How does one discuss Fed policy without considering the impact of that (misguided) policy on the US economy?
How does one discuss the global supply chain breakdown without considering the impact of the war in Ukraine and the extensive economic sanctions — in effect, a financial and economic war layered on top of a tragic kinetic war?
How can you consider these national and international trends without widening the aperture to weigh the impact on the role of the dollar and the future of the international monetary system?
You can’t. It’s all connected.
So that’s the frame for this set of articles. We’ll take those big-picture developments — the US economy, the global economy, supply chain breakdowns, the war and sanctions, and the future of the international monetary system — one by one, offering a detailed analysis of each, yet illustrating the thread or connective tissue that runs through all of them.
When we’re done, you’ll have the information and (more importantly) the tools you need to allocate assets, preserve wealth, and even prosper in a time that holds greater danger for investors than the 1970s, 1929, and even 1914 (when the New York Stock Exchange was closed for five months at the start of the First World War).
Let’s get started with…
The US economy
While we take a global perspective on markets, the US economy is always the best place to begin any analysis. The US is still the world’s largest economy (despite what you may hear of China displacing the US in that role).
The fact is the Chinese economy is still only 70% the size of the US economy, and that’s on a GDP basis. When you adjust those figures per capita, the US economy is more than five times larger than China’s (US$76,000 annual per capita GDP for the US compared to US$14,000 for China). The US is still the 800-pound gorilla of global economic activity.
That said, the US economy is in awful shape. That’s not what you’ll read in the media, but it’s what the data shows. The US economy contracted 1.6% in the first quarter of 2022 and another 0.9% in the second quarter. That makes two consecutive quarters of declining economic activity — which puts the US in a recession.
Pay no attention to comments from Janet Yellen and Joe Biden that there is no recession. The rule of thumb, two consecutive quarters of decline, has been used by experts and everyday observers for decades. White House and Treasury efforts to change the definition now are laughable (if politically convenient) and show just how dishonest our leadership is.
Inflation is running rampant right now, about 9.1% on a year-over-year basis, according to the latest data (note: this article was originally published in August 2022). Inflation has led to higher interest rates and a slowing residential housing market as the Fed struggles to crush the inflationary surge.
It’s from the supply side
The difficulty is that US inflation is coming from the supply side (energy, food, transportation, supply chain dysfunction) rather than the demand side (consumers pulling demand forward based on inflationary fears).
Since the Fed doesn’t drill for oil, drive trucks, or operate cranes, they can’t really affect the supply side directly. What they can do is destroy demand by raising rates so high that consumers will be drained with higher mortgage rates and excessive credit card charges.
This kind of inflation control can work, but it comes at a high cost — a severe recession. Right now, consumers are plagued with high gasoline prices. Those prices will come down when consumers stop buying gas because they’re unemployed or their businesses have failed. To paraphrase an old saying from the Vietnam War, the Fed will have to destroy the economy in order to save it.
The supply chain is disrupted in a new way
Other negative data abounds. The supply chain is still broken, but in a new way.
Early last year, distributors and retailers were short of inventory and the shelves were bare. There’s still some of that, but the delivery channels are working better now. The problem today is that distributors put in double and even triple orders to make up for shortages. Now those orders are being delivered at the same time that demand has fallen off a cliff.
This is known in supply chain science as the bullwhip effect, where small moves at one end of the whip produce huge effects at the other end. Not only are warehouses full, but new orders are drying up. Distributors and retailers don’t need more goods.
GDP is calculated based on inventories, not final sales, so this is another huge negative for GDP.
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.