been writing about it this year in my Patron Posts.
In short, I framed that argument as, “The world is set universally on a course of creating an everything bubble. When that explodes or implodes, it will be a global problem worse than the Great Recession, which will beg for a global answer.” With the global pandemic expanding some bubbles (like stocks) and, oddly, housing, and imploding other parts of the economy that were not bubbles (Main Street, such as restaurants, already endangered malls, etc.), one cannot help but think that time is here.
So, it’s not hard to understand why economists, politicians and bankers are all talking about a global reset now.
Talk of the town
Here are some quotes from the economists and other business leaders:
Mike Corbat: Chief executive officer of Citigroup Inc.
From putting letters of credit on blockchains, digitally onboarding clients, and conducting virtual roadshows for IPOs, bankers are ripping up some of the last paper trails we have left. Consumers who might have not done a lot digitally until now are engaging remotely. Many of those core activities will never go analog again. All that puts even more responsibility on financial institutions to help close the digital divide.Zero Hedge
That cuts straight to the chase on the issues talked in my Patron Posts earlier today and throughout the year. There you have the CEO of a major bank that ordinary people work with on a day-to-day basis, saying banking will never be the same again. All banking will go more digital quickly just as people’s work spaces are going virtual.
[Money managers] should also stop hoping for a V-shaped recovery, argues real estate billionaire Sam Zell. Banking titans James Gorman and Mike Corbat see more and more of the financial industry going digital. One upshot: Firms like Morgan Stanley and Citigroup may not need all that office space.
I think that is a given. Wall Street is one of the easiest arenas to shift toward virtual offices since almost everything they do in their offices is digital anyway. This will expedite NYC’s uptown collapse. NYC is in for a world of continuing hurt as the collapse of commercial real-estate hits hardest in Manhattan, the loss of uptown workers results in closure of Manhattan stores, the rise in violence already seen by Antifa and BLM protests that went wild makes the area less desirable for people to live in, and being the hotspot of repeated COVID breakouts drives people away in fear.
The changes in the workplace are also going to have a longterm impact against the travel industry.
Susan Lyne: Managing partner at BBG Ventures
I can’t imagine companies are going to go back to spending as much on business travel. Everyone has been forced to figure out how to do business across country using Zoom or whatever video products.
Expect other changes in travel that may become permanent:
Glenn Fogel: President and CEO of Booking Holdings Inc. and Coronavirus survivor
You’re going to see fever checks in all airports. They’re going to try to catch anyone who’s coming through who may be infected. Certain jurisdictions are going to ask you to download an app to track where you are.
Proof that you don’t have COVID via a COVID test is already required on some airlines. Due to the latest upsurge in COVID, expect to see proof of vaccination in the coming year as a condition for flying on some airlines. Air Canada has already announced such plans. Some work places may start to require such proof by the end of 2021, depending on how far the vaccine roll-out has gotten. In the immediate future, however, such measures would shut out to many workers or too many travelers to be feasible.
James Gorman: CEO of Morgan Stanley
Clearly we’ve figured out how to operate with much less real estate. Do I think everyone is going to be working from home? No. The mentoring, the connection, the team bonding, the brainstorming, the creativity that comes from being in groups of individuals, like-minded and not like-minded, that’s how great organizations thrive. But can I see a future where part of every week, certainly part of every month, a lot of our employees will be at home? Absolutely. People have been functioning extremely well. We will have less footprint.
That takes us back to the global impact on US jobs that Trump sought to overcome with his revised trade policies, but this transformation will strengthen the move of higher-end jobs to places like China and India:
Joe Lonsdale: Partner at 8VC and co-founder of Palantir
Does this change how we hire around the world? Unfortunately it probably pushes outsourcing a lot more for certain types of jobs in the U.S., because you can hire someone just as well who doesn’t have to necessarily live in your town…. It could be another pressure on the middle class….
I think Biden will capitalize on the trade war Trump began but also seek to bring it to a close. (He has ties with China, remember?)
Chen Zhiwu: Director of the Asia Global Institute, economics professor at the University of Hong Kong, and a former adviser to China’s cabinet.
After the pandemic stabilizes, the New Cold War will be more visible between China and the U.S.-led West. The blame game has already started. But it will get worse once the economic hardship from the pandemic materializes in the coming months or years, to decouple China further from the developed West. As a result of the crisis, China will shift further back to its Communist roots and the Maoist era in terms of worldview and policy mindset.
I’m not completely convinced of that one. I think the world is starting to coalesce against Chinese expansion, which is something Trump should have done from the start in his trade war, drawing Europe into the fight on our side, instead of launching a warn in all theaters at once.
Biden has much better relationships with Europe, and will seek to unify the US and Europe in pressuring China. I’m not so sure China will respond by moving away from the West and going full-on military as it knows it thrives by trade with the rest of world. Only time will tell if Dr. Zhiwu will do better in his prediction about China than I. He certainly has the better credentials, so I won’t stake anything on my prediction.
