Hold Onto Your Seat!

The Worst Might Be Ahead Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Hold Onto Your Seat! - Just because it’s bad doesn’t mean it won’t get worse… - A Federal Reserve governor admits that the Fed is insolvent… - Maybe gold isn’t a barbarous relic after all… Recommended Link [Free “crash” recommendation for today]( [Read more here...]( Last night during a [live stream]( Jim Rickards - a world renown macroeconomist - released a never-before seen “crash” trade completely free. It costs less than $100 to get into, and it could mean an 11X return or more during a market crash. With the crazy times we are living through today – war drums beating, inflation rising, supply chains breaking down – a portfolio hedge like this could NOT be more important. [Click Here To Watch Now]( Portsmouth, New Hampshire June 13, 2022 [Jim Rickards]Dear Reader, The stock market got hammered again today as the major indexes continue to bleed. Trillions of dollars in stock market wealth have been lost this year. The S&P is closing in on bear market territory, which is defined as a decline of 20% or more from recent highs. And it may fall even further. Since World War II, there have been 14 bear markets. The median loss during these bear markets has been 30%, and they lasted about a year (hat tip to Bespoke Investment Group). Last night I went live with what I called the [“Dow Drop Summit,”]( during which I tried to prepare my readers for even more market carnage. I’m sure it’s just coincidence, but stock futures began plunging at about the same time the summit began. Go figure! If you missed last night’s urgent broadcast, I strongly urge you to watch it now before things get worse. I even included a [free “crash trade”]( that could potentially 11X your money during a crash. [Go here now]( to see this FREE trade recommendation. The Kind of Drop We Haven’t Seen in Decades And with the Fed ready to raise interest rates again this week after last week’s red-hot inflation data, we could be soon witnessing an even bigger drop in the market — the kind that we haven’t seen in decades. That’s not fear-mongering or hyperbole. It’s just a sober assessment of the situation. The Fed is deeply concerned about inflation, and it will continue to aggressively raise interest rates to try to tamp it down. Most analysts are projecting a 50-basis-point rate hike on Wednesday, but the odds of a 75-basis-point hike have increased substantially after Friday’s inflation report. Some are even projecting a 100-basis-point rate hike. Regardless, the Fed will continue to aggressively tighten for the foreseeable future. But neither the economy nor the stock market can take the kind of tightening required to really get a hold on inflation. Since the end of World War II, the Fed has embarked on perhaps a dozen tightening cycles in which it raised interest rates. All but one of these tightening cycles resulted in recession. That’s a nearly perfect record. And there’s absolutely no reason to expect that this time will be any different, especially with the tremendous excesses within the financial system. Which brings up the question, is the Federal Reserve broke? Recommended Link [Trump’s Secret Legacy]( [Read more here...]( In July 2020, the Trump administration oversaw a RADICAL change to the tech world… one that could unleash a huge wave of disruption… prosperity… and wealth creation in the near future. Chances are, you haven’t heard about it until today. But according to one of America’s most respected tech forecasters, it’s set to create small fortunes right here in this country. He recently went on camera to explain why... [Check The Footage Out Here]( How Can the Fed Be Broke? When you bring up the topic of the Federal Reserve going broke, most individuals react by saying, “That’s impossible! The Fed can’t go broke. They can just print more money.” That’s a typical reaction, but it displays a misunderstanding of what money is and how the Fed actually works. Yes, the Fed can print all the money it wants. But money is not an asset for the Fed; it’s a liability. Take a $20 bill out of your purse or wallet and read it. On a banner across the top it says, “Federal Reserve Note.” A note is a form of debt; in other words, it’s a liability. That becomes clear when you look at the Fed’s balance sheet (it’s publicly available on the Fed’s website). Assets consist mainly of securities: mostly U.S. Treasury bills and notes and mortgage-backed securities. Liabilities consist of cash, coins and reserves deposited by member banks at the Fed. The Fed’s net worth or capital is simply the net of the assets minus liabilities. That equity account is a small sliver of capital relative to the total assets. In other words, the Fed looks like a highly leveraged hedge fund. Printing money can be used to buy more