I’ve had a pretty solid headache since 7 am. My wife burst into the room to say our checking account was overdrawn (it wasn’t). Then she woke me up 10 minutes later to tell me she had to order my daughter’s school clothes.
Then, we saw a stain on the wall where our pipes had just been replaced. We had to call back the plumbers to drill back into the wall to ensure nothing flooded.
While they were here, the washing machine flooded our laundry room because those same plumbers reinstalled the drainage outlets incorrectly.
So, we had to have another set of plumbers from the same company come out and fix it. Now, I have massive fans whirling around my house, making the pulsation in my forehead even worse.
But none of those things were the worst part of my day.
Bernanke’s Fables
The worst part was reading a paper by Former Fed Chair Ben Bernanke called: “What caused the United States’ pandemic-era inflation?”
For 38 pages, Bernanke explores the sources of post-COVID inflation. Yet at no point does he use the word “money.” He talks on and on about supply chain challenges. It is absolutely bonkers (as I explain here).
My key takeaway is that the central bank and its former members remain in denial. They don’t even bother acknowledging the basic reality of where inflation originates.
Each year, the M2 needs to increase by about 4% to 5% a year to reach the Fed’s target of 2%. That was the lesson of Bernanke’s tenure after 2009 when the Fed bought assets and injected capital into the system.
The M2 increased by 15% alone in the three months following March 2020.
We had about three years’ worth of M2 growth in 90 days.
But the money supply wasn’t done.
By February 2021, one year after the COVID selloff started to accelerate, M2 was up 27%. There was a 19% increase in M2 in 2020. There was another 16.3% increase the following year.
This isn’t freaking rocket science.
Now What?
The Fed released its minutes from the June meeting. During that meeting, the central bank didn’t raise interest rates. But markets are pricing in another 25 basis points during the July meeting in three weeks.
“The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, although the extent of these effects remained uncertain,” the minutes read.
There are a lot of people who think that the Fed has moved us into a period of “disinflation.” Therefore, the market can just rise and rise.
But there’s a problem. The bulk of the inflation - aided by too much money chasing too few goods as the Russia-Ukraine War started - happened in the first half of the year. Over the first six months, the yea-over-year rates have been dropping.
But what happens if we see 0.4% gains in the Consumer Price Index in the final six months of the year? The threat is that we see inflation tick BACK up on a year-over-year basis, possibly above 5% once again.
That would be bad news for the central bank. They have to see it.
What’s worse, with all that money we pumped into the system - it’s still out there. It still has to cycle through this economy. It’s largely on the sidelines - and it’s collecting interest.
People were wrong when they said that the terminal rate would go above 2.5% in 2022. They were wrong when they said we’d top out at 4.5% in 2023. And they’ll be wrong again if they keep betting that we won’t go above 5.5% in the next six to eight months.
The Fed is adrift in the ocean. They do everything they can to avoid blame for how they have managed our economy. And they continue to exhibit an incredible lack of understanding of how the real world works.
The Fed is hiking into a recession. Credit is starting to weaken. There are plenty of fireworks that will arrive later this year with the consumer drowning in debt and weakening economic conditions at play.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Lance’s No. 1 Pick for July
As you know Lance and I are very different traders…
We look at different metrics, target different stocks, and have very different viewpoints on the stock market.
That said, he is still one of the most talented traders I've ever seen…
And t when I saw how many different hedge funds had been adding this $14 stock to their portfolios…
The results shown are not based on any sort of typicality as this is based on data from Lance’s indicator. We make no future earnings claims, and you may lose money.
Market Momentum is GREEN
Momentum is positive to start the back half of the year. But we have already seen some weakness in the world of healthcare to start the month.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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