Postcards From the Florida Republic - June 19, 2022
State of Retirement Portfolios
Market Performance
Market Outlook?
Dear Future Florida Republic Residents:
The Federal Reserve increased interest rates by 75 basis points last Wednesday.??
It was the largest rate hike since 1994. (Keep "1994" in mind, please.)??
Markets continue their downward movement with little end in sight.
Some people are trying to call the bottom again.
Still, I don't think that will happen until at least September when the Fed ends its Quantitative Tightening program – or we finally get capitulation.??
Even CNBC's Jim Cramer has told people not to buy stocks until the market calms down.
Market momentum turned negative on June 8, and we've experienced another hellish leg down that I expected last Sunday.
The markets are having a bad time.
Now stagflation has taken hold of the global economy.
It's been 11 months since President Biden said: "There's nobody suggesting there's unchecked inflation on the way — no serious economist."
That timeline makes the weekend Barron's interview with "serious economist" and former Treasury Secretary Larry Summers more relevant.?
Summers warned last year that Congress' massive fiscal stimulus would be highly inflationary. He was right.
Summers notes that even he was dismissive of inflation at the onset of Ben Bernanke's Quantitative Easing in 2009. He didn't think inflation would be a problem during Janet Yellen's reign at the Fed, either.
It wasn't until the Fed's actions in 2020 – dropping money out of the sky as if a money plane had exploded – that he paid closer attention.?
The combination of overflowing fiscal stimulus (from Congress) and monetary stimulus (from the Federal Reserve) is a massive driving force behind inflation.?
If you watched Money Morning LIVE! last July, I explicitly stated that inflation would go on longer.?
I said the same in January 2022, when most economists thought inflation was hitting peak levels.?
And I said in April that inflation wasn't just heading higher throughout 2022 but well into 2023 – despite concerns about consumer spending and a slowing economy.
Of course, I don't have a Ph.D. or access to the White House, so I guess I'm not a "serious economist."?
But I never wanted a Ph.D.?
Instead, I chose multiple master's degrees in disciplines of economics and finance so that I wasn't a master of one thing.?
The last thing I wanted was some blonde dude walking up to me at a wedding and saying, "Dr. Baldwin, I enjoyed reading your recent study about transnational energy flows and transportation incentivization in the 19th century."?
No offense, doctors.
But take me off the table for a second.?
And let's focus on another "serious" economist named Diana Furchtgott-Roth.?
She is an adjunct professor of economics at George Washington University, a Forbes columnist, and recently the Deputy Assistant Secretary for Research and Technology at the Department of Transportation.
She's arguing that a 75-basis rate hike isn't going to tame 8.6% inflation. I agree. It won't make a big dent.
But Furchtgott-Roth also notes that inflation has never been reduced when the Federal funds rate is under the inflation rate. So I had to go back and check that…
And she's right…???
The Fed is (frustratingly) increasing rates at a slow pace –we will need several aggressive rate hikes…?
That Fed rate-to-inflation factor is critical.?
Summers noted over the weekend that monetary policy lags nine to 18 months. Summers compares monetary policy to changing the temperature nobs in the shower of an old hotel, where you have about a 20 to 30-second lag before the temperature changes.?
He notes that if you turn too much in one direction, you end up scalding or freezing yourself and jumping out of the shower to readjust the nobs again.
"The latest CPI report makes it clear that inflation isn't simply coming down of its own volition," he said. "Team Transitory is wrong. It will require substantial economic slack – a substantial increase in unemployment and reduction in GDP growth – to bring inflation, running above 8% and accelerating, down to acceptable levels."
There's more to this if you start going out nine to 18 months, and Summers expects a recession… and a hard landing for the economy (and the money plane).
Maybe inflation drops, but there can't be a sustainable correction until the fund's rate is higher than inflation. A 75-point hike won't cool speculation, spending, and (overall) aggregate demand.??
And monetary policy isn't enough to fix this economy.
Bloomberg said this week what I said a month ago. The Fed doesn't have the tools to address rising food and oil prices. The White House can effect change with supply-side policies, but they'd be slow-moving.?
More carbon-based energy production would upset Biden's base.
The Green transition is highly inflationary.?
The structural problems with inflation and energy will not be resolved very soon. These issues will stifle any potential RECOVERY in the future.?
Let's think for a moment about a recession here in the U.S. energy prices will likely come down because of demand destruction.?
But if the economy starts to recover two years from now… basic math says that aggregate demand for products and services will increase... and prices too. There would likely still be supply shortages… of pretty much everything because we haven't incentivized businesses to create more stuff…
That goes especially for oil and byproducts like gasoline, jet fuel, lubricants, and diesel. (Don't tell the White House, but everything in your house likely has an oil or gas byproduct, which was probably delivered on a diesel truck.)
Even if the Biden Administration wants Americans to switch to electric vehicles, there is still a supply issue with lithium, rare earth metals, and other materials in the supply chain that we must address.??
To extract large amounts of metals for batteries and other critical materials, the process requires a significant amount of diesel fuel – of which there is a shortage due to wrong policies and market distortion.?
Two years from now, aggregate demand cannot increase without a solution on the supply side – or else prices – and thus – inflation rises when the recovery supposedly starts. This will drag on and on… and the economy will fall into a cycle of false starts and frustration among business owners and consumers.
The prospect of recovery is muted…?
This is how a prolonged recession OR WORSE happens.?
Am I a "serious economist" yet?
What Will the Fed Crush Now?
It's not just the problem of the Fed being behind the curve and the inability to tame inflation without a higher funds rate.?
The other issue is that a significant financial failure happens worldwide every time the Fed's rate increase cycle ends.?
Live by cheap money… die by cheap money.
Here's the history of financial failures when the Fed ends its rate hike cycle.??
I've recently noted that in 1994, there was a nearby crisis when the Fed increased rates aggressively.?That was known as the Tequila Crisis, effectively sinking the Mexican economy.?
Due to the nature of the peso's peg to the dollar, the acceleration of the U.S. dollar left the Mexican economy behind. It led to a massive bailout by the International Monetary Fund and a long, miserable path toward stabilization.
So, where is the next crisis going to be??
After COVID-19, any central bank that could print money did so. Global debt exploded, and now it's time to pay the piper. We'll see many bailouts soon.
The reality is that the IMF cares about some nations and leaves the others out to dry. The latter condition applies to Sri Lanka, which ran out of fuel…?
Does anyone seem to care about the plight of that nation right now? It doesn't seem so.?
You don't hear about this in many media outlets.?
Meanwhile, the IMF is about to offer a bailout to Zambia, thanks primarily to support from China.?
So, where is the next big crisis??
Start with Pakistan, which is a nuclear power.?
Then, always go back to South America.?
There will be a sovereign crisis, and Brazil's economic policy shift is enough to tilt the scales.?
Argentina's problems are only going to get worse until there is dramatic reform.?
I'm also worried about Colombia, which might shift either too far left on social spending… or too far right with efforts to engage in "total austerity."?
It all comes down to the nation's pending election.
We'll just have to keep the camera rolling…
Kleptocracy Updates
I like to ask the same question of our policymakers daily.?
But before I dig into the next topic, I want to explain that I'm agnostic around events happening in Washington, which doesn't keep me up at night.?
The entire system is so broken that throwing everything at one person's feet is too simplistic.?
That said, a few people seem to make the situation worse perpetually. They're typically unelected… And thanks to his advisers and leaders at several agencies, it was a rough week for President Biden.
Start with basic economics.?
The Biden Administration said that the nation would be okay because inflation is higher "everywhere" outside the United States.?
The press secretary had no answer when pressed on this issue by a reporter this week.
It's either a lie… or – once again – no economic advisers know how to use Google.
It's not even remotely close to correct.
Anyone – not just me – can track 183 nations and territories on the state of their economies – including metrics like inflation.?
The United States is ranked 104th with the lowest inflation rate.
Get that??
There are 103 with lower inflation levels than the United States.
Now, I know many nations out there game their numbers (but so do we).?
Still, we're nowhere close to the inflation levels of advanced countries like Switzerland, France, Japan, and Australia.
Anyone can Google "Inflation by Country."
Does anyone in Washington read?
Prepare for Market Distortion?
Staying with this theme, the policy problems continued to mount this week across Washington.
First up, airlines.?
Over at the Transportation Department, Mayor Pete continues to show that he doesn't understand how private industry works.?
On Thursday, he met with airline executives and then had to catch a plane to New York. When he arrived at the airport, his flight was canceled.?
He had to drive.?
He got sad.
Then he devised a solution to fix flight cancelations.
Fine the airlines if they are unable to keep their schedules this summer.?
He wants the airlines to "stress test" their summer travel schedules.?
If they can't ensure that the flights are going to happen – based on their current employee makeup – then potentially pay millions in fines for failing to hire enough customer service representatives and refund money to passengers fast enough.
Mayor Pete is venturing into dirigisme.?
What will now happen – because the sector is facing lousy policy incentives – is that airlines will likely cut their flight schedule throughout the summer.?
That will create a shortage of flights, which will drive up prices all summer… and likely exacerbate the underlying problems causing the cancelations.
领英推荐
It'd be great if they could just go back to the source of the problem…
Airlines had a brutal stretch during the pandemic.?
The industry had experienced a pilot shortage for years that only got worse in 2020.?
Rather than furlough workers during the shutdowns, many airlines offered pilots and other staff early retirement. Many pilots just moved on to some other profession.?
There's a critical staff shortage in a highly regulated industry.
In addition, airlines are paying record prices for jet fuel – when diesel fuel (used to transport jet fuel) faces records AND shortages this summer.?
These new policies are only going to make things worse.
Anyone betting on Pete Buttigieg as the 2024 Democratic nominee is lighting their money on fire.?
You're better off buying Dogecoin than making that bet.?
I wouldn't touch airline stocks with your money based on his reverse Midas touch.?
As I noted, we saw a massive bet by an options trader that American Airlines stock will fall under $3 by January 2024.?
They may go bankrupt.
These policies will increase the odds of that happening – especially the first time the Transporation Department fines the company and shareholders dump the stock because it's not worth the hassle.
Moving on…
Next up – is the Energy Sector.
Let's start with the bump in the ethanol mandate, possibly the dumbest economic policy in Washington...
Why the hell are we increasing our ethanol use?
The stuff is terrible for the environment. It destroys old engines, decays storage tanks, and hurts gasoline station infrastructure. We'll have more smog. We'll also be burning food (it's made from corn), and that will drive up food prices.??
And because we are burning corn, we need to grow more corn, which increases the demand for fertilizer, which is currently experiencing a shortage… and fertilizer requires ammonia, a byproduct of natural gas production, which is also being targeted by the administration's environmental policies and hostile states that don't want to engage in fracking.?
This whole cycle is so stupid that my brain plays a soundtrack of women crying and men gnashing their teeth… whenever I think about it…
That's just the first mistake around gasoline.?
The White House is now considering new ideas to address inflation and rising prices at the pump.?
But every single one of them would INCREASE demand and not help grow supply, except for the suspension of the Jones Act (Thank goodness this is part of the broader discussion).?
Ideas include suspending gasoline taxes (which will likely increase aggregate demand) and providing rebate cards to drivers to help them afford gasoline (also something that will increase demand.)?
This is not a situation that you can spend your way out of it.?
How are these even considered??
Bad policy advisors and a total lack of common sense.
But it gets worse when you consider the demagoguery of energy refiners this week.
The President and the Department of Energy pushed oil refineries to explain their lower capacity levels over the last few years.?
The administration implies that U.S. refineries shuttered capacity to make HUGE profits off this recent oil spike and drove prices even higher after the war in Ukraine.
What??
It's so illogical that I had to lay down when I heard this. More in a moment...
Such an argument is likely the fault of advisors who don't seem to understand basic economics and get to regulate industries that they don't understand.?
There were three big blunders this week on energy policy - and they seemed to all involve Department of Energy head Jennifer Granholm.?
First, the White House demanded that the refineries explain to her why they haven't increased their capacity right now. Jennifer Granholm oversees the Energy Information Administration, the Energy Department's research arm.?
Refineries are increasing capacity.
Exxon alone plans to boost its power by 250,000 barrels per day. But it's expensive and it takes time. This isn't like flipping on a light switch. You can't print refining capacity.?
And as far as capacity utilization – the share of refining capacity currently running – those numbers are also going higher.?
The numbers are here… any time Granholm wants them.
The EIA says the refinery capacity utilization rate sat at 94% last month, well above the recommended 90% level and above the five-year average of 89%.?
As to why refineries dropped their capacity in the wake of the pandemic, Granholm could do a Google search.
She might learn that the EPA shut down the largest refinery in the Western Hemisphere during the Obama Administration and it's never come back online. Few people talk about the Limetree Bay refinery.
Multiple refineries permanently shut down capacity during COVID-19 or due to storm damage.
Plus, a few others switched to biofuel production BECAUSE of government demands that Americans move away from traditional oil. Finally, the East Coast continues to lose refineries due to the renewable fuel standard AND the Jones Act, which has distorted market incentives.
Second, Granholm also engaged in one of the most absurd interviews I've ever witnessed by a government official.?
In a chat with CNN, she demanded that oil companies produce more oil because it is their patriotic duty, and they need to help Americans with lower prices.?
Then, as the interviewer explained, oil well production is expensive, time-consuming, and has a long payback period.?
He asked if the government's stance was still to reduce or eliminate oil consumption in the next five years.
Her answer was "Yes."
Why would you ever produce a new well with a 20- to 30-year life span attached in a heavily capital-intensive industry…
In which the cost of capital is north of 20%...
And the government just increased Federal royalties (for the first time since 1920) by 50%...
If the government wants to crush your business in five years??
Several recent political appointees have said they want to put the oil industry out of business. When people tell you who they are... you should always believe them.
That's why the third error in policy this week is so odd.?
Granholm and some other Washington elite are calling for the President to invoke the Defense Production Act to prioritize gasoline production.?
How exactly would that work??
You can't increase energy production overnight.?The same goes for refining capacity.?
Erik Gordon, a professor at the University of Michigan's Ross School of Business, said that the administration would be trying to suspend the laws of physics in this announcement.?
