Clearly, the US labor market is not yet in a Fed-induced recession. That and the larger-than-expected jobs number for May have investors thinking the Fed will stay “aggressively hawkish,” as advertised. So they dumped stocks and bonds yesterday—as well as gold—and allocated to dollars.
But remember the other big news of the week: the (for the most part) reopening of Shanghai. China plans to both stick with its “zero COVID-19” policy and reopen—by continuous testing of its entire population.
The prospect of China joining the Great Reopening could explain why oil prices rose this week—even on the day OPEC announced a 50% increase to its planned increases in output. Industry insiders I saw seemed doubtful that this would be enough to offset banned Russian oil, but even if it did, China’s reopening could swamp any increases in output actually achieved.
I find myself thinking about this in combination with the data that suggest that the US labor market—the main pillar supporting the “strong economy” thesis—might be turning.
I wonder…
What if the Fed creates the recession almost everyone not in the government says is necessary to cure inflation—but inflation remains high?
Yes, I’m talking stagflation again.
It’s true that I’ve been saying stagflation is the most likely outcome ever since governments started flooding the world with money in response to the COVID-19 lockdowns back in 2020.
I think we’re starting to see that play out now in the data.
Note that I’m not saying next week’s US CPI report for May will soar to double digits. (And yes, I see CPI and PCE figures as cooked, but they are what most investors go by.) Given the very large increases in the CPI this time a year ago, the hurdle is higher for this year’s numbers to come in even hotter. I’m not even sure that May’s CPI be higher than April’s 8.3% headline number… though, as high as gas prices are, it could be.
The point is if China really does join the Great Reopening, we could see CPI numbers head higher throughout this summer—even as the Fed succeeds in “cooling” the US economy.
That’s in stark contrast to the expectations of many mainstream economists for inflation to drop back to 2–3% soon—perhaps even by the end of this year. The more “bearish” ones I hear are thinking maybe 4%.
I think this is delusional.
But until CNBC and The Wall Street Journal start giving me as much time as they give Jamie “Hurricane” Dimon or Elon “Super-Bad Feeling About the Economy” Musk, my thoughts won’t affect markets. They do affect my own speculations—and perhaps some of yours—most of which are priced in US dollars.
So, even if we assume a rosy case of flat to slightly lower CPI and PCE numbers this summer and decreases to 7%, 6%—or even 5% by the end of the year—that’s still a huge problem for the economy.
Market rates would have to respond, and the economy would slow dramatically. If hiring stops, so would wage increases—but not the rising cost of living. No soft landing. It’d be the real McCoy: recession.
And inflation would still be far, far above the Fed’s supposed 2% target—with real rates still negative.
All of this brings me back to my base case expectation: stagflation.
This case seems more solid to me with each passing week. And that’s:
- Bearish for stocks.
- Bullish for commodities.
- Bearish for bonds as central bank selling ramps up (though mistaken “TINA” thinking could prompt unimaginative investors to do some buying ahead of that oncoming steamroller).
- Bullish for monetary metals: gold and silver.
- Bearish for the dollar—in real terms (which may be disguised in FOREX markets by the “race to debase” among fiat currencies).
- Bullish for oil and gas—especially with the New Iron Curtain getting bigger by the day.
- Bearish for real estate (at least after those who fear higher rates ahead rush to buy now) until demographic pressures force the issue.
- Bullish for uranium—even if there is a recession.
- Bearish for average standards of living.
I’m confident enough of these speculative expectations—not predictions—that I’m itching to buy some of the great stocks in the areas I’m bullish on. Many are deeply on sale now.
It’s the “bearish for stocks” bit that stays my hand. I think stocks in the sectors I’m bullish on will do well even if the broader markets remain bearish for years. But if the Fed really spooks investors and there’s a market crash, I expect absolutely everything to go (even more) on sale.
As I’ve argued before, I don’t know that this will happen, so I’m not selling everything and going to cash. Even so, the risk still seems very high to me, so I’m holding off on any buying for a while longer. (Paying clients will be notified when I decide to start buying again.)
That’s my take this week.
As always, if you find value in these views, please feel free to forward this email to anyone else you think might find them of interest.
This Week’s Q&A
Q: I have heard that the US government can’t afford to increase interest rates because it will blow up its debt payments. However, because the vast majority of the Treasuries that are reissued are being purchased by the Fed, this Ponzi scheme permits potentially unlimited borrowing without increasing debt service payments. In fact, the opposite will happen as the increased coupon payments (because of the higher coupon rates) that the Fed receives on the newly reissued Treasuries that it purchases goes back to the US Treasury coffers, which can then be used for fiscal spending. Therefore, there seems to be no limit to the amount of borrowing possible by the Fed in this Modern Monetary Theory Ponzi scheme. If the Fed is the purchaser (rather than foreign governments or the public), the higher coupon payments get paid back to the Treasury with the “magic dollars that the Fed creates.” Please advise how this Ponzi scheme fails if the borrower increasingly is the Fed?
A: Who pays the interest the Fed collects on its government bond holdings?
The same government.
This is circular. That different branches of the government are paying and collecting interest doesn’t change the fact that the government is paying itself—and printing more money as it goes.
Reality may be obscured by the shell game, but it is what it is. The result is currency debasement.
They’ll never admit it, but in some deep, dark cranny of their twisted minds, I think many central bankers know this. That’s why they employ these shell games and say they won’t monetize debt.
Reality matters. Even the US can’t borrow and print to infinity (and beyond!) without consequences.
This is why I tend to agree with those who argue that whatever Powell says, the Fed can’t let interest rates rise too much, or the US government will become insolvent.
All Ponzi schemes fail eventually. Some just take longer than others.
And as always, if you have brief questions for me, please send them to L@LouisJamesLLC.com.
P.S. If you’d like a chance to see me and ask me questions in person, note that I plan to participate in this year’s PDAC conference this month, Rick Rule’s resource symposium in July, and the New Orleans Investment Conference in October. I don’t accept commissions for promoting events. I’m just letting you know that I’m happy to meet readers at such conferences.
This Week’s Free Articles…
- In The Pit: Dave Forest, CEO, Kraken Energy (UUSA.CN). Old friends get no slack if they dare to step In The Pit with me. My friend Dave has a new uranium play—so I had to ask him why it was worth the trouble, given the competition from higher-grade projects and mothballed production ready to come back online.
- The Most Baked-in-the-Cake Investment of 2022. This is an INN interview covering my latest thinking on various issues discussed in this letter—and the commodities I like best in consequence. Can you guess which one I feel most confident of?
In Closing
I see the economic factors discussed above as the most important for resource speculators today. There was one other headline, however, that deserves an honorable mention…
Did you see that Ukraine’s central bank has raised interest rates to 25% to combat high inflation?
I literally laughed out loud when I saw that.
As I tweeted at the time, I’m unsure of many things, but one thing I’m sure of is that inflation in Ukraine is not the result of a booming economy. Using standard central bank “tools” to cool the economy to reduce inflation seems utterly wrongheaded to me. This is exactly the sort of thing I meant when I called mainstream economists “Wrong-Way Corrigans.”
That warning seems more important now than ever.
Caveat emptor,