Tag Archives: inflation

The Fed’s “Catch 22”

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , , , ,

Before diving into the topic, let’s be clear about one thing:  The economic definition of “inflation”  is the increase in money supply relative to the marginal increase of wealth output (GDP) in the economic system for which money supply is created. This is differentiated from “price inflation,” which is “a general rise in prices.”

Money and credit creation in excess of wealth output causes currency devaluation.  It is this currency devaluation that arises from money and credit printing that causes “price inflation.”  More money (and credit) chasing a relatively less amount of “goods.”

Furthermore, the commonly used price inflation reference is the Government’s CPI.  The CPI measurement of inflation has been discredited ad nauseum.  And yet, 99% of analysts, commentators, bloggers, financial media meat-with-mouths, etc uses the CPI as their inflation trophy.   But the CPI has been statistically manipulated to mute price inflation since the early 1970’s, when then-Fed Chairman, Arthur Burns, correctly understood that the currency devaluation that was going to occur after Nixon closed the gold window would have adverse political consequences.  Today, the CPI measurement of price inflation is not even remotely close to the true rise in prices that has occurred over the last 8 years. Over the last 47 years, for that matter.

This notion of rising inflation seems to be the en vogue “economic” discussion now.  But the event that causes the evidence of currency devalution – aka “inflation” – has largely occurred over the past 8 years of global money printing.  If your general basket of expenditures for necessities – like housing, healthcare, food, energy,  and transportation – has risen by a considerable amount more over the last 5-7 years than is reflected in the CPI, ask either the Bureau of Labor Statistics, which publishes the  CPI report – or the moronic analysts who insist erroneously on using the CPI as the cornerstone of their suppositions – why that is the case.

The Fed’s Catch 22 – It’s been estimated that the Treasury will need to sell $1.4 trillion new bonds this year to cover the spending deficit that will result from the tax cuts combined with the record level of Government spending just approved by Congress and Trump. With the dollar declining, foreign Treasury buyers are sitting on significant losses on their Treasury holdings. As an example, since March the dollar has dropped 16% vs. the euro. Add this to falling Treasury bond prices (rising yields), and European holders of Treasuries, especially those who have to sell now for whatever reason, have incurred a large drop in the euro-value of their Treasury bonds. The same math applies to Japanese Treasury bond investors, as the dollar has fallen nearly 9% vs. the yen since March.

One of the primary fundamental factors causing the dollar decline is the continuously deteriorating fiscal condition of the U.S. Government. If the Fed continues hiking interest rates at the same pace – 1.25% in Fed Funds rate hikes over two years – the dollar will continue declining. The pace of the rate hikes is falling drastically behind just the official measurement of inflation (CPI). Imagine the spread between the real rate of inflation (John Williams estimates actual inflation to be at least 6%) and the Fed funds rate, also known as “real interest rates.” Real interest rates using a real measure of inflation are thus quite negative (6% inflation rate minus 1.25% Fed funds = negative 4.75% real rate of interest). As negative real rates widen, it exerts further downward pressure on the value of the dollar.

The Fed could act to halt the falling dollar by hiking rates at a faster pace and actually sticking to its stated balance sheet reduction schedule. But in doing so, the Fed risks sending the economy into a rapid tail-spin. Higher rates and less banking system liquidity will choke-off the demand for the low-cost credit – auto, credit card and mortgage loans – that has been stimulating consumer spending. In fact, I have made the case in recent SSJ issues that the average household is now near its limitations on taking on more debt. Consumer borrowing, and thus consumer spending, will decelerate/decline regardless of the cost of borrowing. We are seeing this show up in retail sales (more on retail sales below) and in stagnating home sales.

