The Fed: Hike, Skip, or Pause?

A pause and a skip aren’t the same, so the press conference must be clear. [The Rude Awakening] June 14, 2023 [WEBSITE]( | [UNSUBSCRIBE]( The Fed: Hike, Skip, or Pause? - Today, Chairman Pow backs himself into a corner. - All signs point to “skip,” which means he’ll likely hike later. - This isn’t a “pause” or a “pivot,” indicating a direction change. [External Advertisement] [6.5 Million Americans are DESPERATE for this New Drug from One Tiny Company]( Decades of pent-up demand for this "first-ever" treatment could give you WINDFALL PROFITS... That's why Jeff Bezos cut the company a check for $130 million when the company first brought him the idea. [Click here to learn more]( [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from a rainy, soaked Asti! It’s been raining here, refilling our reservoirs and rivers, which were dangerously low this time last year. And the rain has kept it wonderfully cool at night. We’re nearly in summer, and I haven’t used my air conditioner at night yet. May that last a bit longer. But turning to more important things like interest rates… Jay Powell and the rest of the FOMC decide bigly today. I know most think this move is a fait accompli. They’re standing pat, and that’s that. But in this Rude, I’ll show you why doing nothing, in this case, is worse than doing something. Market Refresh I’ve updated our S&P 500 chart since we last looked at it in May. We’ve made a clean break above 4,200 and then 4,300 (#11). There’s no reason to be short this index at the moment. By my reckoning, we can quickly hit the 4,600 to 4,650 range, where there is a bit of overhead supply. But really, there’s not much stopping the index from hitting its all-time highs. [SJN] This chart is Exhibit A the Fed should not skip here. Yesterday’s Inflation Numbers But it seems we’ve got all about asset price inflation in favor of consumer price inflation. Yesterday’s inflation numbers came in as expected. The CPI bumped up slightly. But the core numbers are still too high. [SJN] Credit: [MarketWatch]( To see the numbers in trend form: [SJN] Credit: [The Wall Street Journal]( From the [Bureau of Labor Statistics]( The index for shelter was the largest contributor to the monthly all-items increase, followed by an increase in the index for used cars and trucks. The food index increased 0.2 percent in May after being unchanged in the previous 2 months. The index for food at home rose 0.1 percent over the month, while the index for food away from home rose 0.5 percent. The energy index, in contrast, declined 3.6 percent in May as the major energy component indexes fell. For sure, the numbers are tailing off. And that’s good. At the same time, is the Fed’s demand destruction working too well? Commodities are way off, with oil and gas down hard. That’s not because of the Fed or a strong dollar. The credit belts are tightening, and entrepreneurs see a recession from a mile away. Here are the commodity groups’ performances since the hiking cycle began: [SJN] Livestock and the shiny stuff is up. Everything else has been hammered. Sure, a stronger dollar would contribute to that. But I don’t think that’s the whole story. So what are JPow’s options? [New Biden Bucks Follow-Up Available Now]( Hey, it’s Jim Rickards. Since posting my original Biden Bucks presentation online, millions of people have viewed it. Snopes and the Associated Press have even attempted to “fact check” me and claim my warnings are false: [Click here to learn more]( Point being, my message has raised a storm and caused a lot of controversy. But in the time between my message and now, a lot of new developments have come to light. That’s why I’ve just released an update to my original prediction… one which will likely be even more controversial. [>> Click here now to access my new 2023 Biden Bucks follow-up](. [Click Here To Learn More]( The Options As I see it, Chairman Pow has three ways to proceed. Hike This one gets my vote. But he won’t do it this time. My reasoning goes like this: if you’re going to continue to hike later, and the market is rallying this hard, and consumer product prices are still high, you may as well hike. If you stop here, the market may interpret it as a permanent stance, provoking an even harder rally in the SPX. Skip From Nikileaks, in the [WSJ]( Federal Reserve officials’ concerns about stubbornly high inflation could lead them to signal that they are prepared to lift interest rates again this year even if they hold them steady on Wednesday. This is doing nothing under the guise of doing something. By skipping, Powell means he won’t raise rates “this time” but fully expects to hike again soon. Perhaps as soon as next month. This seems to be a way to keep the rest of the FOMC onside so there’s no full-blown mutiny when the announcement is made. Again, from Nikileaks: Signaling a rate “skip”—the combination of holding rates steady in June while signaling a high likelihood of a rate rise in July—could be tricky to explain to the public. “If you were absolutely sure you were going to go ahead with an increase at the following meeting, then you should just go now,” said William English, a former senior Fed economist who is a professor at Yale School of Management. Agreed. Pause In this case, a pause means “lettings rates plateau here and then pivot to rate