Monday, February 27, 2023

Bill Bonner, "Distort and Destroy"

"Distort and Destroy"
How the Feds manipulate the numbers 
to wreak havoc on the economy...
by Bill Bonner

San Martin, Argentina - "Bear markets take time. They also provide countless occasions to lose money. With each bounce comes an opportunity for investors to buy higher so they can later sell lower." ~ MN Gordon

“Here’s an article in the French newspaper, Le Figaro, from yesterday,” Elizabeth reported cheerfully. “A woman was found cut into pieces in a freezer, in the 9th arrondissement of Paris. Her husband has been arrested.” “Gee, I guess Paris isn’t safe anymore,” responded another member of the family. “Wait a minute. There are 2 million women in the Paris area,” your author introduced a statistical analysis. “The odds of getting hacked to pieces is very low." “Unless you live in the 9th arrondissement,” Elizabeth suggested. “Or, you’re married to a guy who cuts up his wife,” we replied.

Manipulate, Distort… and Destroy: In a few sentences, we had identified the problems with statistics. One part useful, one part misleading, and one part a damned lie – they are always a menace. The ratio of butchered women/population is interesting. But not particularly helpful to the woman in the freezer.

Warren Buffett made the same point in his famous speech in Sun Valley, 1999; it’s the particular that matters: "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Last week, we explored the numbers used by the Fed to manipulate, distort and destroy the US economy. Today, we look at the headlines and wonder where the next dismembered body turns up. Benzinga: "Larry Summers Points Out US Never Evaded A Recession At These Unemployment, Inflation Levels: 'Powerful Historical Truth.'

Former Treasury Secretary Lawrence Summers reportedly highlighted the absence of past examples in which the U.S. managed to avoid a recession when the unemployment rate fell below 4% and inflation rose above 4%. That's a powerful historical Higher for Longer."

We asserted on Friday that inflation is now ‘embedded’ in the system. Like a weed in a garden, it will grow until it is pulled out. The Fed is on the case. Here’s the latest from Bloomberg: "Fed’s Preferred Inflation Gauge Accelerates, Adding Pressure for More Rate Hikes." "The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years."

And more…Bloomberg continues: "Fed May Need to Hike to 6.5% to Cool Prices, Study Says." "In a paper presented Friday at a conference in New York, a quintet of Wall Street economists and academics argue that policymakers still have an overly-optimistic outlook and they will need to inflict some economic pain to get prices under control."

Oh yeah? The Fed may have to go even higher. Here is Research Affiliates, with more bad news: "Given the recent US inflation rate, which has been above 6% for the last 12 months and above 8% for the last 7 months, history tells us that the median number of years to reduce inflation below 3% is 10 years, with a 20th to 80th percentile range of 6 to 19 years. How many economists—let alone pundits and policy “experts”—have suggested we may have elevated inflation for six years, much less the longer outliers?

That is the good news. The bad news is at 6% and higher inflation, cresting inflation is the exception, not the rule: inflation usually marches to the next threshold. When inflation subsequently rises to the next threshold, we call these cases accelerating inflation. Indeed, once the 8% threshold is surpassed, as happened this year in the United States and much of Europe, inflation marched to the next threshold, and often well beyond, over 70% of the time.iii The lesson we should take from this is not that inflation is destined to move to new highs in the months ahead (after all, nearly 30% of the time, it is, in fact, cresting!), but that we dismiss that possibility at our peril.

Is it possible that inflation will recede to 4% and then to 2% in the coming year or two? Of course it’s possible! History says it is unlikely. Our fiscal and monetary policies have done far more harm than good in recent years. truth and I think it's one that's relevant to our current situation," Summers said."

Heads They Win, Tails You Lose: In other words, inflation ain’t going away anytime soon. When it goes over 8%, it usually goes higher. The Fed knows this too. So, now – with its many statistical obfuscations and ideological delusions – it is committed to continuing to raise rates. That will inevitably lead to lower stock prices, higher bond yields, and a recession.

Making a long story short, the Fed has to continue raising rates until one of two things happens – either the inflation rate falls (below the Fed’s key rate)…or higher interest rates cause something to break…and the Fed panics.

Our guess is that the second hypothetical will happen before the first one. Then, the situation will get worse, for a long, long time."

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