As it stands now, based on its reluctance to reduce its balance sheet at the $10 billion per month rate initially set forth by Janet Yellen, it appears that the Fed is fully aware of its Catch 22 predicament. Last week, in response to the nearly 10% plunge in the Dow/SPX, the Fed actually increased its QE holdings by $11 billion. It did this by adding $11 billion in mortgages to its SOMA account (the Fed’s QE balance sheet account). This is an injection of $11 billion in liquidity directly into the banking system. This $11 billion can, theoretically, be leveraged into $99 billion by the banks (based on a 10% reserve ratio). The dollar “saw” this move and dropped over 2.2% in the first four trading days this past week before experiencing a small technical bounce on Friday. The 10-yr Treasury hit 2.93% last week before settling Friday at 2.87%. 2.87% is a four-year high on the 10-yr.

The Big Money Grab Is “On” As Middle America Collapses

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , ,

The stock market rejoices the House passage of the tax “reform” Bill as the Dow shot up 187 points and the S&P 500 spiked up 21. The Nasdaq soared 1.3%, retracing its 3-day decline in one day. The tax bill is nothing more than a massive redirect of money flow from the Treasury Department to Corporate America and billionaires. The middle class will not receive any tax relief from the Bill but it will shoulder the burden of the several trillion dollars extra in Treasury debt that will be required to finance the tax cuts for the wealthy. The tax “reform” will have, at best, no effect on GDP.   It will likely be detrimental to real economic output.

The Big Money Grab is “on” at the highest levels of of Wall St., DC, Corporate America, the Judiciary and State/local Govt. These people are grabbing from a dying carcass as fast and greedily as possible.  The elitists are operating free from any fear of the Rule of Law.  That particular nuisance does not apply to “them” – only to “us.” They don’t even try to hide their grand scale theft anymore because the protocol in place to prevent them from doing this is now on their side. This is the section in Atlas Shrugged leading up to the big implosion.

“When you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.” – Atlas Shrugged

Speaking of the economy, as with inflation the GDP report does not reflect the true level of real economic activity in the U.S. because the Government report is not designed to measure real economic output. Instead, the GDP is yet another Government economic report constructed with blatant statistical manipulation and outright fraudulent data sampling. How am I so certain of this? The “tell” on the true condition of the economy lies with the fact that Fed is “normalizing” neither interest rates nor its balance sheet. In fact, if the Fed were to “normalize” monetary policy, it would quickly hike the Fed funds rate up closer to 6% and it would be reducing its balance sheet and removing at least the $2.1 trillion in printed cash sitting in the banks’ excess reserve account.  The problem is that this “normalization” would pop the enormous asset bubble created from money printing.  It would also interrupt the ongoing wealth confiscation.

Elijah Johnson at Silver Doctors invited to discuss the above issues as well as the stock, bond and housing bubbles. And of course gold and mining stocks:

I’ll be releasing the latest issue of my Mining Stock Journal this evening. It will have an emerging junior gold exploration company that has been described at “Gold Standard Ventures 2.0.” You can find out more information here:   Mining Stock Journal info.

Gresham’s Law meets its Minsky Moment

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There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. 

While it’s no secret that the Fed, along all global Central Banks, are supporting their respective financial systems by capping interest rates with “QE” (also known as “money printing”), the yield on the 10-yr Treasury has risen 36 basis points in two months from 2.04% in September to 2.40% currently. There have not been any Fed rate hikes during that time period. The yield on the 2-yr Treasury has jumped from 1.26% in early September to 1.66% currently. A 40 basis point jump, 32% increase, in rates in two months.

This is not due to a “reversal” in QE. Why? Because through this past Thursday, the Fed’s balance sheet has increased in size by over $7 billion since the Fed “threatened” to unwind QE starting in October. The bond market is sniffing hints of an acceleration in the general price level of goods and services, aka “inflation.”

I wanted to post this comment from my blog post the other day because this person uses an expressive writing style to convey incisively the uneasy truth about the financial and economic system in the U.S.:

Bankers are moral lepers, the financial equivalent of hookers and blow. You can never get enough of the moral debauchery in that world.

