Rickards: Fed’s Looking in Wrong Direction

What Leading Indicators Predict for Economy [The Daily Reckoning] May 01, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Rickards: Fed’s Looking in Wrong Direction - The Fed keeps looking backward, not forward… - Several leading indicators are pointing directly to recession… - “Get ready for the recession and don’t expect the Fed to help you see it coming”… [Secret Gold Back currency RUINING Biden’s plans for a digital dollar?]( [Click here for more...]( What I’m holding in my hand is a completely new form of money… As we speak, it's being used as an alternative currency across the U.S. minting in places like Utah, New Hampshire and Nevada… And since it’s made out of a thinly printed sheet of REAL gold... It may be the single best way to protect your wealth from Biden’s plan for a government controlled digital dollar. That’s why, I want to offer to send one to you today. But since I have a limited number I need you to respond to this message by Wednesday at midnight. I’ve recorded a short 2 minute message that explains everything… [Click Here To Watch Now]( Portsmouth, New Hampshire [Jim Rickards] JIM RICKARDS Dear Reader, What’s the situation with the economy? The short answer is not good. Here’s why… There are literally hundreds of economic indicators either as hard data or sentiment surveys released daily. It’s impossible for any analyst to keep up with all of them. But with computers, natural language processing and charts, it is possible to follow broad trends. The key for any good analyst is to settle on a subset of data that has the greatest predictive power and a long track record of getting things right. It’s equally important to know whether indicators are leading, concurrent or lagging. A lagging indicator may be a measure of how bad things are, but it comes too late to do anything to stop the bad turn. By the time you see it, a recession has already begun. Concurrent indicators are useful as validation of what leading indicators have been saying, but they don’t put you ahead of the curve. Clearly, the most valuable indicators are leading indicators — signals that arise six months and sometimes a full year before trouble arrives. Those are the ones to watch most carefully if you want to be prepared in advance. The Fed Lags Behind For reasons that are not clear, the Federal Reserve is obsessed with lagging indicators. This partly explains why they always get policy wrong. They tighten monetary policy after recessions have already begun, making the recession worse. They ease monetary policy when booms are underway, making asset bubbles bigger. Just think of the stock market crash of 1929, the Tequila Crisis of 1994, the Russia-LTCM crisis of 1998, the dot-com collapse in 2000 and the mortgage bubble in 2007. You’ll find a poorly timed monetary policy in every instance. The two biggest failures in the Fed reading of economic signals relate to unemployment and inflation. The Fed considers low unemployment to be a sign of economic strength and a source of inflation. But unemployment is a lagging indicator. When businesses see declining sales, lower profits and bulging inventories, they will do everything possible to cut costs including canceling new orders, dumping goods, holding sales and closing offices. It’s only when those measures fail to stop the bleeding that owners begin to fire people. By the time unemployment goes up, the recession has already started. [The Scariest Part About Biden’s 2024 Campaign…]( It’s not that he could raise our gas prices to $10 a gallon. It isn’t because he has America on the cusp of a nuclear World War III… And honestly, it’s not even his ridiculous, “woke” agendas… What scares me the most is… Is this. Are you prepared to lose thousands – or tens of thousands – of dollars per year due to his upcoming policies? If not… [Watch This Video Now]( Don’t Look to Inflation for Answers Inflation is another misleading signal. It’s meaningful on its own but it has no correlation to the business cycle. In the early 1960s, we had low inflation and strong growth. In the late 1970s, we had high inflation and weak growth. In the late 1990s, we had moderate inflation and strong growth. In the 2010s, we had low inflation and low growth. Does anyone see a correlation there? There isn’t one. Growth and inflation are empirically uncorrelated. We can agree that inflation is bad (although deflation is just as bad in different ways). But inflation tells us nothing about the prospects for growth. The idea that low unemployment leads to inflation (which is what links the Fed’s obsessions with unemployment and inflation) is an artifact of the discredited Phillips curve beloved by Bernanke and Yellen and adhered to by Powell on the bad advice of Fed economists. Why this is so is a debate for another day. For now, it’s enough to know that the Fed clings to two indicators that have no predictive value. They are lagging indicators. This is why Fed policy always lags behind the economy and never leads it. Look Ahead, Not Behind Fine. But what are the leading indicators? Where can we look to see what’s coming? Several powerful leading indicators are hiding in plain sight. They are easy to find and have excellent track records as predictive analytic tools. The problem is that relatively few analysts have heard of them, and even fewer know how to interpret them. Here’s the short list and what they’re telling us right now: An inverted Treasury yield curve. One type of yield curve is just a graph of yields on like instruments of different maturities. The U.S. Treasury securities market is the largest and most liquid in the world. Treasury securities have almost no credit