‘The Fed signals it’s not for turning’, was a headline in the Financial Times last week.
For now, the Fed is sticking with its rate hikes. And investors seem to be waking up to what that will mean. Ray Dalio says a 4.5% Fed rate (still nearly 400 basis points BELOW consumer price inflation) would knock stocks down another 20%. Mark Mobius says the Fed’s key rate may go to 9%. Larry Summers says the ‘Fed needs big rate hikes’ to control inflation.
MarketWatch: ‘Why the stock-market selloff could get ugly if S&P 500 falls below 3,900’.
Markets Insider: ‘Billionaire “Bond King” Jeff Gundlach says it’s time to get more bearish on US stocks, as the risk of deflation is much higher now’.
On Wednesday, five stocks — Amazon, Tesla, Alphabet, Microsoft, and Apple — lost more than half a trillion dollars in value. But there’s still a long way to go to get back to ‘normal’.
Getting back to normal probably won’t happen. Too much of our economy now depends on very abnormal interest rates. As real rates go up, businesses, households, and the federal government will be unable to refinance. They will go broke, default, or, in the case of the feds, print more money.
Naturally, the people who’ve made the most money from the Bubble Epoch’s ultra-low interest rates are least eager to see them go away. They’re also the same people who control the media, the universities, Wall Street, the Fed, and the government itself. Our guess is that they could lose as much as US$50 trillion in wealth if the Fed sticks to its program and wrings inflation out of the system.
And as the losses mount up, they will all tell Mr Powell what an idiot he is. They will tell him to reverse course. Will he have the backbone to resist them?
‘The lady’s not for turning’, was the famous line from Margaret Thatcher used in 1980, describing herself. She was not about to depart from her conservative program, she told a party conference.
At the time, Ms Thatcher’s approval rating had fallen to 23% — a record low. She had cut spending and fired government employees. She even took away the free milk from school children. The unions were against her and threatening widespread strikes. The universities were against her; she reduced government support to education, prompting Oxford to withhold a proposed honorary doctorate. The press and even many members of her own party were against her. Many expected her to do a U-turn.
She did not.
And it got worse. Unemployment rose; there were three million without jobs in the early ‘80s. Inflation hit 18%. An open letter, signed by 364 ‘leading economists’, told her she was going in the wrong direction, that there was ‘no basis in economic theory’ for her program of budget cuts and higher interest rates.
Ms Thatcher also had to fight with the coal miners. Anthony Scargill, formerly a member of the Young Communist League, later founder of the Socialist Labour Party, was head of the miners’ union in the early ‘80s. When the Thatcher government proposed to close unproductive mines, Scargill led the union in a head-to-head confrontation with the government. The miners walked off the job, leaving Britain short of fuel.
But Ms Thatcher didn’t flinch. She was convinced that overspending and overregulating were ruining the country; she was determined to squeeze them out.
A tale of two cities
Our first trip to London was in 1969. It was a grim place. Our hotel was shabby. You had to put coins in a heater to get any warmth. The bathroom was down the hall.
But the whole town seemed shabby. Almost no new buildings. The shops were as dreary as the weather.
Britain was not a wealthy country then. Rationing was not fully eliminated until 1958. A friend of ours, who grew up in London, recalls how delighted he was to eat an orange…for the first time…in the 1950s.
Britain’s economy had not been destroyed during the Second World War. But after the war, instead of removing the wartime controls, the government nationalised whole industries, introduced more regulations, raised taxes, and set up an expensive welfare state.
In effect, what Britain put in place was an extensive form of central planning and socialism. Ms Thatcher is credited with finally getting rid of it — or the worst parts of it. She made no U-turn and by 1983, inflation was settling down and the economy was already on the mend. Later, it boomed. After the ‘Big Bang’, in which the UK’s financial sector was turned loose, London became the money centre of the world — rich and dynamic, where people from all over the planet came to invest, shop, and buy expensive apartments.
We had lunch with Ms Thatcher later in life, in the 1990s. We were surprised by how small she was — delicate, almost frail. But she had nothing to prove then. She had shown the world what she was made of. She was an ‘Iron Lady’. And she got the job done.
And Mr Powell? What is he made of? Iron? Or willow?
We’ll find out.
For The Daily Reckoning Australia