There are many warnings up there that inflation may be a lot more severe than many are currently expecting. I have been writing for a month that the central bank cannot stop the “printing and buying” schemes without risking a total collapse of stock bond and real estate markets.
As a matter of fact, we have seen that just the mention of maybe raising rates by a miniscule amount a couple of years down the road, leads to a severe reaction in the “markets”.
The warnings are coming from many quarters. The latest, just this morning on July 14th, Jerome Powell chairman of the Fed, has finally ended the charade that inflation is transitory. He admitted that it is likely here to stay. The Fed’s Beige Book also contained a few facts that include:
- Prices increased in an above average pace as seven districts reported a strong price growth and the rest saw moderate gains. (My comment: We are seeing prices rise faster than we have ever seen in our lifetimes).
- Pricing pressures were broad- based and grew more acute in the hospitality sector as the reopening of hotels and restaurants confronted limited supplies of materials and workers.
- Construction costs remain high but lumber prices reportedly eased a bit
- Container prices returned to very high levels after having moderated in the spring. (My comment- the prices are actually almost unbelievable as some ships are commanding over $100,000 per day to be leased).
- Some contacts reported that the high-end user demand enabled them to increase their prices and others said that input price pressures had reduced their profit margins.
- The majority of companies contacted expected “further increases in input costs and selling prices in the coming months”.
The inflation that is happening right now is FAR higher than is being reported and at the same time personal incomes (what most of us live on) is decreasing. Lower wages and higher prices equal financial pain. We knew it in the 1970s as stagflation.
Not only are wages falling but many who counted on personal loans are being cut off. Wells Fargo has canceled all personal loans. This is actually stunning to me because they were charging 9% to 21% on these loans. They must really be worried about defaults to give up a gravy train like that. Of course, those who relied on those type of loans will have to use credit cards that charge even higher interest rates. Another form of inflation!
I believe they did this because they are concerned about a liquidity problem that appears to be brewing. I believe it is being concealed from the rest of us by the Fed intervening in the overnight loan markets to the tune of around a $1 trillion- yes that is a $1 trillion- a day. These overnight loans are usually made from bank to bank. Since about September of 2019 pre-COVID, the banks have appeared to not trust each other, not even overnight. So the Fed has stepped in and provided the liquidity needed to keep the system functioning.
Many may say “the banks just released earnings and they’re beating estimates”. That would be true but let’s not forget that this is a normal outcome. They reduce expectations and massage the numbers to make them look as good as possible. Buying back shares is another common way to make mediocre earnings look stellar.
Another way, based upon Citigroup’s latest earnings is:
Revenue was 12% lower from the prior year. Loans were down 3% and their expenses rose 7%. With the fear of default rising, Citigroup decided to take down $2.4 billion that they had set aside for losses on loans and use it as income to pad the bottom line. I don’t think that was a very prudent thing to do but how would the C-Suite get their bonuses without buybacks and these type of shenanigans?
It is no surprise that most people just look at the headlines and go about their business not realizing that under the surface all is not well. This gets me back to the problem of counterparty risk. If any one of the major banks were to fail they would likely all fail because they were all counterparties. They have hundreds of trillions in bets so that a 2% move against the position could be enough to wipe out the entire market value of the bank. The “losing” bank will not be the only one to suffer. The bank that “won” the bet will likely not collect unless, like the last time, the Fed steps in and makes them whole. I believe this has been going on since at least 2008. If I’m correct, the $145 trillion that Dr. Mark Skidmore says is missing, is likely being used to prop up the banks derivative positions. Where else could anyone possibly hide 145 trillion?
The debt and “printing” numbers we see are scary enough. Once a person who has a PhD in economics and is a professor at Michigan State University scours the books the Department of Defense and HUD and finds 145 trillion expenditures that are unaccounted for it pales in comparison to what we think we know.
The bottom line is that people, companies, cities, and states are in far worse financial shape than many believe. The Federal government, since it can have the Fed- through the banks that own it- “print” money, may be in the worst shape of all but will likely be the last people questioned because of this enormous privilege. Of course, they are using this advantage to conjure up so much cash that it is well on its way to becoming worthless.
I am sure that those executing this game plan are aware that the dollar’s days are numbered. This was also true in Germany in the 1920s when their currency collapsed. The powers that be knew what they were doing would ultimately undermine the currency but the thought of what would happen if they stopped the printing was even scarier to them. It is human nature to take the easiest way out.
It is also human nature to follow the crowd. While the crowd is piling into stocks right now the smart money is buying gold and silver. This would be central banks, the major banks, countries, wealth funds and hedge funds. I should also include those regular people, like myself, who are paying attention to what is happening in the economy and markets.
As a matter of fact, in Goldman Sachs last quarterly report, they announced that they had sold 20% of their equity (stock) positions. JP Morgan announced it is holding 500 Billion in cash while they hold (old numbers by Ted Butler) around a BILLION ounces of silver and 25 million ounces of gold.
What do these people at the top of the food chain know that we don’t?
Personally, I believe they know just how close we are to the end of the cliff and are taking action to book gains and hedge their bets for what appears to be a bumpy ride ahead.
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