cuts.” Again, if the FOMC chooses to do nothing, it must stipulate that it’s ready to hike any moment. If not, we’ll have out-of-control equity buying. What Powell Will Do I’m sure he’s going for choice B, the skip. But he must execute this step delicately but firmly. Powell must say something like, “We’re giving the market a month to catch its breath, then we’re coming back in full force. So be careful. You’ve got six weeks to sort yourselves out. Until then, I’ll be quiet. But we’re going to hike in July, so price it in.” Then the belief he’ll hike again will be credible. We’re not out of the woods with inflation, either on the consumer or asset sides. He knows that. That’s why I find it puzzling that he’s skipping. But then again, the politics in the Eccles Building must be palpable. What If You’re Wrong, Seanie? If I’m wrong and he hikes, this will be my reaction: [SJN] If he hikes, the market will be down at least 2-3%. Why? Because the last time I looked at the Fed Funds' futures, they priced in a 4.7% chance of a hike. So the entire market would be the wrong way around. [SJN] Credit: [CME FedWatch Tool]( Absolutely no one is looking for a hike. Could this be the perfect time to wrongfoot the market? Sure, if he wanted to do that. I don’t think that’s his game, though. I think he’d rather keep the peace with the other members of the FOMC, who probably want a pause to figure out their next career moves. Wrap Up It’s a delicate balancing act. But in the end, the Fed will attempt to skip. Much depends on Powell’s presser, where he must convince the market a hike is on for the July meeting. You couldn’t pay me enough to be the Fed Chairman. I bet Jay Powell is wondering whether it’s all worth it. Have a great day. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( In Case You Missed It… Byron King: Debt Bullet Dodged? [Sean Ring] SEAN RING Greetings from lovely Northern Italy. My internet is wonky as hell. Pam said we had a big rainstorm while I was in New York and our home internet hasn’t been the same. So when my friend and ace Rude contributor Byron King sent me his latest, I nearly missed it! No one appreciates Byron’s well-honed, no-nonsense writing more than I do. Whether it’s history, geology, or geopolitics, I’m rapt from Byron’s first word. But this article is about current affairs; one may even call it “tomfoolery.” And Byron is just as spot-on as usual. When Peter Stone wrote the script to his play 1776, he had John Adams say, “I have come to the conclusion that one useless man is called a disgrace, that two are called a law firm, and that three or more become a congress.” You’ll reach the same conclusion after you read this, I’m sure. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [New Biden Bucks Follow-Up Available Now]( Hey, it’s Jim Rickards. Since posting my original Biden Bucks presentation online, millions of people have viewed it. Snopes and the Associated Press have even attempted to “fact check” me and claim my warnings are false: [Click here to learn more]( Point being, my message has raised a storm and caused a lot of controversy. But in the time between my message and now, a lot of new developments have come to light. That’s why I’ve just released an update to my original prediction… one which will likely be even more controversial. [>> Click here now to access my new 2023 Biden Bucks follow-up](. [Click Here To Learn More]( The Debt Bullet Dodged [Byron King] BYRON KING Without fanfare and almost alone, President Biden recently signed a bill to raise the national debt ceiling by $4 trillion. This enables the U.S. government to spend like crazy, up into the $35 trillion realm of debt out to January 2025. This will push both the political issue of debt and the spendthrift political class of America safely past the next presidential election. After signing his name on the magic papers, the president went on national television to brag about it. Yes, America’s politicians have dodged the debt bullet for a while. But not you, the citizen, sad to say. You’re still in the crosshairs. Indeed, what Mr. Biden failed to explain about the national debt is that it comes out of your hide, unless you can manage to stay ahead of events. Let’s discuss this and ponder what it means. Not Quite Another Moonshot The official political and media narrative about this new, higher debt limit is that it’s a major national accomplishment, like winning a war or at least putting a few astronauts on the Moon. I won’t insult your intelligence by quoting the saccharine drivel and fawning, sycophantic praise of propaganda organs like The New York Times or The Washington Post. Heck, even the slightly conservative New York Post characterized the debt ceiling lift as “narrowly averting an economically disastrous federal default, two days before the government was predicted to run out of cash to pay all its bills.” Oh, give me a break. Because talk of a “disastrous federal default” and how the government will “run out of cash” is unadulterated disinformation and a raw, bullying scare tactic. In other words, deficits are just another day at the office for the country’s big-spender class, certainly the politicians. Now with a higher debt ceiling, the Beltway Bandits again continue their generations-long con job on the American people. This whole debt ceiling circus perpetuates the destructive, bipartisan