When a shit box tiny house, half the size of my man cave, goes for $50,000 less than my entire home in Reno, the end is nigh. $2,000 a square foot for a studio? What effing moron would pay that. Don’t answer. We know someone did. I pity the fool.

Bitcoin 7000, DOW 23,500, studios for $550,000 are all a result of the Greenspan /Bernanke/Yellen  QEpocalypse.

The flood of faux FIAT creates the same Cantillion effect as the flood of gold and silver from the new world that inflated the values of assets in the old world and decimated those outside the ring of prosperity created by that effect.

And that was when gold and silver were real money. But do you think gold and silver can catch a break today? Nope, not a chance.

There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. No accident there.

You would think this might solve some fiscal woes at the local and state level by boosting tax receipts by a few hundred percent. Nope, not happening there either.

The states and cities created their own PONZI schemes with underfunded overly generous pension plans. Even a moron could get a better return in those funds but now they are out there with their begging bowls.

The County of Maui just raised it’s property taxes 42% to pay for pension plan deficits. A senator from Ohio wants to use funds from treasury bonds to bail out their public pension deficits.

As we see asset prices sky rocket, the demands from the public sector grow even faster than tax revenues and asset inflation will handle. Gresham’s Law meets its Minsky Moment and none too soon.

And don’t even get me started about Social Security. Just let me get mine before the whole shit show collapses.

The Size Of The Financial Avalanche Coming Grows Larger

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Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:

The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $50,000.

A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $550,000. The seller bought it a year ago for $335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.

Here is monetary inflation as it is showing up in the stock market and housing markets:

The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period.  Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.

The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.

Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.

Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.

The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX.  However,  in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.

While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal:  Zillow Group (ZG) at $50 in late June and Redfin (RDFN) at $28 in late September.  ZG just lost $40 today and RDFN is down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly.  With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.

If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.

What Happens To Gold & Silver When Trump Attacks The Dollar?

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Get prepared because we’re going to have the worst economic problems we’ve had in your lifetime or my lifetime. – Jim Rogers, Macro Outlook in the Trump Era – MacroVoices

Make no mistake, it’s going to get ugly at some point in 2017. Elijah Johnson at Silver Doctors invited me to discuss why I believe Trump’s policies, assuming he gets anything passed and implemented, will be phenomenal for gold. Another factor not being discounted or widely discussed is an acceleration in the rate of inflation over and above the ability of the Government’s CPI sausage grinder to mute actual price inflation in everyday consumables.

The Economy Is Tanking – Inflation/Obamacare Attacking The Middle Class

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The economic reports continue to show an overall rate of deterioration in economic activity down to levels – in general – comparable with the 2008-2010 period.  Freight transportation activity is part of the “nerve center” of the economic system.   The latest data from Cass shows a rapid decline in both freight shipments and expenditures that began in mid-2014:

UntitledAlthough shipments ticked up from April to May 1.3% – attributable to seasonality –  year over year shipments for May dropped nearly 6%:Untitled

As you can see, expenditures plunged 10.1% year over year.  North American freight shipments reflect all economic activity at all levels of the economic system across a broad spectrum of industries.

Retail sales reports going back to December 2014 are signalling economic stress at the household level:   “During normal economic times, annual real growth in Retail Sales at or below 2.0% signals an imminent recession. That signal basically has been in play from December 2014, based on industrial production, retail sales and other indicators), suggesting a deepening, broad economic downturn” (John Williams, Shadowstats.com)

This financial stress at the household level is beginning to show up in credit delinquencies and defaults.  Last Tuesday Synchrony Financial reported an unexpected spike in its credit card charge-off rates:  Rising Credit Card Defaults.   As I’ve detailed in prior posts, auto loan delinquencies and defaults are beginning to accelerate.  I’ve covered a couple of credit and credit-related companies in my Short Seller’s Journal , one of which is down 18% since I featured it on March 20th. This is a remarkable fact given that the S&P 500 is up 1.5% in the same time-frame.   When the stock market rolls over, this stock will drop at least 50%.

