Two Questions That Need Answering

Markets Hang in the Balance Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Two Questions That Need Answering - Two related questions the market is trying to figure out… - The bond market throws cold water on the inflation narrative… - The Fed is too far down the slippery slope of intervention to turn back now… Recommended Link [Biden... Boom?]( [Read more here...]( If you're rolling the dice on a Biden boom, pay attention... Because new research has come to light. A former advisor to the CIA... and the Pentagon... Has just recently revealed — on camera — proof that Joe Biden and Kamala Harris are not equipped for reversing this crisis. Frankly, nobody in Washington is. Because, says this ex-insider, every last one of them is too late. In the fallout ahead, most stocks will collapse... the dollar could fail... But there's one strategy that could rebound, as high as 300% or higher over the next five years. [Find Out More Here]( Portsmouth, New Hampshire July 7, 2021 [Jim Rickards]Dear Reader, There are two related questions the market is trying to figure out right now. The first is when the Fed will begin to tighten monetary policy; the second is if inflation will be “transitory” or a long-term dynamic. Let’s start with the inflation question... Many analysts are convinced that inflation is real and will be around for a long time. The narrative is straightforward: The economy is recovering. Unemployment is declining. Employers can’t find enough workers. Wages are going up to attract help. Stimulus spending is coming by the trillions of dollars. The Fed is printing money. The economy is pushing up against capacity constraints. Add it all up, and inflation is finally going to stick. I’m in the minority in claiming that inflation will not last. The inflation we’ve seen results largely from “base effects.” The economy was bound to recover from the pandemic recession of 2020, the worst since 1946. But, the economy was weak before the pandemic hit. What if that weak growth trendline is now returning to form? A Powerful Disinflationary Overhang The unemployment rate is declining, but real unemployment is not. We still have 7.6 million fewer jobs than before the pandemic, not counting the 10 million or more prime-age workers out of the labor force. Yes, wages are rising in some service industries, such as restaurants, and workers are hard for some businesses to find (McDonald’s is now offering $35,000 per year plus benefits and training for entry-level hires). Still, overall wage levels are not rising significantly, and slack in the labor market is producing a powerful disinflationary overhang. Money printing isn’t producing inflation because the velocity (or turnover) of money is still declining. That’s disinflationary. What good is new money if the banks just give it back to the Fed as excess reserves, so the money is never spent or lent? Fiscal policy and stimulus checks are not producing stimulus because debt levels are so high (the U.S. debt-to-GDP level is now 130%, the highest ever). With debt levels so high, solid evidence indicates that stimulus doesn’t work. I could go on. I’ve made these points before, but the inflation narrative is gaining so much momentum, I feel I need to repeat them. Recommended Link [The Final Warning every American should hear]( [Read more here...]( In March 2020, Casey Research analyst Nick Giambruno uncovered a sinister scheme by Nancy Pelosi and her government colleagues to take the cash out of your wallet… And replace it with a digital currency. According to their research, one of Biden's top priorities could forever change our financial system, and completely alter the way we spend, borrow, save, and invest. Millions of Americans will be completely blindsided by the events to come… But this short presentation will show you exactly what’s coming… what Pelosi’s plans mean for your cash… and how you can prepare. If you have money in any kind of U.S. bank account... business contract… or even cash under your mattress… You’ll want to take a look at Nick’s briefing as soon as possible. [Here's What You Need To Do]( The Bond Market Holds the Key Do you know who else rejects the inflation narrative? The bond market. The yield-to-maturity on 10-year Treasury notes dropped from 1.745% on March 31 to 1.31% today. That’s a huge drop, given how low rates are overall. Anyone who thinks that's a sign of "inflation" doesn't understand bonds or inflation. In fact, falling yields are a reliable sign of disinflation bordering on deflation. CPI/PCE data lags, but you'll see disinflation in these inflation metrics soon. The key takeaway here is that the bond market is signaling that the inflation narrative is wrong. And bonds are a much more reliable indicator of where the economy is going than the stock market. Inflation will come eventually, but not right now. Now, let us return to the first question: when will the Fed begin to tighten policy? Is This Tightening? The Fed may enact a rate hike in late 2023 at the earliest. Some consider that a bearish sign. But is one projected rate hike next year (that might not even happen) really