monetary myth that deficits don’t matter. But wait, you say. All the scary pronouncements from politicians and TV talking heads tell us that, absent from raising the debt limit, the government will run out of cash! And then we’ll have a horrific default! So be afraid, right? No, that’s hogwash. And if you don’t believe me, then believe the Monthly Treasury Statement published by no less than the U.S. government. Every month, the Treasury Department reports its receipts and outlays. Helpfully, the government’s own moneymen and women explain from where income flows into our national coffers. Plus, the civil servants explain how it gets spent. Yes, they come right out and tell you. This chart from April 2023 is pretty clear; a basic, graphical depiction of receipts and spending. The government takes in money from income taxes, Social Security taxes, corporate taxes, customs duties, etc. And then funnels it out on Social Security, interest on the debt, and national defense, among other things. [SJN] Monthly Treasury Statement, April 2023, pg.3. Of course, April was a net-positive tax month. In fact, every April of every year there tends to be a surplus because millions of people send in tax payments. While in other months, to be sure, the government is not so flush. Still, you can see that in April alone, the U.S. government collected $639 billion, per Treasury numbers. That’s more than enough to pay $62 billion owed in interest on the debt. And plenty left to pay $115 billion in Social Security. Plus $12 billion in veterans’ benefits. And even fully fund the Pentagon with $58 billion. And so on. So what’s with all the pearl-clutching hysterics about a federal default? Frankly, it’s rhetorical deception because the government always — every month, tax season or not — takes in enough cash to pay the basics: interest on the debt, plus Social Security and veterans’ benefits, and fund national defense. Go back to the Treasury Statements. Look at the numbers. Month after month, year after year, after paying core-level obligations, there are sufficient funds left on the account balance for Treasury to pay a whack for “health,” per the graph above, and much else of what the government has obligated itself to spend. The cash flow problem — the government’s constant deficits and continuous buildup of debt — comes only because every year Congress obligates more to spend than the Treasury Department takes in from revenues. This brings us back to that national debt issue: at root, the country’s problem is not revenues, but chronic overspending. Yes, let’s grant that the country has its must-pay obligations like interest, Social Security, and a few other items. Well, the good news is that month after month, the money is there; it’s not an issue of Uncle Sam running out of cash and going into default. The bottom line of government accounting is that the Treasury ALWAYS has enough to pay for essentials: pay interest on the debt; pay Social Security and veterans’ benefits; pay for defense, health, and quite a bit more. It’s politics, though. Collectively, Congress can’t stick even slightly to paying for just the basics. If that was the case, in the current economy and with current tax rates there would never be even the shadow of a default. But constantly, Congress blows through more than the Treasury rakes in because of high spending on other, far more discretionary programs. The Skyrocketing National Debt At this point in history, overspending and rising debts are clearly a U.S. cultural and political failure; they’re a feature, not a bug. And it’s a legacy matter because, since the 1960s, Congress has continuously outspent the government’s tax receipts. The problem is deep-rooted and fully embedded in the system. Here’s the chart of total public debt, courtesy of the Federal Reserve Bank of St. Louis: [SJN] It’s depressing to see this, yes? One might ask, how does a nation pay this off? (Hint: likely never; unless it gets inflated away.) And worse, this skyrocketing growth in national debt is out of our collective hands. Vote however you like, but the system is rigged in ways that no single member of Congress or Senator can fix. No matter who goes to Washington, spend- ing grows, grows, and grows some more. Now comes the next angle to this problem. Take that massive debt level and increase interest rates on it, which is what happened over the past year. And guess what? Monthly interest payouts on the national debt have moved higher as well. How bad is this interest payment problem? Well, here’s another government chart that illustrates and forecasts which portions of the federal budget go to pay interest, relative to other obligations: [SJN] Obviously, Social Security and Medicare payouts are increasing as Baby Boomers retire and collect benefits. But over and above that, look at the fastest-growing segment of federal spending, which is interest on the national debt. Indeed, by 2028 — five years from now, but perhaps far sooner — the U.S. will pay more in interest on the debt than it pays for the Pentagon. More government deficit spending leads to higher national debt, which leads to more and higher interest payments on the debt. And this crowds out other things in the federal budget. What It All Means to You We’re staring at a continuing, worsening, macabre combination of budget merry-go-round