Although the latest retail sales report last week showed a small gain month over month, the unexpected gain was fueled almost entirely by the rise in gasoline prices.   The Government CPI report does not show much inflation, because the Government goes out of its way to not measure inflation.

The Government’s methodologies used to hide real inflation have been dissected ad nauseum by this blog and many others over the years.  Instead, I wanted to share a write-up a friend and colleague of mine sent me which elegantly describes the truth about inflation and Obamacare and the affect both are having on the average American household:

There’s a huge disconnect between the Government CPI report and true inflation. May wholesale gas prices were flat while the Commerce Dept reported that May gasoline sales for retail sales purposes went up 2.1%. Implies 2% usage higher which might tie in with how, with lower gas prices earlier this year there was the shift to the lower mileage bigger vehicles, or could be more driving.

However, April gas prices according to CPI were up 8.1% but wholesale prices were up more like 14% in April. So the CPI price increase is 57% of the futures price increase. Apply the “lower inflation” to revenues driven by inflation and that’s how GDP gets overstated.

There a lot of moving pieces in the data charade. CPI is reported later this week (June 16th) and it will be interesting to see whats reported for gas. I looked at this a few years ago and found stark inconsistencies between the price level used by the Government in its CPI index vs wholesale gas prices, which are futures based.

The other issue is in food. This is where the CPI index substitution comes into play that John Williams (Shadowstats.com) talks about. My own index includes “outside skirt steak” which is approaching $20 a pound, where I used to pay $5-7 a pound a few years back. So we actually bought/substituted rib eyes at 10 bucks a pound. From an inflation perspective, if that got into the counting, I reduced my inflation by 50% (we later bought hamburger meat at Sams for 2.79 a pound so in the month we cut out our personal CPI on meat by 85%-although we moved to lower quality products). Another issue was cereal–which I used to buy regularly at Walmart early this year at $2.50 a box and it’s now $3.30 a box (32% price inflation).

So, what’s the point?

The point is that there is getting to be some serious inflation in food and somehow its not showing up in the Govt data. In addition, with all the variability with sales and type of stores and how the GDP, Jobs or CPI surveys are created–less than scientific, the government can drive whatever reporting outcome it wants and it’s virtually impossible for anybody to follow.

Regardless of how gasoline pricing is showing up for various Govt reports, between the higher cost of gas and food, and lower earnings in general, people are getting more and more stretched especially as healthcare, education and housing costs go much higher.

This latest retail sales report did confirm home improvement is now declining (big ticket items and durable goods), which had been one of the few bright spots in retail. I am also guessing that there is a shift in overall spending to necessities. The huge increases in Healthcare premiums is pretty significant for a family along with co-pays and deductibles. Practically speaking the middle class is getting attacked. There are not enough ultra-high income earners who can carry the economy.

The S&P 500 made another failed run at an all-time high earlier this month.  If the Fed was not aggressively preventing any down-side momentum from gripping the stock market, there would like be a stock market crash.

The U.S. financial and economic system is inching toward an abyss that is much deeper and darker than the abyss into which it plunged in 2008.

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The Government Fraudulently Reported April Inflation Numbers

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There’s no B.S. like the BLS – Dave Kranzler, Investment Research Dynamics

The Bureau of Labor Statistics reported the Consumer Price Index for April this morning. This Ministry of “Truth” published an inflation report that asserts that consumer inflation rose .1% month over month for April.   But a further dissection of the numbers shows that the BLS has the price of gasoline falling 1.7% during April.

This is either a politically motivated act of fraud or complete incompetence on the part of the Government statisticians and data gatherers (the Census Bureau).

In fact, the price of gasoline rose over 12% during April – the fastest monthly rise in history:

gasoline

As you can see, the price of gasoline rose from $1.77 to $2.00 during the month of April. Either the people running the BLS are complete incompetent idiots or have been given strict orders from above – i.e. the White House – to produce politically friendly economic reports. Let’s call the BLS “The Ministry of Disinformation.”