securities, but all that does is leverage the balance sheet even more by piling more assets (securities) and liabilities (money and reserves) on top of the same sliver of capital. But what if it’s worse than that? What if the assets are less than the liabilities so the Fed has a negative net worth? Less Than Zero A negative net worth is one definition of insolvency, which is a fancy name for broke. In the steady state, this would not happen. The Fed could just sit still; let assets mature at par value; and get paid the cash by the issuer, at which point the cash just disappears when the Fed receives it. The Fed could gradually deleverage just by doing nothing. But what if the Fed balance sheet were marked to market like a real hedge fund? Or what if the Fed sold securities at a loss instead of just waiting for them to mature at par value? The Fed’s accounting method does not mark to market, but any analyst can run the numbers anyway just by looking at asset maturities and using current market prices for those assets. If you do this, you find that higher interest rates have resulted in many securities in Fed’s portfolio being worth less than book value. That’s bond math 101: higher rates = lower prices. Beyond that, the Fed does not want to wait to deleverage. It wants to reduce the balance sheet quickly. That means asset sales, especially the less liquid mortgage-backed securities. That’s where real operating losses arise because an actual sale below par value results in a loss that must be charged against capital. So yes, the Fed is probably insolvent on a mark-to-market basis (a method it does not use). Recommended Link [Strange 2021 Prophecy Rapidly Coming True]( [Read more here...]( America’s #1 Futurist George Gilder is telling American’s to “brace yourself” for the coming $16.8 trillion revolution. This same revolution could redefine millions of jobs and radically transform the way just about every major corporation does business. It could even change the way you get paid, save and invest for retirement. And, says George, it could make you exceedingly rich... [Click Here To See Why]( A Fed Governor Admits the Fed Is Insolvent If you evaluated the Fed on a mark-to-market basis the way you would with a hedge fund, its capital would be wiped out. It’s insolvent. I once had a conversation with a member of the Federal Open Market Committee who admitted this to me privately. I reached a conclusion on my own, but she confirmed it. The conversation went like this: I said, "I think the Fed is insolvent." This governor first resisted and said, "No, we're not." But I pressed her a little bit harder and she said, "Well, maybe." And then I just looked at her and she said, "Well, we are, but it doesn't matter." In other words, a governor of the Federal Reserve admitted to me, privately, that the Federal Reserve is insolvent but said it doesn't matter because central banks don't need capital. Well, central banks do need capital. She may be right in the short term that it doesn’t really matter. Most people don’t even know what the Federal Reserve is let alone the inside accounting issues I described here. But in the next panic, it just might matter. Maybe Gold Is the Foundation of the Monetary System After All The problem is each financial crisis is larger than the one that preceded it because the system itself is larger due to massive central bank interventions. It’s a matter of scale. How can the Fed bail out big banks when the Fed itself is insolvent? The issue might not be a legal one so much as a matter of confidence. Just in case, the Fed does have a hidden asset to offset all of those not-so-hidden losses. The Fed has a gold certificate on its books based on a quantity of gold valued at $42.22 per ounce. If that gold were revalued to the current market price of $1,850 per ounce, another $500 billion would appear out of thin air. That could be added to Fed capital. The Fed doesn’t like to talk about gold, but maybe the entire monetary system is based on gold after all. One day we might just find out the hard way. Regards, Jim Rickards for The Daily Reckoning P.S. This is urgent. Last night during a [livestream]( I released a never before seen “crash trade” completely free. It costs less than $100 to get into, and it could potentially mean an [11X return or more during a market crash.]( With the crazy times we are living through today, a portfolio hedge like this could NOT be more important. That’s why I suggest you [watch my message]( now. Because with the state of the market today, I don’t think this recommendation will stay cheap for very long. [Click Here to View a Rebroadcast of Last Night’s Message]( --------------------------------------------------------------- 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! 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