Your best chance against a system in flux

Friday, 1 July 2022 — Burradoo, Australia

[7 min read]

Dear Reader,

No doubt the talk of an impending market crash is dominating conversations everywhere.

Central banks are raising rates and reining in the currency supply amidst the most challenging economic times we have seen in four decades.

People are concerned about the higher cost of housing, grocery, and utility bills rising while their stock and crypto portfolios take a massive hit.

And yet, we’re early in the market downturn if you look at how far things have moved since central banks started to tip the global markets upside down.

And in Australia, we are quite behind.

The RBA has risen rates twice this year; it’s now sitting at 0.85%. We are late in the game. After all, the US Federal Reserve has raised rates three times, and their rates are at 1.5–1.75%. The Bank of England started raising rates last Christmas and now sits at 1.25%.

Our markets have taken quite a body slam, with the ASX 200 Index [ASX:XJO] down 15% from its recent highs in mid-April. Mining companies fell harder, with the ASX Metals and Mining Index [ASX:XMM] down just over 20%.

But spare a thought for investors in gold stocks…

The ASX Gold Index [ASX:XGD] is down a whopping 36%. Earlier this week, two of the top ASX-listed gold producers, Evolution Mining [ASX:EVN] and Northern Star Resources [ASX:NST], tumbled to pre-2019 levels as fears grow about operating costs due to high fuel and electricity prices. Several gold producers have warned about delaying projects or having to downgrade their future outlook in the past fortnight.

The same story goes with the property market. Headlines about how property investors should brace for prices to fall are now splattered across mainstream media. Not long ago, these news outlets would tell us that property prices never fall, only growing at a slower pace.

What about cryptos? This was a US$3 trillion market last November. It’s now sitting at around US$860 billion. How far it has fallen from its peak!

The current mood is that things could get worse. Central bankers are warning of more rate rises to rein in inflation.

My view is that central bankers are on a suicide mission that will sabotage our financial system.

What I want to do is show you how and what you can do to avoid being a victim.

Decoding the voodoo economics of inflation, interest rates, and productivity

Central bankers set the interest rate of the economy and target inflation or the exchange rate to stabilise the economy. They meet regularly to review economic data and then run their models to help them come up with their policy decisions.

At least, that’s what they want you to think they’re doing.

It is an exercise in futility, with potentially dreadful consequences.

Central bankers are pushing on a string. They want to manipulate the supply of currency into the market to nudge businesses and households to deliver a desired level of real productivity (manufacturing goods or providing services) and economic growth.

Here’s the first spanner in the works — not all participants deploy the currency to produce. Some will speculate in the markets, squander it in frivolities or simply put it in a box or a safe place. Currency created without producing goods or services contributes to inflation. It circulates in the system, chasing fewer goods and services, causing prices to rise.

There are two ways to deal with inflation — produce more goods and services relative to currency to bring prices down (supply-driven stimulus, the ideal outcome) or to remove currency from the system in the hope that it would reduce prices or discourage speculation (demand-driven contraction, a dubious outcome).

As you would expect, it’s harder to achieve the former. Low interest rates have made speculation too easy that it’s now irreversible. People are prone to seek the path of least resistance, and speculation or gambling is more attractive than actual toil.

Therefore, central bankers are forced invariably to take the punch bowl off the table through raising interest rates and cutting the currency supply so the hot money evaporates from the markets.

That is why our markets are falling.

Do you think people are going to fold on their speculation and go back to honest toil? Not easy when businesses at this time see their capital dry up so they have to lay off workers.

This is the second spanner.

Finally, the third spanner is high energy prices, thanks to environmentalism and the war against fossil fuels. This is what drives inflation as it hinders production and causes consumers to fork out more wherever they shop.

So there you have it — an economy crippled by foolish central planners that have cultivated undesirable outcomes.

Just how do we bring the economy back?

Economic recovery — a Gordian knot

The way to economic recovery would be to spur productivity.

There are massive challenges.

First, we have a broken supply chain starting with primary producers facing high input costs and labour shortages preventing them from delivering much needed goods to kick off production.

Then we have businesses struggling to find workers and balancing their books.

To top it off, central banks are raising rates during all this, effectively tightening the noose.

What is the result?

Commodity prices are falling due to falling demand from weak business confidence and capacity.

Business activity is weak, causing higher unemployment and lower wage growth.

To overcome this is as difficult as untying the Gordian knot.

Odds favour a recovery in commodity and fossil fuel producers

The good news is that this state of absurdity cannot last forever.

Expect inflation to give way to deflation due to a collapse in consumption.

We may be close to that tipping point.

The key is in the price of oil as it has a chokehold on primary production.

When the oil price falls, mining companies, food production, and transportation companies will gradually ramp up their activities. This will feed into the rest of the economy. Assuming governments hold back on splurging on stimulus cheques to divert production to speculation, we could see a sensible economic recovery.

Remember how mining companies have dived sharply in the last two months?

The fears about these businesses being able to weather the storm of high operating costs are real. Many believe that the prices of oil and diesel will remain elevated for a long time.