The BLS’ distortion of the data it reports is far greater and fraudulent that ANYONE is willing to admit, investigate or report.

Here’s what they did to gold after that fraud-filled CPI report was released (click to enlarge):

Gold hit

Any questions as to the political motivation behind the Government’s intentional release of fraudulent economic data?

Janet Yellen Says The Economy Is Fine And Price Increases Are Just Noise

Financial Markets, Gold, Precious Metals, U.S. Economy, , ,

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If the economy is hunky dory, then why is the money supply going parabolic?

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The adjusted monetary base is all currency either in circulation with the public or held in bank reserve accounts at the Fed.  This chart reflects all of the money the Fed has printed since QE started.  As we know, most of this money has ended up in the  Fed’s “Excess Reserve” accounts of the Too Big Too Fail banks.  This is more than just “noise,” to borrow Yellen’s term.  There is a very specific reason for this and my co-producer and I are working on a multi-part video series explaining what we are pretty certain is going on and why most of the money printed up by the Fed – and most of the money the Fed continues to print in a parabolic fashion (see the graph above) – remains on the big bank balance sheets.

Hint:  there is a massive derivatives melt-down brewing, the likes of which will probably trigger the collapse of the dollar.

Other than that minor occurrence,  the graph above raised some interesting questions that no one in the media or Congress seems capable of asking Fed Chairman Yellen.  So I will ask them.  Please feel free to email them to the Fed.

If the economy is recovering, why is the money supply still expanding at a parabolic rate?  If the recent numbers which show accelerating inflation are just “noise” – in your words, Janet – how come my monthly grocery and gasoline and housing expenditures are roughly 25% higher than they were this time last year?   Janet, when is the last time you spent money at the grocery store or at a restaurant?  When are you going to drain the excess reserves of the big banks, which are just sitting there collecting more interest than a 30-day T-Bill?

For everyone else reading this, why are you still holding money in bond mutual funds and money market funds?   You are watching a speeding freight train with no brakes come straight at your car stuck on the tracks and yet, you seem incapable of getting out of your car and running to safety?

Get your money out of bond and money market funds and buy every dip in gold, silver and mining stocks.  For some great junior mining stock ideas, see this:  Junior Mining Stock Research Reports.

FIrst Quarter GDP Declined 1%

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Untitled

The first revision of Q1 GDP showed  that GDP declined 1%.  If you strip out inflation, the contraction would be even more severe.  The original Government Q1 estimate showed a .1% increase, before inflation is stripped out.   Forecasters were expecting the revision to show a .5% decline.  It came in at -1%.   You can read Forbes’ reporting of this here:   Recession Time.

Of course, in it’s infinite Einsteinian wisdom and superlative willingness to spin the facts, Bloomberg News is reporting that negative GDP number does not mean a recession.  I guess they have their own “special” dictionary of economic definitions.

You tell me, does this look like a recession has set in (source Forbes, edit in red is mine):

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Let me correct one mistake in the title of that graph.  It says “real” GDP.  But the number that’s being reported is “nominal” GDP, meaning it includes price inflation.  If you strip out the price deflator used the Government of 1.3%,  “real” GDP would -2.3%.

Bloomberg is also blaming the bad number on “the weather.”  Oh, the dog ate my homework.  But we know that’s not true because the retail sales and housing numbers continue to decline month to month this year through April.  Sorry Bloomberg/media, April had great weather for the most part.  Was it too sunny out to go shopping or look for a home?

The real economy is contracting even more quickly than the rigged Government numbers show.  Retail sales are plunging, with both shopping mall and online sales registering declines.  Real average weekly income is declining, inflation is heating up and more people leave the workforce everyday and take out student loans to enroll at OnlineUniversity.com.

It’s going to get very ugly in our system over the next several months.  If you own gold and silver in your possession, hold on tight and add.  If you don’t own any, may your Higher Power – whatever you call it – have mercy on your soul…