Fed up with these serial bubble blowers

Tuesday, 5 July 2022 — Mallorca, Spain

[7 min read]

Dear Reader,

A recession, as defined by the Oxford Dictionary, is (emphasis added):

‘…a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.’

OK, are we good with that?

Two successive quarters of negative GDP numbers and it’s official…there’s a recession.

From MarketWatch on 29 June 2022:

One quarter down, one more to go, and the US is officially in recession.

And, if you take the headline on face value, it’s going to be touch and go as to whether the second quarter (ended 30 June) is positive or negative.

However, if you believe a high-ranking Fed official, it’s a case of…‘recession, what recession’?

As reported by Bloomberg on 24 June 2022 (emphasis added):

‘Federal Reserve Bank of St. Louis President James Bullard said fears of a US recession are overblown, as consumers are flush with cash built up during the Covid-19 pandemic and the expansion is in an early stage.

‘“I actually think we will be fine,” Bullard said in a speech in Zurich Friday. “It is a little early to have this debate about recession probabilities in the US.”’

Earth to Jim Bullard…mate, when you’ve already got one negative quarter in the bag and the second one is oh so close to going negative, how can the probability of a recession NOT be THE topic of debate?

The incompetence of these serial bubble blowers is beyond belief.

If you’re holding onto the belief of the Fed having your back, you’re suffering from a serious case of misplaced trust.

They’re going to stuff this up…big time.

A haven for inbred PhDs

The reason why can be found in a recent article in Ben Hunt’s ‘Epsilon Theory’.

The article delved into the employment history of some of the most senior people in the US Federal Reserve.

Here are the findings…this discredited institution is a haven for inbred PhDs:

• ‘John Williams, head of the NY Fed, has never held a job outside of the Federal Reserve system.

• ‘Jim Bullard, head of the St. Louis Fed, has never held a job outside of the Federal Reserve system.

• ‘Esther George, head of the Kansas City Fed, has never held a job outside of the Federal Reserve system.

• ‘Mary Daly, head of the San Francisco Fed, has never held a job outside of the Federal Reserve system.

• ‘Charles Evans, head of the Chicago Fed, has never held a job outside of the Federal Reserve system and academia.

• ‘Raphael Bostic, head of the Atlanta Fed, has never held a job outside of the Federal Reserve system and academia.

• ‘Kenneth Montgomery, interim head of the Boston Fed since Eric Rosengren resigned in disgrace, has never held a job outside of the Federal Reserve system.

• ‘Meredith Black, interim head of the Dallas Fed since Rob Kaplan resigned in disgrace, has never held a job outside of the Federal Reserve system.

• ‘Patrick Harker, head of the Philadelphia Fed, is not a Fed lifer. No, he’s an academia and government lifer.

• ‘Thomas Barkin, head of the Richmond Fed, is also not a Fed lifer. No, he’s a former senior partner and CFO at McKinsey.

‘…while she’s no longer a regional Fed president (but is on the Fed board of governors), Lael Brainard had a stint at McKinsey as her only job outside of government and academia.’

Any employment ad for the Fed should have in big, bold type…DO NOT apply if you have real-world experience.

When all their adult working life has been spent in an intellectual bubble, it’s little wonder the decision-makers in this institution have such an appalling track record in long-term economic management.

The reason we’ve experienced three historic asset bubbles in the last 25 years is due to PhD groupthink.

How anybody thinks these clueless, conceited, career academics — the ones responsible for creating the ‘everything bubble’ — have the skillset to manage a ‘soft landing’ is beyond me. They are completely and utterly incompetent.

Their world is one of neatly calibrated models.

Real-life scenarios involving chaos, unintended consequences, unbridled greed/fear, and unforeseen out-of-left-field reactions are not something they can easily relate to in their perfectly simulated and cloistered world.

Central banker conceit is evident in the following chart comparing the actual Federal Reserve interest rate (blue line) with the prescribed rates determined by two different methodologies (both based on prevailing economic inputs):

In the 1970s, then-Fed Chair Arthur Burns kept the Fed Funds rate lower than the methodologies indicated.

