"It's the Fed, Stupid!"
Plus, a year of "I told you so's" and plenty more to come...
by Bill Bonner and Joel Bowman
Normandy, France - "Last year was such a hoot we are reluctant to say goodbye to it. It was one ‘I-told-you-so’ moment after another. The Fed raised rates…trying to recover from the embarrassment of failing to see the approaching inflation. The higher rates caused stocks to go down. The biggest losers were those that had just made the biggest gains – especially the big techs and cryptos. It all happened pretty much as it should have happened. See, ‘I told you so.’
People try to complicate it. Disguise it. They aim to distract your attention from what is right before your eyes. They claim ‘capitalism failed’ or ‘corporate greed’ suddenly imposed itself or, for those with no ax to grind, simply that there were ‘supply chain interruptions.’ Here’s the hopeless Robert Reich, former US Labor Secretary, in The Guardian. He says corporate monopolies are to blame:
"Worried about sky-high airline fares and lousy service? That’s largely because airlines have merged from 12 carriers in 1980 to four today. Concerned about drug prices? A handful of drug companies control the pharmaceutical industry. Upset about food costs? Four giants now control over 80% of meat processing, 66% of the pork market, and 54% of the poultry market. Worried about grocery prices? Albertsons bought Safeway and now Kroger is buying Albertsons. Combined, they would control almost 22% of the US grocery market. Add in Walmart, and the three brands would control 70% of the grocery market in 167 cities across the country."
And so on. The evidence of corporate concentration is everywhere. Put the responsibility where it belongs – on big corporations with power to raise their prices.
But Why? You’d think a man at his stage of life might be curious. Yes, there is consolidation. But why? How come Kroger is buying Albertsons? Where does it get the money? Could it have something to do with the Fed’s low interest rates? And how come – now that people can compare prices instantly and order on-line – doesn’t competition keep prices low? Even with only two competitors, isn’t price competition sharper than ever? The questions deserve a fuller treatment. But Mr. Reich is like an old-time labor leader with one enemy: the powerful, greedy, black-hearted capitalist.
As far as we know, businessmen in 1960 were every bit as greedy as those of today. And unless we are mistaken, capitalism itself – that is, the desire to get ahead by trading goods and services with others – has undergone no substantial modification.
The lead characters are still the same. The grasping capitalists. The grumpy business managers. The struggling households. The saintly working stiffs. The earnest feds. All are every bit as avaricious, malign and dumb as they always were. What has changed, substantially, is the setting. US debt in 1960 was $382 billion – and going down against GDP. Now, it’s $31 trillion…and going up. The inflation rate was 1.7%. Today, the numbers are reversed; it’s 7.1%.
That brings us to the most likely real cause of today’s price increases: money. This is where the ‘I told you so’s’ reach some kind of deafening crescendo. For, here at Bonner Private Research, we’ve been warning for many years that the Fed is ruining the economy…and that artificially low interest rates and out-of-control money-printing would produce inflation.
Because… The Fed! Why does it take more money to buy the same things (aka inflation)? Because the Fed added money! The Fed increased its balance sheet 1,200% since 1999. The extra money drove up prices, first where it entered the financial system – on Wall Street. Later, the money made its way into the real economy, where it caused consumer prices to go up at the fastest pace in 40 years. No need to overthink the situation; but a little thinking wouldn’t hurt.
Soaring prices on Wall Street misled investors. They thought there was something about the investments themselves that made them more valuable. And they saw no reason why the trend wouldn’t continue forever. Fortune.com reports: "Billionaire venture capitalist Tim Draper said in June 2021 that Bitcoin would hit $250,000 by the end of 2022
ARK Invest’s Cathie Wood …. In November 2020, she told Barron’s that institutional adoption of crypto would drive Bitcoin’s price to $500,000 by 2026 and repeatedly “bought the dip” whenever Bitcoin prices fell. Wood even told The Globe and Mail in a February 2020 interview that Bitcoin was “one of the largest positions” in her retirement account.
Tom Lee, head of research at Fundstrat Global Advisors…spent over 25 years on Wall Street…in early 2022, he predicted that Bitcoin would hit $200,000 in the coming years. Bitcoin ended up finishing 2022 just above $16,500…
Snakes in the Grass: Investment banks were way off too. They thought the S&P 500 would end 2022 at 4,825 – a gain for the year. Instead, it went down almost 20%. Many analysts were particularly keen on Carvana, which seemed to have found a sweet spot in auto retailing. Morgan Stanley’s Adam Jonas said he expected the stock to go to $430 by the end of the year. But by New Year 2023, you could buy a share for just $4.48 – a 98% discount.
Coinbase was another one that the pros got very wrong. Jim Cramer said he liked “Coinbase to $475.” The average price target for the stock was $400 per share. Today, Coinbase is quoted at $33.
As we saw last week, real wealth is based on time and stuff. Both are limited. So, when the dog reaches the end of this chain, he goes no further. Also last week, our investment director, Tom Dyson, examined the chain itself. He noted the ‘hook’ at the end, where money supply (the Fed’s balance sheet) topped out…and began going down. It’s the “most frightening chart in finance,” says Tom. Because it shows that – for now – the Fed’s inflation has turned into the Fed’s deflation. M2 – a broad measure of the money supply – began to hook over and trend down in the summer of 2020. Asset prices followed. Yes, dear reader, we’ve found the snake. Need we keep looking in the grass?"
Joel’s Note: Here’s that chart Tom shared in his research note with BPR members last week, in case you missed it…
Click image for larger size.
As you can see, it’s the first time in some 60 years we’ve seen any “significant” contraction in the M2. (Quick refresher: M2 is the Federal Reserve's estimate of the total money supply. That includes all of the cash people have on hand plus all of the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit.)
Think of the flow of money like the ocean tide… when the tide comes in, asset prices - both financial and consumer - tend, on average, to float higher. When the tide goes out, as Warren Buffett likes to say, you get to see who’s been swimming naked. (It also, if we might add, underscores the importance of shorts… a subject for another day.)
In his classic work, "Human Action," Austrian economist Ludwig von Mises outlined what he saw as the 5 fundamental, unavoidable truths of expansionary monetary policy. They’re perhaps worth bearing in mind when considering the Fed’s current, self-inflicted predicament. To quote Mises: "Economics recommends neither inflationary nor deflationary policy. It does not urge the governments to tamper with the market’s choice of a medium of exchange. It establishes only the following truths:
By committing itself to an inflationary or deflationary policy a government does not promote the public welfare, the commonweal, or the interests of the whole nation. It merely favors one or several groups of the population at the expense of other groups.
It is impossible to know in advance which group will be favored by a definite inflationary or deflationary measure and to what extent. These effects depend on the whole complex of the market data involved. They also depend largely on the speed of the inflationary or deflationary movements and may be completely reversed with the progress of these movements.
At any rate, a monetary expansion results in misinvestment of capital and overconsumption. It leaves the nation as a whole poorer, not richer. Continued inflation must finally end in the crack-up boom, the complete breakdown of the currency system. Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."
We’ve seen the years of mis- or malinvestments and overconsumption spurred by loose, expansionary monetary policy. Decades of easy money funded the final crack-up boom of recent years, where prices floated ever higher on a tide of the Fed’s printing press fiat. No doubt this was popular with the masses, who saw the “value” of their investments soar. The equal and opposite forces that await may not be so pleasant. Free tip: Keep a pair of shorts handy."
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