risk, so the yields reflect the time value of money, inflation expectations, liquidity preferences and not much else. A normal yield curve is upward sloping, which means that longer maturities carry higher yields. That makes sense. If I’m going to lend you money for 10 years, I probably want a higher interest rate than if I’m going to lend you money for six months. Right now, the Treasury yield curve is steeply inverted. This means that longer maturities actually have lower yields than shorter maturities. The 10-year Treasury note yields 3.57%, the 2-year Treasury note yields 4.14%, while the 3-month Treasury bill yields 5.03%. The last time the Treasury yield curve was this inverted was — you guessed it — in mid-2007 and early 2008, just ahead of the global financial crisis. When investors accept lower yields on longer maturities, it means they expect yields to drop like a rock because of recession or worse. That 4.14% yield on the Treasury note looks weak compared with 5.03% on the 3-month bill. But the 3-month bill matures in three months. That 4.14% yield on the 2-year will look rich if rates drop to 2.00% by late this year in the depths of a recession. That’s why investors like it. They see the recession coming. [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here for more...]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything. [Click Here To Learn More]( The Eurodollar An inverted Eurodollar futures curve. This is a bit esoteric, but it’s an even better predictive indicator than the Treasury yield curve. Eurodollar rates are basically short-term interest rates that big banks pay each other for dollars in unregulated markets. Investors can buy futures contracts on these rates out to five years forward, although the one- to two-year contracts are the most actively traded. Basically, these are long-term bets on short-term rates. These contracts are priced as a percentage of par or 100.00. The lower the price, the higher the yield (because the discount to 100.00 is greater, so the return is greater). Right now, the June 2023 Eurodollar futures contract is priced at 94.5850. The September contract is 94.9650. The December 2023 contract is priced at 95.3300. Notice how the price goes up over time? That means markets are betting short-term interest rates are going lower. That’s another recessionary bet. Rates can be expected to come down in a recession, which means those futures contracts could go deep in the money. This inverted yield curve was also last seen in 2007 and 2008 ahead of the crash. More Recessionary Omens Negative Swap Spreads. U.S. Treasury securities dealers buy long-term notes and finance them in overnight repo markets. They receive the fixed rate on the notes and pay the floating overnight rate on the repo. This same trade can be done in derivative form using an interest rate swap agreement. In the swap, a dealer can receive a fixed rate from the counterparty and pay a floating rate to the same counterparty. The swap is the same as owning the bond with two differences: There is no bond involved; it’s just a contract. And the parties take credit risk with the counterparty, whereas when you own a Treasury note there’s almost zero credit risk. It follows that the fixed-rate payment on the swap should be slightly higher than the fixed-rate payment on the actual bond to account for the credit risk in the swap. That’s not the case today. Fixed rates on interest rate swaps are significantly lower than what an investor can receive on the actual Treasury note. Is this because dealers trust bank credit more than U.S. Treasury credit? Not at all. It’s because the swap does not use up balance sheet capacity, while the actual Treasury note does. It’s also because Treasury notes are in short supply whereas swaps can be written in unlimited quantities. Both conditions — balance sheet constraints and shortages of Treasury notes — are indicative of ultra-tight monetary conditions that lead to recessions. There are other technical monetary indicators that point in the same direction. In addition, there’s a flood of hard data from non-monetary channels including declining world trade, declining industrial production, falling house prices, deteriorating consumer credit, declining real wages and many other indicators that all point to a recession. So the recession is definitely coming and may already be here, according to the best predictive analytic data. The Fed will be the last to know because they’re looking in the rearview mirror at lagging indicators. Get ready for the recession and don’t expect the Fed to help you see it coming. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. I recently called in the aid of one of my most trusted, hedge fund intelligence contacts. I call him [The Banker.]( My goal was for him to teach you his most closely guarded income secrets — ones that he’s used to manage $20 million portfolios. He’s personally beaten several billionaire investors with these secrets — including Ray Dalio. And guess what? [He made this video… showing you EXACTLY how he does it.]( Have you watched it? I certainly hope so because I want to help you succeed. And you can learn the tools to thrive — even in Joe Biden’s economy. Do you want to protect yourself — and your family — from whatever Joe Biden throws at us next? [Then go here to learn about The Banker’s powerful income strategy.]( But please don’t procrastinate. I don’t know how long this critical information will be available. --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim 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. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. 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