The result…inflation got out of control.

Proving there are no free lunches with interest rate suppression, the Fed, in the late 70s/early 80s, was forced to raise rates well beyond the level prescribed by the two methodologies.

During the 1990s, Greenspan closely followed the interest rate methodologies.

However, when the US economic applecart was upset in 2000/01, Greenspan panicked.

He abandoned the disciplined rate approach and plunged the Fed Funds rate to 1% and kept it there too long…laying the foundation for the subprime lending fiasco.

You’d think the Fed lifers, having lived through this period, would’ve had an ‘aha’ moment and thought, ‘let’s not do that again’.

The embodiment of insanity

When the GFC hit, the Pavlovian academics responded as per their institutional programming, dropping the Fed Funds rate way too low for way too long.

Had they followed the setting determined by the two methodologies, when the immediate danger of the GFC passed, the Fed should have cranked up rates somewhere north of 3%.

Had the US cash rate been set at an appropriate level (one that balanced the needs of savers and borrowers), we would not find ourselves in the awful mess we’re in.

Corporate debt would have been more restrained.
Buy backs (goosing up earnings per share) wouldn’t have been so prevalent.
Speculative behaviour would have been a little more subdued.

Would’ve. Could’ve. Should’ve.

It’s all academic…a bit like the Fed’s theories.

We have to live and invest in the world that actually happened.

These academic numbskulls occupying senior Fed positions have delivered upon us the greatest asset bubble in history.

The lifers who were instrumental in keeping rates ‘so low, for so long’ to spark inflation, are now the ones people are counting on to have the nous to rein in inflation without tanking the economy?

Dream on.

It ain’t going to happen folks.

These people are the very embodiment of Einstein’s definition of insanity.
They keep doing the same thing over and over and over again, expecting a different result.

The Fed’s completely clueless (but Wall Street and Washington friendly) strategies are destined to make an already bad situation a whole lot worse.

With this lot piloting the world’s largest economy, investors would be well advised to brace for the crash position.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

This just in.

Fox News reports:

‘The GDPNow gauge, a widely watched measurement from the Atlanta Federal Reserve Bank, indicated Thursday that real gross domestic product shrank by 1.0% in the second quarter from April through June.

‘While the official advance estimate of Q2 performance will not be released for another month, this preliminary reading shows the second quarter in a row of negative growth in the economy after GDP contracted 1.6% in Q1.’

As forecast, now we have a recession on Main Street as well as a bear market on Wall Street. But what we don’t have yet is any sign of panic from the Fed. It’s committed — for now — to tightening up the money supply in order to combat inflation.

But we’re just at the beginning. Mr Market is correcting the Fed’s mistakes and deflating the economy. And he’s got a long way to go. Investors are still looking for the bottom. Typically, real bear markets don’t end until investors get fed up…give up…and stop looking. Dow 20,000? Dow 15,000? We don’t know, but it’s probably a much smaller number than most investors expect.

Then, we’ll see what kind of stuff the Fed is made of. It will face the ‘Decision of the Century’ — either continue to let Mr Market do his work, cleaning up more than 20 years of irresponsible monetary policies…or go back to printing money and letting inflation rip.

That decision will determine whether we suffer a serious bear market and deep recession now…or a total economic, political, and social breakdown later.

Stay tuned.

Spontaneous order

Meanwhile, we look ahead. And putting the present conversation in historical perspective…

…today’s standards of living…our ability to feed eight billion people…with average lifespans that are twice what they were 150 years ago…air-conditioning…power steering…Facebook…mosquito repellent…

…for good or for evil — the world we live in was created by people who paid little attention to government. Instead, they drilled wells and built refineries…they invented automobiles and produced them by the millions…they hammered steel…and cooked dinners with ingredients that came from all over the planet. Pineapples from Hawaii…palm oil from Malaysia…beef from Texas…strawberries — even in the wintertime!