James Galbraith: Professor of government at the University of Texas
There will be a vast tangle of unpaid debts that cannot be cleared, and—what is different from 2008 and 2009—the model of foreclosures, evictions, and repossessions to deal with them is going to be absolutely unacceptable. People sheltering at home without income are in no way responsible for their circumstances and will refuse to accept the terms of those contracts. So the contracts will have to be suspended, and the debts cleared away, or there will be a confrontation on a vast scale….
The right model is that of the treatment of inter-allied war debts after World War II: They were canceled, because dealing with the common enemy was a common effort. So the whole financial system will have to be reset. This is not an ideological point but a practical necessity for reestablishing a functioning economic system.
I think some form of a partial debt jubilee on mortgages could happen later in 2021. The pandemic was not the quick three-month thing the government was hoping for when it set up forbearance. There was no V-shaped recovery, except in stocks. It is becoming impossible for landlords to ever recover in making up mortgage payment that were inevitably stopped by rent forbearance.
Other homeowners are facing a mountain of deferred payments they will find hard to manage because the forbearance thing could easily go on another six months before it starts to break all apart everywhere. Maybe banks will be able to roll those up into refinanced loans.
If not, that will force some kind of debt reset, especially in rental houses, because renters are never going to come current with landlords. They didn’t create the problem, so as Galbraith says, they will demand government support for a situation the government (state directly and federal by guidance/policy) forced upon them.
It’s POSSIBLE, you could come out better being underwater on your mortgage than if you chose to slog your way through and maintain payments. Possible. Depends on how the government responds to the crisis it helped create.
Ray Dalio: Founder and co-chief investment officer of Bridgewater Associates
The second-order consequences of the coronavirus will be big. The large monetizations of debt and the pushing of bond yields to around 0% (while necessary) will reduce the appeal of holding dollar- and other reserve-currency-denominated debt. The wealth and political gaps and the conflicts from them will influence the distribution of wealth and power.
Dalio has been way off in many of his predictions, but I think that one is almost a no-brainer. The wealth gap, already terrible from decades of expansion, spread exponentially under Trump. So, we are getting to a breaking point where one cause of violence is that people feel the injustice of disparity as they see banksters have, again, grown much richer under the existing government’s bailout programs.
Without a doubt, we’ll see increasing cracks in society and a strengthening of efforts to claw back money from the wealthy, which to a large extent is deserved because much of the disparity was created by tax structures that resulted frequently in the wealthy paying a much smaller percentage of their total income in taxes (especially for Social Security and Medicare) than the middle class.
The forms that takes, however, may be economically bad ideas. Removing the cap on taxable Social Security income would only affect wealthier individuals who have had a free benefit there for decades because most people pay those taxes on 100% of their income. Placing that same tax on capital gains could be justified as easily as placing it on wages.
Social Security’s problems would be ended even without taxing capital gains just by removing the income cap; so, the latter may not be necessary. Republicans, however, are constantly pushing for the interests of big money and trying to demand SS be saved on the backs of recipients by making them feel guilty for feeling “entitled.” As I’ve said many times, of course they are entitled. It was their money in the first place, held in trust. You’re always entitled to your own money if it is held in trust.
Other responses could have all kinds of damaging consequences, such as a move to Universal Basic Income now that we have helicopter money already falling out of the sky. To a lesser degree, a direct wealth tax. These are two ideas that will gain currency under Biden, whether he embraces them or not, especially if Dem’s gain control of the senate.
One way or the other, the new reset will include clawbacks from the wealthy, or it will end in torches and pitchforks. Under a Biden administration and with a strong mandate from the Democratic part of the public, the following path is likely to gain traction, whether one likes bigger government or not:
Robert Reich: Secretary of labor for President Bill Clinton and now studies public policy at the University of California at Berkeley
I hope I’m not looking at it through rose-colored glasses, but it’s possible we may understand that at least with regard to minimum safety nets, and minimum health care, we need to do much more for our country and each other than we are doing now. We can’t ever afford to find ourselves so unprepared and lacking in the basics. The richest country in the world can’t even make sure all its people are safe. That makes no sense. Americans as a whole are gaining a deeper appreciation of how important government is…. Americans emerging from this may say to themselves: We really do have to have a government that works well. And we’ve got to have a public-health system that is the best in the world. Why not?
I’m not saying things should go that way, but I think they will, especially if Dem’s seize the senate. There will, of course, be a lot of push back from the new “not my president” crowd that is replacing the Democrats on that particular watch — a movement that has suddenly been fully embraced by Republicans against Biden.
With the Democrats in the ascendancy, you can be sure of more of the following:
Former Secretary of State John Kerry attended a panel discussion at the World Economic Forum during which he asserted that a great reset was urgently needed to stop the rise of populism. Kerry vowed that under a Biden administration, America would rejoin the job-killing Paris Climate Agreement but that this was “not enough….”
Speaking about how Trump increased his vote in 2020, Kerry noted, “What astounds me is that as many people still voted for the level of chaos and breach of law and order and breaking the standards and … I think that, the underlying reason for that is something that everybody has to examine.”
European Commission President Ursula von der Leyen … said the two entities [the EU and the US] would work on “a new rulebook for the digital economy and the digital society…. I see this as an unprecedented opportunity.”Summit News
The globalists are back in charge.