Jim discusses how monetary policy has changed over his career and the consequences of negative real rates and quantitative easing. There has been more and more accommodation by the Fed. Most investors today have never experienced a period of high inflation. Further, bonds and equities are now both selling off, which has surprised many.
Since 1981 the use of fiscal and monetary policy to limit economic slowdowns has created unintended consequences of not properly purging the economic system. The Fed has overplayed its hand and is now cornered. Every unit of debt added today is increasingly less beneficial to growth. Debts are now growing faster than GDP, and money velocity has been declining since the mid-90s. This is why we’re setting up for a major secular bear market. Many people believe we are in a recession, but the first quarter demand was good. Consumer finances remain strong and people have refinanced mortgages at lower rates. The majority of consumers are in a reasonable position to withstand some inflation. We’re not entering a recession yet, but perhaps next year once savings have eroded. Jim shows long-term charts that demonstrate the unusual nature of the recent inflation cycle. We’re now seeing good prices decline somewhat, while costs of services have begun to rise. Inflation is affecting a considerable section of the CPI metrics, which probably means a tough time to get below five percent. The odds of the Fed preventing a recession seems low. Gold has done very well for mitigating inflation, but the dollar has created some big headwinds. Gold is likely going to rally toward 1850. We could be looking at a re-test of the highs at some point. Europe is facing a cold winter, and it will be interesting to see what happens to Germany’s industry, which is hungry for energy. A recession for Europe is certain given all the dynamics. The dollar is probably approaching a top.
