Forget 50 or 75 bps, Fed Funds Rate May Need to Soar to 20% Once Again
The CPI inflation data last week came in at a new high of 8.6% on June 10 “officially”, reaching another 40-year high. However, we know that true inflation is actually about twice that high. Everything reported nowadays is fake, false, and outright lies now a days.
Analysts continue to tell gullible investors we are near “peak inflation” and that it will decline from here. They are either dumb or intentionally dishonest.
They tell us that the Fed Funds rate will go to 3-3.5% next year. But they have no idea how wrong they will be.
As the CPI reached new 40-year high, the markets plunged that day and continued to plunge the following days. “Friends and family” of the insiders probably got the statistics the prior day, because that is when the market plunge actually started.
For some reason, members of Congress are very successful investors. Could that be considered insider trading?
FED’S MONUMENTAL MISTAKE: The Fed once again has made big mistakes. Committee decisions are usually wrong. Aside from the fact that their economic education was terribly faulty, they also must please their masters, the high up politicians, while trying to fulfill their official mandates of full employment, avoiding recessions, and avoiding high inflation.
Economists and Fed officials say that the “neutral” Fed funds rate is 2.5%. How can that even be close to the real target? Real interest rates must be above the rate of inflation to make the cost of money a true cost, not “free money.”
The Federal Reserve is so far behind, one must wonder if they are deaf, dumb, blind, or perhaps never read any financial history. Or is it all to fulfil some other agenda?
In March 1980, the CPI year-over-year inflation rate hit a record 14.8%. The latest reading from last week (June 10th) showed the CPI rising to 8.6%. This shows the Fed has a long way to go to get above the rate of inflation, especially the “true rate”, which according to Dr. John Williams is 16.1%.
When we forecasted in our Wellington Letter in 1979 that the prime rate would hit 20%, Wall Street analysts called that absurd. But it happened the next year, March 1980.
The reason we expect the Fed Funds rate to soar, perhaps to back to the record high of 20%, is because that’s how high it got in March 1980 when the Fed was fighting record high inflation. Currently the Fed Funds rate is 1%. But the analysts on TV don’t mention that.
I often feel like Diogenes, searching for the “honest man.” But he isn’t to be found easily. Most everyone has a conflict of interest, especially those who manage money, which we don’t do.
In the current cycle, should the Fed Funds actually get to 20% AGAIN as in 1980, you can imagine what it would do to stock prices.STAGFLATION?: Another piece of bad news reported last Friday, June 10th, was that Shanghai, which was reportedly ending its lockdowns, now decided to return to lockdowns. Officials say it will be “temporary”…again. With about 25 Covid deaths, Shanghai, a city of 26 million people, was locked down with no one allowed outside except to make a short trip to the grocery store.
Does that make sense? If something doesn’t make sense, find the real reason. We think we know what it is.
A very poor economic number came from the University of Michigan Consumer sentiment survey, which plunged to an all-time (110-year) low.
This confirms the nightmare scenario of central bankers: STAGFLATION, i.e. high inflation and bad economic news.
From now on, we will see economic statistics delivering very negative surprises in an accelerating fashion. But analysts still talk about a “robust economy.” What are they smoking?
The above provides just a few reasons for the sharp stock declines the past few days. This is all bear market behavior.
A bull market would shrug all this off. But ask if the people in charge anywhere are capable of creating conditions to improve the current environment? Does any investor believe that these people can solve the immense problems created over the past 17 months?
A well-known economics professor on TV last week said, “investors should welcome lower stocks prices.” If that is true, then investors will become absolutely ebullient if our forecasts of a monumental bear market materializes.ANATOMY OF A BEAR MARKET: Every bear market starts the same: the first 6-9 months of decline are greeted with analyst recommending endless bargain hunting. The words usually are: “if you wanted to buy it at 100, it is a real bargain at 50.”
That is followed by a period of caution, as most portfolios are under water. Then comes the ruinous “bottom picking.” Every brief rally is greeted as the “correction bottom.”
Bottom picking is the sign that the bottom is not even close. It means that the bear market has not been fully recognized because the economy still seems ok, and unemployment has not soared.
The younger/newer investors (under the age of 60) don’t seem to know that by the time serious economic problems surface, stocks are already down 50% or more.
We wrote in 2020 that we were starting a period like the 1930’s. We would see similar droughts, famines, economic depressions, stock market crashes, dictatorships, and wars. It’s due to long term cycles.
But the really bad news might be that it would probably last longer than 10 years.
We have suggested reading one or two books on the German hyperinflation in the early 1920’s and how it progresses. It is imperative to know that.
But reading books has become old fashioned. Now the sources of information are Facebook (Meta), Tik Tok, Pinterest, Netflix, and YouTube.
That is today’s education!
But a time of great adversity creates great opportunities. It is just not where 90% of all investors look.
These are exciting times and if you haven’t already done so, now is the time for investors to make some hard decisions.
Investors have the choice to be in the small minority and make some great profits over the next several years or follow the crowd on the way to financial disaster.
The bulls are still in the majority. After an important market turn, it usually pays to be in the minority. If the majority were ever right, the majority of people would be wealthy. Are they?
The recent weekly losing streak in the S&P 500 from April 4th to May 20th (7 consecutive weeks of declines) was the longest since 1928. That is one week longer than seen during the CRASH OF 1929.
Such records are very meaningful and to me suggest that the final bottom will be much lower. In our award-winning Wellington Letter, now in its 46th year, we give our targets.
CONCLUSION: All our work suggests that we are in the very early stages of the bear market in stocks. The global stock declines seen so far have wiped out more than $11 TRILLION of value.
The negative is that the market is not a “zero sum game.” That $11 TRILLION lost is not a profit for others. It has vanished. And this is just the beginning.
The last 42 years we had disinflation while the central banks were massively creating money out of thin air. As we have always said, “debt is ultimately deflationary”, though not in the early stages.
So now the long-term economic cycle of stagflation has begun, which will last for a very long period, perhaps a decade or more.
Great profits can be made by knowing that. But you have to realize that the inflation will be very detrimental for the uninformed masses.
The US dollar has lost 99% of its purchasing power since the start of the Federal Reserve in 1913. Yet, currently it is the strongest currency in the world (don’t believe the TV commercials about a weak dollar.)
The amount of money and credit created since the start of Covid is an incredible $9 TRILLION. That is nine times the amount created over the past 95 years.
Will that continue? We believe so, because if the Fed stops, the economy will plunge into depression. It’s like a drunk drinking more alcohol to escape the pain of a hangover.
Fasten your seat belts for a very volatile decade. Keep exposure low and learn to sell short in order to profit from this environment. We can show you how, just visit our website.
Send this article to a friend: