Tuesday, September 27, 2022
The economy is already in a recession. The stock market(s) are solidly in grizzly bear territory. Mortgage rates have doubled. Inflation is at nosebleed levels (highest in 40 years.) Great jobs numbers? Sure if you like flipping burgers. Housing? Yeah that's teetering on collapse. Buckle up America, those oxygen masks falling from the bulkhead are not comforting. The most likely outcome of Joe Biden's disastrous economic and monetary policies will be a crash landing.
Although there has been much speculation about the effects of the recent Fed moves and whether they can engineer a "soft" landing, the previous scenario is far more likely. Consider the rampant increase in the M2 (money supply) coupled with a a Federal Reserve hellbent (suddenly) on taming inflation. The "tough talk" coming out the Fed along with a crippling pace of hikes has kneecapped the consumer.
Where was the "A-Team" for the past 18 months? Nobody knows, but thanks for the postcard from Jackson Hole. Disgraceful. Prof Jeremy Siegel is correct, the Jerome Powell owes the American People an apology for doing such a horrible job. A heartfelt resignation letter in conjunction would also be acceptable.
Destroying some $20 Trillion+ dollars in value must have consequences. Obscene government salaries, fat pensions, and free healthcare for life all need to be revoked. Even a child knows, if you do not have skin in the game then you are not in the game. Suit up Jerome Powell, or hit the locker room like Tony Fauci.
Recommended course of action? Here at ILAF it's always game time and we are all about solutions. Start with a new Treasury Secretary in the form of Art Laffer. If he's busy, ask Steve Forbes. Either works. Then swap out a couple other cabinet secretaries (or all of them) like a scene from Moneyball; trade out Energy, Commerce, and Transportation. From there field a team that is pro-Energy, pro-Security, and pro-Growth. Pro-America damn it. Timeline to full recovery? Thirty days should do it. Elections have consequences.
Friday, September 16, 2022
The infamous investor Warren Buffett once quipped: "5% interest rates will attract money from the moon." Dear readers, that is where we are at. As the global economy craters due to rabid inflation, new business activity drys on the vine like raisons, and government spending is punched into overdrive, dutiful taxpaying citizens are left holding the bag, yet again.
For a large swath of the elite wealthy population these are Halcyon Days. Risk has been outsourced to the Middle Class. The Fed, whose benefit packages to themselves are an insult to the citizen-taxpayer, rackets the lever higher. Tech giants can now effectively capture hundreds of millions in risk-free interest. Consider, Apple's $200B cash hoard earns an extra $500M each 0.25% increase in the Fed Funds rate. There will be 3 jumbo 0.75% hikes this year...so some quick math 9 X $500 = $4.5B. That's nice.
Retail investors like us can also jump on the hay ride. Who wouldn't like some of this 5% gravy train? The one "bright spot" in the economy has been the strength of the dollar which is allowing US buyers of foreign goods to make a proverbially killing. Especially in French Chateaus. Swiss Chalets. And English Castles. For those peasant Americans who still need mortgages, the story isn't so sweet. The effective mortgage rate has doubled. Younger generations of Americans are completely priced out of the real estate market (unless they want to live OUTSIDE America.)
Moon Dollars should help the extremely wealthy protect their assets in risk-free Treasury Bills until the back of inflation is broken. Since they don't use mortgages, the borrowing costs won't bother them. A large segment of the ultra wealthy DO, however, borrow from themselves via the "Buy, Borrow, Die" investment strategy. The Fed Funds increase won't be as dramatic as their falling equity prices. The old adage of "Don't Fight the Fed" rings true.
So from a big picture perspective, expect the next 0.75%+ hike on Sept. 21st to be a final nail in the coffin for small businesses, especially those that don't have fat government contracts. Unions should do well. And of course the largess of government will also do well...their benefits are never reduced when there is vast economic destruction laid on the feet of citizen taxpayers.
What is a financial farmer to do? Bet on crops that have the best chance of survival. If cash is paying a good rate, take it. With blood in the streets there are bound to be good opportunities for savvy buyers looking to capitalize on the failure of other businesses. A crisis always offers a glimpse into opportunity. Like the svengali Rahm Emanuel once said: "Never let a good crisis go to waste." Go and do likewise financial farmers, these Halcyon Days of ineffectual leadership and disastrous economic policy won't be with us forever!
Thursday, September 15, 2022
Ode to the Taxpayer
Taxpayer burdens increases by the day, yet their representation crumbles with the dilution of citizenship. How long can the Republic last?
Inflation, corruption, and dilution are all intricately linked. As financial farmers poor economic and monetary policy steals your seed capital, and ultimately your harvest as inflation swindles us all. The cost to plant is higher. The cost of the land is higher. Fertilizer is higher. Labor is higher. Even God's water is higher. All of this is a result of too many dollars chasing too few goods.
Obviously there is a problem(s). The current economic cycle *should* be firing on all cylinders as we are well out of the pandemic. But as any farmer knows, it is tough to make progress with the plow stuck. And that is where we are right now. Inflation has ripped the heart out of the American growth miracle and left us hobbled, bleeding out in a fallow field.
Until the ravages of inflation are dealt with we are in a precarious position. And the lonesome taxpayer will be called upon, yet again, to bail out a government increasingly bought and paid for by foreign interests (read China.)
But even this would be surmountable if the value of citizenship wasn't being diluted by the hour. That is the crux of the problem dear readers. A society's riches can only support a finite number of people well. Historically, those people have been citizens with the legal right to accept the largess of their own labors.
The value of citizenship was similar to farming; the land from which you toiled yielded crops for your benefit as you tended the land, harvested the crops, and received benefits in return for your labor, intelligence, and sacrifice. Abundance came with increased work, yield from the fields, and protection from droughts, plagues, and marauders all capable of stealing your harvest.
We now have too few in the Middle Class, typically the 85% of the population working in small, family-owned businesses that built America, bearing too much of the yoke. Representatives are no longer representing their constituents. The Federal Government is no longer enforcing laws in violation of their respective oaths of office. What we're seeing is the collapse of a country. Next on the ballot? "Non-citizen voting rights."
Citizen-taxpayer options are steadily decreasing. Most now work for the privilege and duty of paying taxes to support healthcare for all, education for all, housing for all, etc., etc. And the tax burden grows. Get ready for the 1099-Ks coming your way in 2023 for purchases/sales of $600 or more. All while the barn door is open out back letting TRILLIONS blow away.
So here's a toast to you taxpayer, on the final day of withholding in 2022: Make sure you withhold some money (preferably gold) for yourself, and if you've taken a 30% haircut this year in your income, make sure the IRS gets their haircut too. We're in this together, right?
Saturday, September 3, 2022
Ever feel like you're going nowhere fast? That's stagflation in a nutshell; working harder for less while getting squeezed by paying more. A hallmark of the Biden Administration has been the failure of the economy. The jobs number gets a lot of ink, but the jobs are typically service-orientated, lower wage, and not full-time. And that's the bright spot in the economy!
A combination of raging inflation and economic stagnation has resulted in morass of stagflation. Recent market trends indicate that rather than achieving escape velocity from the Bear Market begun in January 2022, we may have several months to go especially if the S&P 500 tests the June '22 lows again. Couple that with a housing recession (mortgage rates have doubled since January), persistently high oil prices, and large companies freezing their hiring and we're in dire straits.
One of the only options for Americans is that most favored by Third World residents; buy hard assets as soon and quickly as possible because fiat money (think paper money NOT backed by gold) is worth less every day. Hence we have seen massive, incoherent, gains in machinery, durable goods, and of course real estate. But even the latter might be in for trouble now as the Federal Reserve is on a mission to break the back of inflation.
The noted investor Warren Buffett once said that "5% interest rates will attract money from the moon." Expect the Fed Funds rate to exceed that by the end of the year. There is no stopping a motivated Fed on a mission with the implicit backing of the Biden Administration.
With equities range-bound and drifting lower investors are in a pernicious position of having their dividends taxed at a higher rate, underlying corporate growth slowing, and innovative small companies being snuffed out of existence.
Stagflation ends when inflation is tamed and economic policies enable the free market to function. Two years into this Administration offers little hope that anything will change. The question that needs to be answered by investors is this: "What is the impetus to buy?"
Tuesday, August 30, 2022
Winter is Coming
Winter is coming. For most of Europe this winter it will be the worst in at least a generation as potentially thousands will freeze. Why? For more than a generation Europe has relied on cheap Russian natural gas to prop up an economy essentially in decline that had not prepared for the possibility of having their primary energy source cut off.
With no energy bridge in place, Europe is completely at the mercy of Russia. President Trump warned Germany of this potential problem in 2018 and was laughed off the stage. The only laughter one can hear now is that from chattering teeth.
The lesson financial farmers need to pull from this looming catastrophe is that old Boy Scout motto: "Be Prepared." Europe is not prepared, and its socialist leaders have led their people to a self-inflicted crisis. As previously blogged, corruption and inflation are intricately tied together. Almost always, where there is rampant inflation, there is widespread corruption.
Look no further than the ruling elites in Europe to pinpoint the source of corruption. It may take many names, but the result is the same: the people suffer, while the leaders jet off to cozy chalets for the winter.
For ambitious energy investors this is the primetime for profitability, as mismanagement of natural resources (and by that I mean not tapping existing supplies to achieve energy independence) has provided a window of unparalleled opportunity.
It seems Western Europe never remembers the past, while Eastern Europe never forgets.
Wednesday, August 24, 2022
Inflation Production Act
The deceptively titled "Inflation Reduction Act" is right out of Saul Alinsky's "Rules for Radicals" playbook. It is more accurately an "Inflation Production Act" than anything. How Joe Biden can claim otherwise is pure malfeasance. What's even more troubling is that ALL 50 Democrat Senators AND the Vice President went along with the lie. But isn't inflation just a "First World" entitled problem?
As the famous Janus God of investing Warren Buffett recently quipped, "Inflation swindles us all." And up until recently, high inflation was actually almost always a Third World problem. That is because there is a strong correlation between inflation and corruption. Where there is high inflation, there is almost always rampant corruption. The two are joined at the hip. Consider the lowly penny for example.
Pictured at the top of this blog post today is a penny from 1845. It is 4X as heavy, almost 2X thick, and nearly 2X as wide as the corresponding 2022 penny. Oh yes...and the 1845 version is also 100% copper. The modern penny is almost all zinc. The penny provides a nice visual example of inflation over the past 77 years.
Generally speaking, when too much money is printed not backed by physical value (think gold), then the cost for goods increases because too many people have too much money chasing too few goods. That is the textbook definition of inflation. This is how a nation robs its people of value. It increases the money supply without increasing the value behind the money. You pay more for less.
The "Inflation Reduction Act" accomplishes this at scale by spending dollars we don't have on things we don't need at a price point that is too high. Even more troubling, it acts as a government clearing house for picking winners and losers rather than embracing a free market system where citizens are the deciders on how best to allocate their own capital. And then there is the IRS issue. 87,000 new armed tax police.
If this country is going to escape from a self-inflicted recession, then we need smart economic and monetary policies. Elected representatives should embrace the principle on which this country was founded, namely a "wide horizon, free range" mentality of low regulation, few laws, just enforcement, and a focus on self-reliance; from energy independence to USA manufacturing to leading the world in engineering, medicine, and free thought in all its forms...movies, painting, poetry.
The only thing holding this country back from enjoying a long stretch of uninterrupted Halcyon Days is hypocrisy...that failure to recognize, accept, and act on truth. Financial farmers would do well to concentrate on identifying ownership opportunities where truth reigns paramount.