and fiscal juggling act with government tax receipts. Looking ahead, it will roll on until such time as the whole enterprise crashes... which might be a while, or maybe not. Nobody knows when or how this spending train will leave the tracks. So, what can you do? Well, the usual advice pertains. On a personal basis, spend less than you earn and save the difference. First and foremost, always have funds in the bank (or under the mattress) for the basics of life. Let’s say you lost your job or other income. Could you cover the rent or mortgage, pay the utilities, and buy gas and groceries for, say, three months? How about six? Twelve? It’s up to you, of course. It depends on your comfort level. Then comes inflation, which, over the past two years, has totaled about 17% or so, per government figures; and that’s probably a lowball estimate. Still, let’s run with the number. Your $100 bill of two years ago now buys only $83 worth of goods and services. Prices are up for housing, whether you buy or rent. They’re also up for new and used cars, plus the fuel you put into the tank. And food prices are up, along with the cost of clothes, trips to the doctor, airline tickets, hotel rooms, and a long list of other items. This brings us to preserving wealth by holding precious metals, namely gold and silver. On a day-to-day level, spot prices go up and down. But over the long haul, these particular assets will help you keep up with inflation. For example, 100 years ago in 1923, a $20 U.S. gold coin was worth twenty U.S. dollars. [SJN] When minted, that 1923 coin held exactly .9675 ounces of gold, plus a small amount of copper for alloying strength. Today, that same quantity of gold is worth about $1,880, not allowing for the numismatic value of old gold coins. In other words, just the gold alone, in that coin, is worth 94 times the long-ago face value. But the gold hasn’t changed at all, not one atom. Gold in an old coin is still gold. What has changed over time is the value of the dollar, which has lost over 94% of its value in one century. And this is just one reason why, for the long-term preservation of wealth, you should hold gold. If you’re just starting out, go for bullion with as low a markup as you can find. That is, don’t dive into coin collecting unless you do some serious self-education up-front. Frankly, markups for old gold coins (silver, too) are way too difficult to fathom at the beginner level. Don’t walk into that minefield; just stick with basic bullion gold and take physical possession if you can properly store it. Here at Paradigm Press, we like to mention the Hard Assets Alliance (HAA). I must note that we have a business relationship with HAA, but that’s because we know the people and have worked together for several years. If you don’t want to try HAA, there are many other precious metal dealers. If you want to own gold but not take possession, another way to do it is via the Sprott Physical Gold Trust (NYSE: PHYS), with a market cap of $6 billion. The trust is administered by the Sprott company of Toronto, with professional management and secure storage of physical product at the Canadian Mint. You buy shares, and the Sprott people buy gold. It’s that basic. If you want silver instead, there’s the Sprott Physical Silver Trust (NYSE: PSLV), with a market cap of about $3.8 billion. It’s the same thing as with gold, administered by Sprott, except it deals with silver. You buy shares, and the Sprott people buy silver. If you own shares in either of these Sprott products, you won’t ever see the metal, but Sprott guarantees that it’s there. Leave the storage and security to Sprott. But down the line, if you own enough to make it worthwhile, this Sprott product has the advantage that you can arrange to send an armored truck to pick up your metal at the Canadian Mint. If you want an exchange-traded fund (ETF) of gold miners, Sprott offers two of them. One is called the Sprott Gold Miners ETF (NYSE: SGDM), with net assets of about $260 million. This is a collection of major companies that work in the gold space, allowing many mining plays also produce silver, copper, and other metals. You can avoid stock-picking and let the pros at Sprott do the professional management for you. And when the gold sector rises, this is one great place to be. If you want to invest in the junior gold mining space, with higher risks but also higher returns when things work out, there’s the Sprott Junior Gold Miners ETF (NYSE: SDGJ), with net assets of about $100 million. This too is a collection of gold plays that work in the junior side, also with related metals like silver, copper, and more. And again, this product allows you to avoid stock picking, while Sprott manages the day-to-day balance of companies on the roster. It’s time to wrap it up here. In summary, yes, the national debt ceiling is up, and look for increased national debt and more interest paid out through higher rates. It’s inflationary over anything like the medium and long-haul, so do what you can to preserve wealth. The quick takeaway is to hold cash, hold gold and silver, and invest in mining plays. You’ll be as well prepared as anyone, and likely better off over the long run. Best wishes… [Byron W. King] Byron W. King [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. 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