Trish Regan: Financial ‘Engineering’ At Its Finest – At What Point Do Markets Revolt?

Investors have much to celebrate with the strong retail sales numbers for August. Nonetheless, the party is being somewhat spoiled by Thursday’s jobless claims miss.

These continually high jobless numbers suggests that no matter what the Fed does…it can’t seem to cure the fundamental issues plaguing  our economy right now – namely, that people don’t want to go back to work.

To be clear, there are jobs. More than 10 million of them open right now. Yet, this week’s jobless claims came in at 332,000, above the estimated 322,000. Initial claims in the week prior were at 310,000.

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This is partly because people have learned to make do with less. Many families have made the informed decision to have one parent stay at home. The pandemic changed our economy in many ways – and showed some Americans that living a more simple life comes with significant benefits, including more family time and less work.

Yet, the Fed has said repeatedly that it is most concerned with employment numbers. Inflation data, it tells us, is less relevant than jobs data right now.

This, despite the fact that inflation has increasingly shown a massive, unprecedented uptick in the costs of goods and services.

In the latest month, for example, wholesale prices jumped 8.3%. The consumer price index showed that prices consumers pay for goods and services is up 5.3% from this time last year. The concern is that producers will eventually have no choice but to either raise prices even more for their products, or face declining profitability.

Perhaps the short-term silver lining for markets is that the Federal Reserve will remain ready, willing and able to continue its easing…thereby giving even more life to the stock market. But, keep in mind, the Fed’s increased liquidity comes with consequences. First, it depresses the value of the U.S. dollar, thereby contributing to even more inflation while forcing everyday Americans further out on the risk curve.

I mean, really. Where else are you going to put your money? It can’t be in a savings account. It can’t be in cash. And, it can’t be in treasury bonds. As legendary bond king Bill Gross recently recently said – bonds are trash. TRASH because a 10-year treasury bond is yielding just 1.3%. Let me ask you, would would lend money for a decade and expect just 1.3% interest? Especially when inflation is over 5%? Of course not!

This is financial engineering at its finest. At some point, the Fed really will be pushing on a string. Markets will revolt and valuations on stocks could come tumbling down. Bubbles are often started as a result of the Fed’s aggressive policies – consider the ultra-low interest rates that led to the subprime crisis in 2008.

Meanwhile, the potential combination of liquidity from the Fed along with multiple stimulus packages (including President Biden’s $3.5 trillion social infrastructure stimulus bill) runs the risk of creating even more inflation.

This is reminiscent of the late 1960s which led to the mass inflation of the 1970s.

In 1965, Fed Chief William Martin abandoned his efforts to curtail inflation and, like Jerome Powell today, decided to focus primarily employment. This shift in policy–away from the Bretton Woods agreement put in place with our World War II allies in 1944–was unprecedented. Prior to 1965, Martin had been adamant about keeping inflation in check. But, political pressures associated with President Lyndon Johnson’s ‘Great Society’ caused him to focus on employment at the expense of inflation.

What followed was a mass increase in inflation unlike anything our country had ever seen.

The fed printed money, abandoning the discipline of the gold standard. Foreign governments that had trusted us as the world’s reserve currency were furious. They began cashing in their dollars for gold, creating a kind of “run” on gold.

The U.S. was in bad spot and had no choice but in 1971 to no longer peg the dollar to gold. After than, fiat money became a kind of free-for-all.We’ve been experiencing inflation in one way or another ever since. Consider this: the purchasing power of a dollar is just 15% of what it was in 1971.

In sum, the Fed has become quite skilled at money printing and ‘kicking the can down the road’ shall we say. Government refuses to address real problems and instead, seems to think the answer is just more liquidity in the system.

So, at what point, then, do we hit a wall? And, at what point does the market revolt?

It won’t be tomorrow. Bubbles take time. But, let us be clear: this pace of inflation is unsustainable. And, this pace of increase in market valuations is unsustainable.

There will be a hard landing. At some point, investors will be there to remind our government leaders that money really does not grow on trees.

Inflation Surge: Wholesale Prices Spike 8.3% in August


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