bearish? That just shows you the extent to which the stock market has become dependent on ultra-low rates. Meanwhile, the Fed has also begun “to talk about talking about” tapering its asset purchases, which currently amount to $120 billion a month. But the minutes from the Fed’s June FOMC meeting revealed that “participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.” You can basically predict what will happen. The Fed will hint about tapering, the market will sell off, the Fed will then back off its statements, the market will bounce back, and the dance will continue. The problem is that the Fed has built a house of cards constructed of zero interest rates and quantitative easing. It really can’t afford to take them away without risking a collapse. And that comes back to a deeper problem… Recommended Link [Free - Digital Currency Summit 2021]( [Read more here...]( On July 13-15, more than 47 of the world’s top digital currency insiders are gathering for an epic event. Where they will reveal the best investments for the digital currency bull run of 2021. And if you move fast, you can get access for free. [Click Here To Learn More]( The Slippery Slope of Intervention The problem with any kind of market manipulation (what central bankers call “policy”) is that there’s no way to end it without unintended and usually negative consequences. Once you start down the path of manipulation, it requires more and more manipulation to keep the game going. Finally, it no longer becomes possible to turn back without crashing the system. Of course, manipulation by government agencies and central banks always starts out with good intentions. They are trying to “save” the banks or “save” the market from extreme outcomes or crashes. But this desire to save something ignores the fact that bank failures and market crashes are sometimes necessary and healthy to clear out prior excesses and dysfunctions. A crash can clean out the rot, put losses where they belong, and allow the system to start over with a clean balance sheet and a strong lesson in prudence. Instead, the central bankers ride to the rescue of corrupt or mismanaged banks. This saves the wrong people (incompetent and corrupt bank managers and investors) and hurts the everyday investor or worker who watches his portfolio implode while the incompetent bank managers get to keep their jobs and big bonuses. All it does is set the stage for a bigger crisis down the road. The COVID-19 pandemic was a unique situation that required an emergency response in the face of economic lockdowns, but the same dynamic still applies. The Fed’s incredible balance sheet expansion has no precedent. The U.S. Is Turning Japanese There's little reason to believe that all this money creation will improve economic conditions. The fear is that the U.S. could become like Japan… In my 2014 book, The Death of Money, I wrote, “The United States is Japan on a larger scale.” That was seven years ago. Japan started its “lost decade” in the 1990s. Now their lost decade has dragged into three lost decades. The U.S. began its first lost decade in 2009 and is now entering its second lost decade with no end in sight. The pandemic and the resulting GDP losses only deepened the original problem. What I referred to in 2014 is that central bank policy in both countries has been completely ineffective at restoring long-term trend growth or solving the steady accumulation of unsustainable debt. In Japan, this problem began in the 1990s, and in the U.S., the problem began in 2009, but it’s the same problem with no clear solution. The irony is that in the early 2000s, former Fed Chair Ben Bernanke routinely criticized the Japanese for their inability to escape from recession, deflation and slow growth. When the U.S. recession began during the global financial crisis of 2008, Bernanke promised that he would not make the same mistakes the Japanese made in the 1990s. However, he made every mistake the Japanese made, and the U.S. is stuck in the same place, where it will remain until the Fed wakes up to its problems. Bernanke thought that low interest rates and massive money printing would lead to lending and spending that would restore trend growth to 3.2% or higher. But he ignored the role of velocity (speed of money turnover) and the unwillingness of banks to lend or individuals to borrow. When that happens, the Fed is pushing on a string — printing money with no result except asset bubbles. That’s where we are today. The Fed has built a house of cards that it must keep propping up. Without the Fed’s constant support, it comes crashing down. Regards, Jim Rickards for The Daily Reckoning P.S. Last month I went live to share details on a massive cross-borders conflict that’s quietly taking place. 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So if you want in on my $6.6 trillion secret, [click here to learn more.]( --------------------------------------------------------------- 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) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. 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. 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