You can't just retrofit manufacturing facilities to make gasoline. Refining is expensive, and building a refinery takes a long time. It's also one of the most heavily regulated industries out there and would require a tremendous amount of permitting...
With existing capacity, you'd also need to ban exports of fuel, but that creates incredible complications for refineries that import fuel and then export the byproducts like gasoline to foreign customers.
So, why propose this?
Because it's all political theater, there is no plan and no positive outcome without the supply-side solutions that I've proposed.
No one is buying this demagoguery and policy nonsense except for the "chatter class" at CNN and MSNBC.
And, by the way, Granholm reportedly just exercised $1.6 million in stock options on Proterra (PTRA), a California-based electric vehicle company.?
Does anyone.. anywhere… for the love of all that is holy… see the conflict of interest in this situation?
It's so comical that I noticed this on Granholm's Wikipedia bio on Saturday.
?It has since been changed.?
"Inside trader."?
She has never worked in the private sector and doesn't understand it...
Quick Hits?
GDP Cratering: The Atlanta Fed failed to shock me when it slashed its second-quarter GDP estimate to 0.0%. The move down would put the U.S. economy in a technical recession. There are plenty of signs that we're already in a recession, and no one wants to admit it because of politics. The Atlanta news complemented various downgrades to GDP from Wall Street players like Goldman and Bank of America.??
The Other Debt Bomb: Government subsidies on a large scale have created massive levels of debt housing, student loans… and… medical debt.?People are swimming in this debt, and it's cutting into their savings and lifestyles. This is yet another affordability crisis.
This chart is disturbing.
But - to quote P.J. O'Rourke, if you think healthcare is expensive now, wait until it's free.?
Brutal Selloff: The 2022 market selloff has erased nearly $3 trillion from U.S. retirement accounts, according to the Center for Retirement Research at Boston College.
Crypto Winter Accelerates: Bitcoin went under $18,000 this weekend. And there might be more to go. Bitcoin miners have been flowing exchanges with Bitcoin – sending more than 88,000 BTC on June 15. That's a sign of liquidation and why we can anticipate another leg down. I fail to understand how blockchain creates wealth when it creates abundance. These are two different things (the latter being deflationary). The capitulation of whales will likely hit around $12,000 to $15,000. And from there, the max drawdown comes to about $5,000. Much of this will be interest rate dependent, and I think the Fed will have to go to 5% next year. No market or sector is prepared for that.??
Fix This: Medicare fraud is a $60 billion per year business. That's the annual revenue of PepsiCo. – in fraud, every single year. It's more than the revenues of Wells Fargo, General Electric, and Walt Disney. Maybe… that would be a priority of the government, as reducing $60 billion in fraud would be a relatively reliable way to help tame inflation. Wasted capital is, by definition, inflationary. But knowing the U.S. government, they'd probably end up spending $500 billion to recover $100 billion in fraud over a decade.
UNRELATED: And now… a picture of what Manhattan would look like with nothing there… and the other sides of the East and West Hudson. This seems a lot more peaceful…
?Updates from the Florida Republic
The story this week from the Florida Republic… is…?
The Chatter Class.
I'm talking about the people on-air four hours a day complaining about everything with carefully scripted talking points written in some basement in Foggy Bottom, D.C., or National Harbor, Maryland.?
That constant chatter of sociologically intrepid opinion articles written on the fourth bottle of wine to fulfill an obligatory contract at a mainstream media outlet. These are people who do nothing except divide…?
It's time for them to go.
They won't be a permanent class in the Florida Republic.
One of the easiest ways to handle this is to limit constant political coverage.
The media should not overly cover politics until we are three months ahead of the elections.
This is basically what every other Western nation on the planet does.?
And they seem to get along with one another a lot better.
I have to cover monetary, fiscal, and domestic policy now because it is the dominant force behind the economy and market performance today.
Most days, I'd rather be covering paintball on ESPN 8.?
The Florida Republic isn't going to have much of a government to cover.
And as I've explained in past issues, the elections end with the two presidential candidates being shipped away from the Republic the night before the election.
Our President is a Bulldog.
We are always looking for ways to reduce the want for power.
So there is one more thing I'd like to add…?
Yes, we will have plenty of media organizations. But no one from the media should marry or date anyone who is in the political leadership roles of the Florida Republic.
It's frowned upon.
Have you noticed this trend in America over the last 15 years???
People at the White House are married to mainstream reporters or leaders at media organizations… I'm not against people being married, but there is a glaring conflict of interest here, and no one wants to confront it.
In the Florida Republic, you can love whomever you want (Key West is our second capital, after all)… except for political leaders if you work for the media.?
It's an ethics problem. This isn't hard.?
The Week Ahead
Monday?
?Tuesday??????????????????????
Wednesday
Thursday
Friday
That's all for this weekend. Enjoy your evening.