Rickards Defies Consensus

Is He Right? Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Rickards Defies Consensus - Three dynamics giving inflation a short-term boost… - The bond market says inflation won’t last… - Then Jim Rickards’ senior analyst, Dan Amoss, shows you why the Fed is locked into EZ money policies, despite its talk… Recommended Link [Robert Kiyosaki Mid-Year Review – and Predictions for What’s Next]( [Read more here...]( Robert Kiyosaki is holding a mid-year review and predictions event designed to help you boost your cash flow and build your personal wealth this year by leveraging new opportunities for investors of all experience levels. Today, you can get 100% FREE Access to the exclusive online broadcast of Explosive Wealth Trends. [Click Here For More Details]( Portsmouth, New Hampshire July 1, 2021 [Jim Rickards]Dear Reader, Inflation talk is everywhere. There are literally hundreds of articles available on the “hot” inflation in April and May 2021, but they all recite the same narrative, and none of them have the detail needed to either confirm or refute the inflation narrative. It’s one big echo chamber. We do know that base effects accounted for about 50% of the total CPI increase. That does not mean that prices didn’t go up. It means that they went up from an extreme drop the year before; and therefore, the increase is not sustainable. It’s like falling into a 50-foot hole and then climbing out 50-feet. You had a good climb, but you’re really just back where you started with no net gain. Base effects don’t tell us anything about what comes next. The other 50% of the price increase is real, in the sense that it reflects current economic trends that may (or may not) continue. The reasons for the price increases are: 1. Supply-chain disruptions causing shortages. This is mostly felt in semiconductors, which, in turn, hurt auto production (cars are computers on wheels these days). This gave a boost both to new car sales and used car sales. 2. Economic reopening. After 18 months in quarantine, there’s little doubt that people were ready to shop, dine out and be entertained. When you combine this with labor shortages, especially in the restaurant and retail business sector, we’re seeing some wage increases that get passed along as higher consumer prices. 3. Stimulus. The government handouts last December and March combined with record deficit spending and other social welfare programs have given a boost to consumer spending. The boost is relatively weak compared to the amount of money handed out (data shows that only about 25% of the handout checks are being used for consumption), but a boost is still a boost. These three inflation factors are a bit difficult to disentangle and there are some feedback loops. For example, as people get stimulus checks and go out to dinner, more pressure is placed on food and commodity supply chains that are already stressed, and so on. It’s also important to bear in mind that CPI and PPI are not monolithic but are baskets with many components. People run around yelling, “Gas prices are soaring!” and “Food prices are through the roof!” What these statements miss is that they are focused selectively on highly visible components. Many prices are actually going down. Clothing is down. Consumer electronics are down, etc. The bigger issue is where do we go from here? Are the elements that gave rise to higher prices sustainable or not? It appears that the upward price pressures are temporary and non-sustainable. Supply chain disruptions are real, but they’re getting sorted out. You can only reopen once; after that, it’s back to business as usual. The labor shortage is a myth. There are between 10-20 million prime-age workers who are not in the labor force and not officially counted as unemployed. In addition, millions more are collecting $35,000 per year in unemployment benefits and not responding to job openings that pay $32,000. Once the unemployment benefits run out and after modest one-time wage hikes, those jobs will be filled. Again, the price pressure is real, but it’s a one-time effect. There is no real labor shortage that will cause cost-push inflation of the kind we saw in the late 1960s and 1970s. Finally, the stimulus parade is over. Biden may get another $2 trillion in infrastructure spending, but we won’t see more government handouts of the kind that boost retail sales. Infrastructure spending takes years to play out. The near-term consumption impact will be muted. Also, higher gas prices mean less disposable income is available for shopping and movies. So, with all three stimulus factors fading fast, we’re back to a punk economy not much different from what we had from 2009-2019, but maybe worse because the debt levels are so much higher. The bond market agrees. The yield-to-maturity on the 10-year Treasury note (a benchmark security) has dropped from 1.745% on March 31 to as low as 1.375% in June. That’s a huge drop in bond-land. It does not signal inflation. It signals at least disinflation and possibly deflation. The bond market has a far better track record of accurate predictions than the stock market, which never sees trouble coming. The 10-year yield is 1.48% today, but still well below its March 31 high. This analysis is completely contrary to the CNBC narrative about inflation. My expectation is that rates will remain low, inflation expectations will not be met, the Fed will not raise rates before 2023, and the gold price will soon recover its recent losses. Below, my senior analyst, Dan Amoss, shows you why the Fed is essentially locked into monetary easing, which is a tailwind for gold. Read on. Regards, Jim Rickards for The Daily Reckoning P.S. Are you aware of [the constitutional amendment set to cause an explosion in the gold market?]