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Rickards: The Fed Needs to Read This

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dailyreckoning.com

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Mon, Jul 25, 2022 09:45 PM

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Bumbling Into a Disaster Were you forwarded this email? Elon Musk has had the same vision since the

Bumbling Into a Disaster Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Rickards: The Fed Needs to Read This - Even if the economy isn’t in recession now, it’s coming… - Could the Fed be underestimating its tightening impact by a factor of four?… - The never-ending merry-go-round of intervention… Recommended Link [Elon Musk's Nemesis Turned Secret Partner?]( Elon Musk has had the same vision since the creation of Tesla… and now, a nemesis turned secret partner is helping him achieve his vision… Leading [Elon Musk's L.A.S.E.R. project]( straight into the limelight. Disrupting the tech market like never before. [See The Details For Yourself]( Portsmouth, New Hampshire July 25, 2022 [Jim Rickards]Dear Reader, On Wednesday the Fed will be announcing another rate hike. The only question is how big will it be? The market consensus forecasts a 75-basis-point increase, which I happen to agree with. Regardless, the Fed is tightening into weakness. For the economy and the stock market, that means a bumpy ride is ahead — and maybe a very bumpy ride. First of all, it’s highly likely that the U.S. economy is in a recession today. The shorthand definition of a recession is two consecutive quarters of declining GDP (although some other factors such as unemployment are also taken into account). Recession Now or Recession Later The U.S. economy contracted by 1.6% in the first quarter of 2022. The best estimate of second-quarter growth (from the Federal Reserve Bank of Atlanta) shows another decline of 1.6%. That data alone indicates the U.S. is in a recession now; the official report on second-quarter GDP will be released Thursday. But let’s assume for the sake of discussion that the report shows a slight Q2 GDP gain and that the economy avoids the textbook definition of recession. Well, even if the economy is not technically in a recession, growth is unquestionably weak to negative, and the U.S. is likely to be in a recession later this year either way because of continued monetary tightening by the Fed. The Fed has raised interest rates to 2.25% in a matter of five months (including a 0.75% rate hike expected this week) and is on track to raise rates to 3.75% or higher before year-end. That’s the fastest rate-tightening cycle since Paul Volcker’s Fed in the early 1980s. In addition, the Fed began reducing its balance sheet last month. It only ran off about $47 billion, but that figure is expected to reach $95 billion in August. But the real question is is the Fed tightening even more than it realizes? Four Times More Tightening Than the Fed Realizes? I’m not normally one to cite the Council on Foreign Relations, but I think their analysis is spot-on. Here’s an extensive excerpt from a recent article explaining how the Fed is dramatically underestimating the amount of tightening its balance sheet reductions will cause: Powell has said that the monetary impact of balance sheet reduction is very uncertain; that there are only “rules of thumb.” Fed staff, however, have tried to quantify it. Using a theoretical model, they estimate that the $2.1 trillion in balance sheet runoffs scheduled through September 2024 will raise 10-year Treasury yields by 60 basis points. And that increase, they further calculate, will have roughly the same monetary-tightening effect as raising the short-term policy rate by 56 basis points. We, however, do not believe that the Fed staff have correctly identified this relationship. Specifically, we do not believe that a given movement in long-term rates (60bp) is equivalent in economic effect to a similar movement (56bp) in the Fed’s short-term policy rate. We believe that a 60bp rise in 10-year Treasury yields is equivalent to a rise in the Fed’s policy rate of four times that amount. Here is why. Recommended Link [Biden Just Signed Death Warrant On Your Freedom]( [Read more here...]( If Biden’s Executive Order 14067 comes to pass, a former advisor to the CIA and Pentagon is predicting legal government surveillance of all US citizens; total control over your bank accounts and purchases; and indefinite Democrat control past 2024. He says Covid was a trial run for how to control a population. Dems will use their “pandemic playbook” to silence any dissent. See exactly what to do before it happens. [Click Here To Learn More]( We’ve compared the output of the Fed staff’s model with actual empirical findings — findings obtained by an earlier group of Fed researchers. According to that earlier study, it takes a whopping 240bp rise in the policy rate to produce a 60bp rise in 10-year rates. If this relationship is correct, it means that the Fed’s total projected balance sheet runoffs will produce a tightening equivalent to hiking the policy rate by 240bp, and not 56bp… We put more credence in this earlier Fed estimate specifically because it measures the relationship among actual historical data, and is less subject to the “significant uncertainty,” which the later Fed study acknowledged in its modeling. If we are right, then, Powell, whose thinking is clearly being guided by the later study, is underestimating the tightening impact of balance sheet reduction by a factor of four. A Shot to the Solar Plexus You don’t have to worry about the technical aspects of this analysis. The key takeaway here is, to repeat, the Fed may be underestimating the tightening impact of balance sheet reduction by a factor of four. That’s a shot to the solar plexus for both the economy and the stock market. So we have a one-two punch of rate hikes and balance sheet reductions that will slam the U.S. economy and send stock markets down sharply in the days ahead. That's not what the Fed wants, of course, but that's what they're going to get. Powell is downplaying the balance sheet reductions. But when the Fed started QT in late 2017, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and that it would "run on background" just like a computer program that's open but not in use at the moment. Recommended Link [Federal Ruling does WHAT?]( [Read more here...]( The Federal Government just passed an obscure new ruling. It could change your life in ways you’ve never thought possible. And help some Americans make a small fortune in the process. [Click Here To Learn How]( Think Again It was fine for the Fed to say that, but markets had another view. Not surprisingly, we had the Christmas Eve Massacre in December 2018, and Powell was forced to begin easing policy again. The bottom line is tightening policy in a weak economy is almost certainly a recipe for a recession and a stock market crash. When the recession does arrive, the Fed will have little "dry powder" to fight it. The Fed needs rates to be at least 3%, and preferably higher, when recession begins. That gives it plenty of room to cut rates back down to zero. If the Fed ratchets rates to 3.75% by the end of the tightening cycle, that only leaves it 0.75% (or 75 basis points) to work with. And that’s not nearly enough ammunition. The Never-Ending Merry-Go-Round But recession will hit long before the Fed can get rates that high — if we’re not in one already — so cutting rates won't be much help. Eventually the Fed will reverse course with rate cuts and a renewed policy of quantitative easing. But by then, it’ll be too late. They will have already caused the recession. It’ll be just another trip on the merry-go-round of easing, followed by tightening, then a severe economic and market downturn, followed by more easing, etc. Unfortunately, the Fed can’t get off the merry-go-round because every market intervention it engages in leads to another intervention to address the consequences of the previous one. It’s a never-ending cycle and we’re all along for the ride. Regards, Jim Rickards for The Daily Reckoning P.S. I took a red-eye flight back from Japan, and drove eight hours straight to record this [emergency broadcast.]( Because according to my research, we may be [just days]( away from one of the biggest stock market sell-offs in history… And it looks like it could be coming as soon as this [Wednesday, July 27, at exactly 2 p.m.]( Not to be dramatic, but that means you have a big decision to make. You can choose to ignore this message, and come Wednesday, you risk being one of the millions of sheep that gets led to the slaughter. On the other hand, you can take control of your future, and take a second to [review my FOURTH and FINAL warning about this upcoming market event on the 27th.]( If you do, you’ll not only be in the best position to avoid the impending carnage, but you could potentially make a small fortune in the process. [Go here now]( for the urgent details, and you can decide for yourself whether or not you think my warning is justified. --------------------------------------------------------------- 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. 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]© 2022 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[.](

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