Expect the unexpected. Signs of economic stress are surfacing. More than a trillion dollars of wealth has evaporated since the start of 2022, and there is chatter of a 1929 stock market crash, but old hands have learned to expect the unexpected.
When wealth destruction is over one trillion dollars that is likely to impact the economy adversely. So millions of people are now poorer. The primary saving tool for Americans, their 401k was hit by the stock slump leaving more people reliant on social security and state welfare for their basic needs in retirement.
For the Z generation, those 18 to 24 years old, it is their first taste of a bear market.
“For the Z generation, those 18 to 24 years old, it is their first taste of a bear market”
Generation Z invested mainly in the emerging crypto-market and the Ark technology innovation fund. But the recent crypto-market crash and Nasdaq slumped stories are emerging that some of these new investors have had their savings wiped out.
So the crux to all this pain is policy-driven cost-push inflation and the fallacy that the central banks can reduce inflation by monetary tightening, which will raise the cost of finance.
As noted previously, the current inflation is not due to excess demand.
Signs are emerging that consumer demand is slowing down rapidly, so expect the unexpected
Indeed, bellwether companies Walmart and Target’s latest financial statement highlights waning demand as cost-push inflation shrinks household budgets. So household discretionary spending and business profit margins are retreating as the cost of energy and commodities squeeze consumer spending and corporate profits.
But it is supply restraint factors due to the ongoing war in Europe, sanctions on Russian energy, and lockdowns in China that restrict supply and cause prices to rise.
“bellwether companies Walmart and Target’s latest financial statement highlights waning demand as cost-push inflation shrinks household budgets”
So from basic economics, we know that restricting supply due to war, sanctions and lockdowns result in the supply curve shifting inward to the left along the demand curve, which increases scarcity and price, as illustrated here.
Central banks have an army of Ph.D. economists and own all the think tanks. Fed Chair Powell knows that tightening will probably worsen the situation, bearing in mind that the cost of finance is another input cost for businesses.
“Humanities’ worst hunger was man-made. Russia’s Stalin imposed collectivization and starved millions of Ukrainians” – Win Investing
How could further tightening worse the situation?
Transportation impacts the cost of all goods. Everything you see on a retail shelf or online are delivered to you by a truck. So, with energy costs already nearing record highs, that has already had a tightening impact on the economy.
Keep an eye on trucking companies filing for bankruptcy due to spiraling energy costs brought to you by a string of policy blunders.
Google trucking companies’ bankruptcies, and you get a list as long as your arm. The spiraling cost of diesel is the main reason for trucking companies to go bankrupt.
So if the Fed hikes rates, that increases the cost of credit, which could trigger a wave of trucking bankruptcies and reduce road haulage capacity.
Increasing the cost of servicing debt will shift the supply curve and increase road haulage rates.
Put simply, monetary tightening in a downturn will cause a string of bankruptcies which will increase scarcity and higher prices.
If the higher cost of fertilizer and fuel is making it difficult for farmers to break even, and then the Fed hikes rates making farming a loss-making activity, farmers will leave the business. Again, grain supplies will fall, and food prices will rise.
If the Fed wanted to create a mad max scenario, they could keep hiking and collapse the supply chains where there are no farmers to plow the fields and trucks to deliver the produce.
Humanities’ worst hunger was man-made. Russia’s Stalin imposed collectivization and starved millions of Ukrainians.
During the potato famine, English landlords exported food from Ireland while 400,000 Irish starved to death.
So expect the unexpected. The stock market is almost driven entirely by central bank monetary policy.
“Put simply the Fed is a private banking cartel that is no different from OPEC oil cartels. Cartels collude to promote mutual interest and are ruthless about taking down the competition” – Win Investing
Remember the global economy in lockdown and central bank liquidity stimulating the greatest bull run ever?
The fact people are losing their savings and households are struggling, and some businesses are going bankrupt will not be enough for the Fed to reverse its tightening stance.
The Federal Reserve is as federal as federal express. The Fed is a privately owned company with secret shareholders. But you don’t need to be Sherlock Holmes to figure out the likely identity of these secret shareholders. Put simply the Fed is a private banking cartel that is no different from OPEC oil cartels. Cartels collude to promote mutual interest and are ruthless about taking down the competition.
So expect the unexpected, particularly when you think the sky is about to fall, and when the banks are in trouble, the Fed will rise to the challenge and protect its member banks by providing more liquidity. The fact that joe public and small retailers are going to the wall is probably of no concern to the Fed, after all, bankers like lending to corporate monopolies and the government because of the low risk of default.
Expect the unexpected when big creditors are in trouble when you read about loan defaults and sovereign debt crises that is likely to be when the central bank liquidity taps open
The shortest tightening cycle will end not when investors, households, or businesses are in pain but when the banks are in pain. The mob, the banking cabal, look after their gang members.
Long term, the system is rigged so that risk pays enough for investors to go into debt to keep playing. The banking cabal pushes debt, so the bear market comes and goes, but the bull keeps coming.