( If not, then I urge you to see my [latest video]( where I detail what I expect to happen within the next few months of the Biden presidency… and how you could completely transform your financial life with this specific strategy. [This is a prediction that could help only those who prepare to completely transform their financial lives in the midst of the chaos our nation is soon to face.]( I’ve put together a special briefing detailing my prediction, and how everyday people like you can grow their wealth in one corner of the market only 1% of Americans and Wall Street insiders know exist. Your chance to not only protect but grow you and your family's wealth is detailed in [this special recording.]( But I warn you not to hesitate because I can’t promise you this video will be available tomorrow. [Click here to see the biggest prediction of my career.]( Recommended Link [Man Who Predicted the Smartphone in 1994 Issues Shocking New Prophecy]( [Read more here...]( George Gilder, the most accurate technology prophet on earth, reveals a shocking announcement every American must hear. Investors could have made bank on the trends he’s talked about, years ahead of the curve. What’s he saying now? [Click Here To Find Out]( The Daily Reckoning Presents: “The Fed will be forced into a state of more or less permanent ease, almost regardless of the reported inflation rate”… ****************************** The Fed Can’t Tighten By Dan Amoss [Dan Amoss]Gold’s recent selloff looked familiar in that it resembled the types of gold selloffs that occurred when the Fed talked about tightening its loose policy for years in the mid-2010s. It sure talked a good game. But, when it came time to really test how much tightening the debt-saturated economy could handle, by late 2018, the Powell Fed folded like a cheap suit. In fact, the Fed not only felt compelled to reverse the slow, wimpy tightening that it had implemented from 2016-18; it also had to restart QE in the fall of 2019 when it became clear that the yield curve was not steep enough to absorb a wave of Treasuries hitting the market at the time. By late 2019, the repurchase loan (“repo”) market seized up. It threatened to push short-term rates in the money market above the Fed’s policy rate. So, the Fed implemented the so-called “not-QE” program in which it boosted the volume of repo loans to ease funding conditions in the Treasury market. When the COVID crash arrived, it provided cover to slash short-term interest rates back to zero. With a slightly wider yield curve, primary dealers in the Treasury market could once again fund themselves at a near-zero rate to absorb the heavy volumes in Treasury auctions. And just in case Treasury auctions threatened to get out of hand, the Fed stood by with a steady, reliable bid for at least $80 billion per month in Treasuries and $40 billion per month in agency mortgage-backed securities (MBS). This $120 billion per month in QE has flooded the Wall Street money markets with so many excess reserves that the system temporarily ran out of safe securities or bank deposits to park them. Rates on Treasury bills were on the verge of going below zero percent. The Fed wants to avoid that because it’s damaging to money market funds. So, it implemented a large reverse repo program. Over the past two and a half months, the Fed’s reverse repo facility expanded from practically zero to $813 billion. A complicating factor that added to the demand for reverse repo facilities is the fact that the Treasury Department has been drawing down its Treasury General Account at the Fed. During this drawdown, the supply of new Treasury bills at auction has temporarily fallen to low levels. The mismatch between the Fed’s QE firehose at a temporary dearth of Treasuries is what nearly drove short-term rates below zero. Why do I mention all this? I just wrote several paragraphs loaded with financial jargon. The key takeaway is that the Fed is terrified of changing its messaging on QE or interest rates. The Fed doesn’t want to pop what it is finally recognizing as bubble activities on Wall Street. We know this because rather than stop (or even “taper”) the volume of QE to limit the glut of reserves in the money market (to prevent negative interest rates), the Fed chose instead to roll out a large reverse repo program to temporarily “sterilize” all the reserves that it had printed in the past. Also, the Fed likely wants to maintain a heavy pace of QE to ensure that when the Treasury auctions ramp back up to fund future budget deficits, there will be enough buying power at today’s low yields to prevent a repeat of the fall 2019 hiccups in the repo market. The bottom line is that federal deficits will remain extremely high. In order to fund these deficits at rates that the government (and the broader financial system) can afford, continued Fed QE will be seen as necessary. As Jim has often noted, the forecasters at the Fed are almost always wrong. Whatever they say their rate policy will be in two years is not what’s likely to happen. Recommended Link [Wall Street Legend Warns: Get in now!]