by Chris MacIntosh
Things are a tad wonky.
The problem that market participants are not thinking about is this. When combining the most levered global and US economy in the history of our planet, record low interest rates (lowest in recorded history), the greatest disruption to world’s energy supplies as well as direct and indirect attacks on our food networks, not to mention sanctions against Russia and hence Ukraine — two major exporters of food. The consequences of all of this have delivered to us the highest inflation in four decades… oh, and this was BEFORE the Russkies went hunting for biolabs in Ukraine and the attendant fallout.
The result… or at least one result is in the graph below.
Real wage earnings are collapsing like a teenager at spring break after a bottle of Kalashnikov vodka.
The problem with the pointy shoes over at the Fed is that they believe they can curtail inflation by destroying demand. Destroying demand, which they are attempting to do, will cause a negative wealth effect. This they think will mitigate inflationary pressures. Even presumably fuel and food price inflation.
Consider this… In a recent speech Gov. Waller said:
“I support tightening policy by another 50 basis points for several meetings. In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.”
Now, if we step out of the world of central planners who live in ivory towers, out there in the real world the West is at war with Russia and Ukraine who produce collectively startlingly large amounts of both food and fuel.
No solution exists to end this war. If anything, the central planners are encouraging it.
What does this mean for supply of fuel and food?
Despite what the Fed may do with interest rates, this will persist. Sure, there will be demand destruction as inflation eats into disposable incomes. But it is food, fuel, and shelter that sit at the foundation of must haves. They are far more inelastic than iPhones, soy lattes, and definitely monkey JPEGs.
What will the governments do?
They’ll send out money in some form. The Brits are already doing it. How are they getting the funding to do this? Good question. By taxing the energy companies an additional 25%. Genius! I’ll refrain for the minute from walking you through how idiotic this is and move onto other measures government will likely employ and then we’ll look at what this means for the bond market.
To pay the subsidies, the thickos in DC will need to generate more cash, which will necessitate the issuing of more treasury bonds due to a widening fiscal deficit.
Who will buy these bonds? Not foreign central banks.
Nope. Remember the stealing “freezing” Russia’s central bank reserves? That was a shot fired only once, because by firing that shot every single nation on planet earth was put on notice.
The implications are clear. If at any point in time we dislike your stance, even where that stance is in the interests of your own citizenry, we’ll punish you. To think they won’t be acting accordingly is isht that only the cerebrally impaired can manage.
The critical point is that foreign central banks, having seen what happened to Russia, will reduce their purchasing of US treasuries. Incidentally, they also have their own issues to deal with.
Stagflation is global and especially in emerging markets they’re struggling against a rising dollar while revenues are generated in local currency. It isn’t like there are piles of cash swishing about for them to find a home for. Furthermore, they’ve no ability to issue treasuries like the US has been able to do. Then, of course, there is the domestic (US) market who are waking to the fact that the cost of a banana today is more than it was last week… and they’re thinking that maybe, just maybe the whole “transitory” thing may just be bullshit.
So who’s gonna buy them? This is where things are about to get truly nutty.
We are about to experience a “wartime” economy.
Certainly the central planners will play on this narrative.
And in a wartime economy central banks lose their independence and become merged with the government, which means they merge with the treasury department. This is about to happen. When? Not sure, but I’d be surprised if it takes more than 12 months.
When this happens two things will take place. Bonds will tank and it will be when gold finally gets bid. It is still cheap. It’s not going to stay that way.
At this point the central banks and central planners will be well and truly trapped. Trapped by their own attempts to self detonate the economy with the demonstrably fake Covid narrative, failure to contain or fully understand the consequences of shutting down global supply chains (which can’t, aren’t, and wont simply be turned back on), failure to contain the stagflation, and resultant rising social unrest and economic depression of their own making. But most of all they’ll be trapped by their inability to depress the world’s largest-ever debt bubble.
Financial market collapse, together with rampant stagflation, will be the result of an implosion of the fiat money system turned credit system laboring under the grandest credit creation and money printing in human history.
We are getting close. Be prepared. I think this promises to be a once-in-a-100-year type of event.