I believe that the cure for high prices is high prices. Sure, there have been longstanding underinvestment in developing new mines while government regulation hinders production in existing fields. Insane ideologues and environmentalists have played their part in pushing governments to limit fossil fuel development. And oil-producing nations play political football and limit supply to maintain their profits.

But it is not irreversible.

A commodity boom is in the making. The system is in flux but this market crash could be just what we need to spur that boom.

Don’t write off commodities or fossil fuels. It could come back to haunt you.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

Dear Reader,

Poor Ghislaine Maxwell. The woman got a 20-year sentence yesterday, for ‘sex trafficking’.

The subject matter is far beyond the scope of our mission here at the Letter. But we aim to connect the dots and Ms Maxwell’s trial is one of the most flagrant examples of NOT connecting dots that we’ve ever seen.

Nowhere in the mainstream press did we ever see a reporter, a lawyer, a judge — anyone — making any effort to get to the bottom of it. Where did Jeffrey Epstein get his money? Why was he flying Bill Clinton, Donald Trump, Prince Andrew…and many others…back and forth, in his own private jet, to Florida, Europe or ‘Orgy Island’, his getaway in the Virgin Islands? The plane was a huge Boeing 727. On it, Bill Clinton was a passenger 26 times, according to press reports. Donald Trump was on-board seven times.

What was Epstein up to? Why would he spend so much time and money befriending — and putting in compromising positions — the US’s former and future presidents?

Ms Maxwell’s father, the British press lord Robert Maxwell, was allegedly a spy for Israel. When he died, apparently falling from his yacht, the ‘Lady Ghislaine’, he was given a lavish funeral in Jerusalem. Among the many ‘it’s a small world’ dots left unconnected was this gem: reciting the Kaddish at the funeral was none other than the stepfather of the US’s current Secretary of State, Anthony Blinken.

Let’s see. Two US presidents. The son of the Queen of England. Bill Gates. The US Secretary of State. Nobody wants to connect those dots! The Epstein Affair was reported as a salacious sex scandal. End of story.

Dot…dot…dot…

But there’s always more to the story. Only part of it is ‘fit to print’. Any news item that interferes with the preferred narrative never makes it to prime time. A story that portrays the Russians as bad guys and the Ukrainians as noble heroes, for example, is quickly slapped on the front page. It doesn’t even matter if it is true…or even plausible. But where are the stories about the puppies rescued by Russian troops…the Russian victories…the destroyed Ukrainian tanks? You won’t find them.

So too with a whole range of mainstream themes — climate change, diversity, white supremacy, disease control. News coverage must fit neatly into a tidy narrative. Reports that don’t fit in the box — or the elite don’t want you to hear — are silenced.

The trouble — in the financial world — is that markets won’t shut up. They keep bringing more dots to connect. And the dots can’t be ignored. This from Forbes: ‘Dow Plunges Nearly 500 Points, Recession Fears Resume As Consumer Confidence Hits New Low’:

‘Stocks fell for a second day in a row on Tuesday as markets failed to build on last week’s strong rebound from 2022 lows, with investors once again selling off shares amid looming recession fears and new economic data showing that consumer confidence plunged to a 16-month low.’

The Fed giveth. Mr Market taketh away. Prices go up. Prices go down. And yesterday brought more signs that the first wave of ‘inflation’ is rolling over. From CBSNews: ‘U.S. gas prices continue to decline as oil costs fall’:

‘American motorists are getting a measure of relief at the gas pump, with the cost of filling up sliding for a second consecutive week as oil prices tumble.

‘The national average on Tuesday stood at $4.88 for a gallon of regular, down nearly 9 cents from a week ago, according to AAA. Worries about the rising risk of a global recession has reduced demand for oil, with the price of crude falling to around $107 a barrel from $110 last week, the travel club noted in a news release on Monday.’

And here’s Fox News:

‘During an interview on Mornings with Maria, Tuesday, market expert Dominick Tavella said that the economy is “definitively” slowing down and that consumers are pulling back on spending.

‘[We used to have] “10 or 15 people bidding on houses,” said Tavella. “Now it's down to two or three people bidding on houses. So it's clearly starting to have an effect in the economy. The economy's definitively slowing down, whether it's the Fed or higher energy prices.”’

USA Today adds:

‘Several companies, including Netflix, Microsoft and PayPal, rolled out layoffs and hiring freezes, anticipating a downturn in the economy.’

And the Financial Times warns of a ‘pan-Atlantic recession’:

‘Economists on both sides of the Atlantic told the Financial Times they had become increasingly pessimistic after the Federal Reserve’s jumbo rate rise to counter soaring inflation, and as concerns mounted over the security of European gas supplies this winter as Russia reduces exports.
‘Holger Schmieding, chief economist at Berenberg Bank, said the balance had “tipped” in favour of an economic contraction next year in the US and Europe. “What used to be a rising risk has now turned into the base case”.’

We may never know what actually happened in the Epstein Affair. But the dots will come together in the financial world, whether we like it or not.

Stay tuned.

Regards,

Bill Bonner,
For The Daily Reckoning Australia