Why the Fed Will Move From Monetary Inflation to Fiscal Inflation

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By Bill Bonner

 

 PORTLAW, IRELAND – “Well… what did you expect?

 

When all is said and done, it’s “Inflate or Die.” Fed chief Jay Powell didn’t want to die. Yesterday, he put his cards on the table. He said “incoming data” tell him that there are “uncertainties” and “concerns about the strength of the global economy.” Blah… blah…

 

In a free, healthy economy, markets would weigh those data and signal to investors, bankers, lenders, and savers in prices, giving them a clear and honest measure of what was going on. Instead, in our late, degenerate, Fed-managed system, a central planner decides for himself what short-term interest rates should be… thereby distorting the most important price signal in capitalism… and corrupting the whole shebang. So, Mr. Powell put out the word that he was prepared to cut rates. The Dow shot up immediately. And the S&P crossed the 3,000 mark for the first time ever.

 

No Real Boom: But wait… as we told you last week, you don’t get a classic Dow Theory buy signal unless and until a new high in the Dow Jones Transportation Average confirms a new high in the Dow Jones Industrial Average. The transportation stocks – trucks, ships, and trains – tell us when real goods are moving. If they’re not moving, there’s no real boom. And guess what? Transports didn’t go up yesterday. They went down. Freight volumes are down, most likely because the economy is slipping and sliding towards a slump.

 

And as the day wore on, investors began to realize that a few basis points of cuts were not going to make much difference. The S&P backed away from the 3,000 mark. And when the bell rang, the Dow was still up… but not significantly.

 

Downbeat View: More importantly, gold seems to have gotten a peek at Mr. Powell’s cards; it’s growing bolder. While the Dow was up 0.29%, gold was up five times as much – 1.45%. The only way the feds can hold off a correction is by inflating. Everything else is bluff and BS… and gold investors know it. And trying to goose up stocks with a few cuts to the federal funds rate won’t be enough to stave off the inevitable.

 

First, the Fed doesn’t have many rates to cut. It’s kept its key interest rate below the rate of consumer price inflation for almost an entire decade. There’s not much juice left in that lemon.

 

Here’s CNBC: “An interest rate reduction by the Federal Reserve, if it were to happen, probably wouldn’t lead to a big increase in stocks, the chief U.S. equity strategist at Goldman Sachs told CNBC on Tuesday. “A lot of that rise in the market, in my estimation, is already behind us,” said Goldman’s David Kostin in a “Squawk on the Street” interview. “Ninety percent of that rally has been about multiple expansion.”

 

Morgan Stanley has drawn the right conclusion. As Investopedia reported: “We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns,” Sheets [Andrew Sheets, chief cross-asset strategist with Morgan Stanley] wrote this week in a note to clients. Mike Wilson, chief U.S. equity strategist and chief investment officer (CIO) at Morgan Stanley, has an even more downbeat view. His bull case foresees a gain of less than 1% for the S&P 500 through mid-2020, and his base case projects a 7.6% loss, per a recent Weekly Warm Up report.”

 

Desperate Measures: A few basis points of Fed cuts are not going to change this outlook. And as the slowdown becomes more apparent, the feds will become more desperate. They will move from monetary inflation to fiscal inflation. That is, they will turn away from the Fed’s Eccles Building and toward the D.C. Swamp.

 

Democratic candidates are already pushing for it. Student loan forgiveness… more infrastructure spending… a new, green agenda… “Economic patriotism” – all ways to inflate the economy. And our guess is that Mr. Trump will upstage them all with bigger boondoggles of his own.

 

In other words, inflation will move from Wall Street to Main Street… from the financial economy to the consumer economy. Instead of inflating stock prices, it will inflate consumer prices. And that will set feet a-dancing – in the gold market. Stay tuned…”

- https://bonnerandpartners.com/

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