They did these things without subsidies or tax credits. And not because Congress passed a law, or the president threatened them. They did them to make their lives better.

No Great Transition plan showed them how to go from a muscle-powered world to one with 1,000 times more power — from fossil fuels. No ‘Group of 7’ world leaders got together and decreed a switch to coal, oil, and gas as primary energy sources. No Pete Buttigieg directed people to build gas stations. No think tank showed them the way forward. No regulations guided their feet…nor was there any Department of Energy (not created until 1977) looking over their shoulders.

Often, the biggest innovators — those who added most to our wealth and comfort — worked on their own…unknown to the powers-that-were…with no backing from universities or non-profit foundations or governments. Each one danced to his own tune…followed his own compass…and brought forth the quality of life that we enjoy today.

Good and hard

They gave. They got. Consumers decided what they wanted; the rest was rejected. And thus did the progress of the world take place.

But there are always people who think they know better. They don’t care what ‘the people’ want. They know what ‘the people’ should have!

And when they get control of a government…they give it to them, good and hard.

The Industrial Revolution really got into gear about 1850. At least, that’s the date taken as the ‘baseline’ for today’s greenhouse gasses measurement. The next 150 years were perhaps the most productive in human history.

But then, the know-it-alls grew more strident. ‘Rich’ is relative. Even the paupers of 1999 lived better than kings did 200 years before them. For they had painless dentistry and so much food that obesity killed more of them than hunger. But as the whole world grew richer, more people discovered that they were not among ‘the richest’.

And as the whole society grew wealthier, it could support more parasites…more busy bodies with time on their hands and improvement on their minds.

Karl Marx’s mother came from a rich family that later founded Philips Electronics. Marx’s wife was a minor aristocrat. Friedrich Hegel’s parents were both functionaries for the Duchy of Wurttemberg. Friedrich Engels lived off the wealth of cotton mills. Ho Chi Minh, the son of a scholar, was educated by the French…Che Guevara’s family sent him to medical school.

Growth needed to be controlled, they said. Problems — inequality, alcoholism, poverty — needed to be solved. The economy needed to be rationalised; wealth should be shared out more fairly. Money was wasted, they added, on advertising…and giving ‘the people’ too many choices.

The great spend-a-thon

The first major effort to bring the economy under elite (government) control came in the Soviet Union. Later, Germany, Italy, China, Cuba, Vietnam — all took a stab at it. All failed. And usually, the failures were accompanied by millions of deaths — either ‘liquidated’ by intention…or by accident. The largest ‘accident’ was in China, 1958–62, where the Great Leap Forward so thoroughly wrecked the economy that 50 million people starved.

But the planners, world improvers and controllers don’t give up. Now, they are convinced that unrestrained growth will bring the ‘death of the planet’.

It’s not clear to us that an increase in global temperatures would be a bad thing. Nor is it apparent that the Earth lacks its own feedback loops and counterbalance mechanisms. We’ll leave ‘The Science’ of it — if there is any — to others.

What is apparent to us is that trying to control the weather is likely to produce the same sort of results as every other Great Crusade since 1914. The elite, for all its technocratic pretensions, has botched every major policy initiative and bungled its way into one debacle after another. The First World War, Prohibition, Korea, Vietnam, the War on Poverty, the War on Drugs, Stagflation #1 (in the ‘70s), the War on Terrorism, Iraq, Afghanistan, Libya, Syria, the bailout of Wall Street, the COVID Panic, and the Gimmie-Stimmy spend-a-thon, the sanctions war against Russia, and now Stagflation #2.

They’ll almost certainly make a mess of this Great Transition away from fossil fuels too. But now the stakes are higher. Now, they put the progress of more than 150 years — and the lives of eight billion people — in jeopardy. The rich may miss a latte — a few may swing from lampposts. But the poor? ‘The People’?

Tomorrow, we’ll look at how it might develop.

Regards,

Bill Bonner,
For The Daily Reckoning Australia