( [Read more here...]( With market manias like Gamestop, AMC, and Bitcoin making its mark on 2021, Chris Rowe, America’s #1 Wall Street Insider, has issued a new urgent warning about an event he believes could impact portfolios all over the nation by July 4th. [Click Here To Learn More]( I’ll add this: The Fed might think it has plenty of room to maneuver markets where they want them to go. However, it will likely be increasingly seen in the eyes of the public as constrained. It won’t have the flexibility of action that it used to have. Circumstances and inertia will force the Fed to remain easy whether it wants to or not. By taking on so many explicit and implicit policy mandates – relating to unemployment, inflation, stock market bailouts, Treasury auction funding, and bank liquidity provision – the Fed may eventually be forced to drop one or more of its mandates in order to focus on the highest priorities. Very few analysts and commentators mention this, but even though the dollar is still the world’s reserve currency, the U.S.’s foreign creditors still have some power over U.S. financial market conditions. Consider this hypothetical scenario… A Fed eases aggressively during a future crash in stocks, and a spike higher in Treasury yields will give foreign owners of U.S. Treasuries, corporate bonds and stocks every reason to sell. Foreign creditors would sell because of a heightened risk of a large decline in the exchange value of the dollar. If foreign creditors sell and repatriate some of the gargantuan asset base that they have accumulated over the past decade, selling pressure on the dollar would be strong and persistent. The Fed would be limited in its ability to hike rates and defend the dollar due to its other mandates. The net international investment position (NIIP) of the U.S. has gone from -$2.5 trillion in 2010 to -$14 trillion in 2021. That is rarely discussed but will get more attention in the years ahead. Non-U.S. investor ownership of U.S. assets exceeds U.S. ownership of foreign assets by $14 trillion. Over the past decade, the net inflow of $11.5 trillion in foreign capital into U.S. markets has been a powerful driver of stocks, bonds, and real estate. Yet, it’s rarely publicized. It has made up for the low U.S. household savings rate. It’s part of the answer to the question, “Where does all the money come from to prop up U.S. financial assets, when the average U.S. household has meager savings?” Such an environment can’t go on forever. There are practical, political, and national security-related limits to how much of a country’s assets can be sold to foreigners to fund imports. U.S. politicians will recognize this. Some foreign creditors will also recognize this, and the first to do so will sell and repatriate their capital to get ahead of the risk of capital controls. Even if that stabilizes and flattens over the next decade, that means roughly $1-2 trillion per year would have to come from U.S. domestic savings to keep Treasury yields, stocks, and corporate bond spreads at current, wealth effect-promoting levels. And since a trillion-dollar-plus surge in organic household and corporate savings cannot materialize without causing a deflationary depression in consumption, the Fed will feel compelled to maintain a $1 trillion or more per year pace of QE for a sustained period of time. Tax hikes might be debated but probably won’t be passed on the realization that this would hurt a fragile economic structure. The unsustainable nature of public and private sector spending, savings, debt, and deficits means that a ton of pressure is going to fall on the Fed to plug gaps. The Fed will be forced into a state of more or less permanent ease, almost regardless of the reported inflation rate. Until this dynamic changes, the U.S. dollar cannot be relied upon as a store of value. And when the dollar ceases to be a store of value, gold becomes the ultimate store of value. Regards, Dan Amoss for The Daily Reckoning P.S. A specific constitutional amendment could cause an explosion in the gold market. Jim explains it all in [this special recording]( and how you could potentially transform your financial life with [one very specific strategy.]( It involves one corner of the market that only 1% of Americans even know exists. [Click here to see the biggest prediction of Jim’s career, and what it could potentially mean for your financial future.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Dan Amoss]Previously the investment adviser to one of the top small-cap mutual funds in the country, Dan Amoss is a senior investment analyst and CFA at Agora Financial. Dan tracks aggressive accounting and other red flags that markets miss as he exposes frauds and promotions that suck in unsuspecting investors. His bottom-up investing style focuses on management strategy, return on capital and the truth (and lies) buried in financial statements. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. For any further comments or concerns please email us at feedback@dailyreckoning.com. If you are having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox [by whitelisting The Daily Reckoning.]( [Paradigm Press]© 2021 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Email Reference ID: 470DRED01