Saturday, August 20, 2022
Fans of the monumentally successful Harry Potter series will well recognize the "Leaky Cauldron" reference in this blog post...in Harry's world it is a tavern. My reference is to the economy, and in particular, the fine balance between regulation and production. A leaky cauldron has many benefits.
Consider how a nation's economic success follows a delicate arc between enforcement and laissez-faire; the Joe Biden Administration would be wise to loosen the chokehold on small businesses and entrepreneurs in America. Today in the United States nobody really even knows how many laws there are. Most Americans need professional help figuring out their own taxes. Why is this? Absurd!
Rather then hiring 87,000 more armed IRS agents to enforce an encyclopedic tax code, this President and Congress should laser-focus on taking care of its Veterans by offering direct Small Business Loans from the Federal Reserve for the express purpose of buying small businesses. The citizens in this country who volunteered to serve should not be left behind on sidewalks while their government builds edifices to itself. A great benefit to a leaky cauldron is that not all the money gets to the people who waste it the worst, namely Congress.
Individuals will always waste money the best, ie in their own self-interest. We few proud scorned citizen taxpayers elect members of Congress for the primary purpose of spending our tax money. Think about that...every American citizen has their own personal shopper, who in reality rarely buys what you want, for the price you want, or even when you want it! A leaky cauldron helps to alleviate this problem.
Finally, a leaky cauldron bubbles over rather than causing the cauldron to explode. That's a good thing. Explosions cause a lot of damage, while bubbles typically can be mopped up. So in summary, government officials should focus primarily on understanding the Laffer Curve and loosely regulating an economy based on a "leaky cauldron" principle. Financial farmers should LEAN OUT hard against increased government regulation, enforcement, and penalization. All of those are taxes on productivity which shifts power away from the people. Remember, your government works for YOU.
Wednesday, August 10, 2022
The United States officially became a banana republic (and I don't mean the cargo-pant slinging clothier) on Monday August 8th, 2022. Couple the Trump Raid with the looming passage of the "Inflation Reduction Act" adding 87,000 armed "tax police" and we are there dear readers. As my good friend Jackie Chiles would say "Outrageous, Egregious, Preposterous!"
Under the auspices of non-compliance with an Archives Act violation (what is that anyway?) the FBI raided former President Donald Trump's Mar-a-lago home Monday August 8th, 2022 in the most brazen political hit job this country has ever witnessed. On the heels of this raid, Democrats have voted 51-50 to send arguably the most freedom destroying legislation to the House. The impact of creating an armed partisan tax police with 87,000 new recruits boggles the mind. This country is in trouble.
When justice is no longer blind to political affiliation or religious beliefs or the Bill of Rights truly storm clouds brew. Such is the case now as the country will undoubtedly become more polarized along political lines as the Constitution becomes a notion rather than an ideal.
What is a financial farmer to do? Oddly, the market continues to rally into the better-than-expected horrible inflation number (8.5% vs. 9.1% previously) so a crest in inflation may sling-shot us out of a Bear Market. But to a larger extent, the market is always forward-looking. How far forward is a matter of debate, but something along the lines of 6-9 months is a reasonable assumption. And based on inbound data from recent macro events it *appears* that with inflation peaking the Fed may only have to raise another couple points.
"Only have to raise another couple points" is a tricky proposition nonetheless, as mortgage rate increases tied to the 10-year Treasury Note dictate the housing market. Expect purchasing to slow, inventory to rise, mortgage payments to be missed, and a general malaise to hit the housing market. It is hard to believe housing will continue to rally into a near-doubling of rates. The one savior (economically speaking) of this economy is the unemployment rate.
With historically low unemployment and steady to higher wages, the consumer has some semblance of protection from inflation, protection in the sense that they can now get less for more; "grin and bear it" has become the signature economic policy of the Biden Administration.
That's where we're at now as a country, trying to shoulder the burdens of inflation without breaking our backs all the while watching the rule of law disintegrate. But keep faith dear readers, as so plainly spoken in "Unbroken": "If you can take it, you can make it."