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Inflation And Its Impact On The Economy - Jim Welsh #6009 · Financial Survival Network

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Wall streets more like what's going to happen in the next six months, And
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if the FED is looking at the labor market still being relatively tight, GDP
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growth is still home and along at a pretty good clip. Cutting rates is
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only going to end fuel to that, which means that as the economy would
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we accelerate next year in response to the FED cutting rates, The odds are
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it will put upward pressure on inflation, and the FED has repeatedly said they
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don't want to repeat the mistakes of the nineteen seventies. You're listening to Carrie
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Lutz's Financial Survival Network, where you get valuable information you just can't find anywhere
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else to thrive in today's trying times. You need the Financial Survival Network now
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and gift. Financial Survival Network now more than ever, And welcome. You
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We're back from Thailand. I'm going to do a triple Letz report on
1:03
that. Do a triple Lutz report also on Trump's current legal woes. The
1:10
large money judgment that was entered against him in the courts in New York.
1:15
Happens to be my specialty. I know much about judgments, although haven't practiced
1:22
in a number of years, but be that as it may, I handled
1:26
literally tens of thousands of money judgments. I had a printing company that printed
1:34
up cases on appeal for attorneys, So I know about bonds, I know
1:38
about stays and you know it's not being reported on very accurately in most places.
1:45
And also I know about what steps the state could take to enforce these
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judgments. So anyway, stay tuned for that. That'll be Triplets number four
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ninety five, Triple Letz Report number four ninety the meantime, Jim Welsh is
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with us macrotides dot com. Macrotides definitely your place to go to, Jim.
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It's great to have you back on. So what are you seeing here?
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This market has taken off, Inflation is picking up, gold is still
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over two thousand. Uh. What are the tea leaves telling you? Well,
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a combination of things. Obviously, we have a fair amount of speculation
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going on, particularly focused on Nvidia other semiconductor stocks. You know in Vidio
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is a great company. They're growing at a phenomenal pace. So the you
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know, a lot of people have been comparing what's happening to nineteen ninety ninety
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two thousand with the dot com bubble, and one of the big distinctions is
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back then, a lot of those companies weren't real companies. The companies today
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are real companies. So I think that's a legitimate counterpoint. The thing I
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would focus on is the level of speculation and sentiment is comparable to what happened
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back then, and whenever you get excessive optimism and a fair degree of speculation,
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that is a warning sign that things are getting stretched. One thing along
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with it is daily option activity is up to fifty million contracts, and half
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of those contracts expire on the same day, so in other words, they
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have a lifespan of at most six and a half hours. So when you
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have that kind of activity, obviously it's very very short term focused. And
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last week in Vidia came out with their earnings on the same day that the
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FED released the minutes from their January thirty first meeting, and there were some
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nuggets in there, Carrie that I think the market, because of all the
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hoopla regarding Nvidia, overlooked, but I think are actually more important than the
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story just about in India. Okay, so what did the market overlook here?
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And how fortuitous that the minutes come out the same day in Vidiot has
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these bang up earnings? Right? Yeah? Yeah, So basically, you
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know, the Fed minutes confirmed that the FMC members and there's seventeen Boulders.
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There might be eighteen now because they just added somebody, but the majority are
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not in any rush to lower rates. And as we know, coming into
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this year, Wall Street was looking for six or seven rate cuts, with
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the first one happening in March, so you know that's been pretty much thrown
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out the window. The thing I would point out is the longer the Fed
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holds the funds rate at its current level, the restrictive nature of that level
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is going to continue to push downward putt put downward pressure on the economy.
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So the real funds rate, which is the funds rate, which is currently
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at about five point four per per minus inflation expectations, that brings the real
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funds right up to about two point nine. That's very comparable kerry to where
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it was in two thousand and seven, and a little bit less than where
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it was in nineteen ninety nine, two thousand. Both those other episodes were
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followed by recessions. So my point being what was overlooked is that monetary tightness
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is going to be maintained for a longer period, and I think that runs
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counterpoint to the idea that we don't have to worry about any kind of meaningful
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slowdown in the economy, and that's really the pillar that's under pinning, if
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you will, the market, this idea of hey, the economy's not going
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to have a recession, earnings, you're going to be up ten twelve percent,
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and of course coming into this year's and the Fed is going to be
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cutting rights all this time. Now Wall Street's accepted, well, they may
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only increase three times, it may not be until June. But I think
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the more important message from the minutes was that the Feds not cutting the funds
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rate. The real funds rate is going to remain restrictive, you know,
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for a longer period of time, and there's economic repercussions for that. Okay,
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So so rumors of the Fed's cutting rates has been greatly exaggerated out absolutely.
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I mean, it was stupid quite honestly, the Fed was never going
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to be cutting rates that aggressively with the unemployment rate hovering your a fifty year
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low, plus chair poll in numerous beaches has talked about needing to see GDP
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grow slowed to below the long run non inflationary growth potential that the Fed PEG's
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at about one point eight percent per year. The last six quarters, GDP
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hasn't been below two percent. It's unlikely to be a below two percent in
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the first quarter of twenty twenty four. So my point is the Fed is
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a three to year time frame in terms of what they're looking at. Wall
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Street's more like what's going to happen in the next six months. And if
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the Fed is looking at the labor market still being relatively tight, GDP growth
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is still humming along at a pretty good clip. Cutting rates is only going
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to end fuel to that, which means that as the economy would we accelerate
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next year in response to the Fed cutting rates, the odds are it will
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put upward pressure on inflation, and they the FED has repeatedly said they don't
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want to repeat the mistakes of the nineteen seventies, and I think Wall Street
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has been so myopically focused on, oh, look at inflations down, that's
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the driver of monetary policy. Yeah, a year ago was a driver of
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monetary policy, you know, when inflation was up nine percent, seven and
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six and so forth. But now the set is looking at these other items,
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and an election year, they can't go out and say, yeah,
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you know, we really need to see that on a primonaries go up and
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we need to see the you know, economy really slow. They're not going
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to say that, you know, so they're dancing around some things. But
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I think it should be common sense to understand that how the Fed is approaching
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this situation is not what's going to happen in the next six months. They're
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looking out over the next one to two to three years, and and so
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they really see more slowing in the economy and an upticking in the unapployment rate,
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they're going to be reluctant to cut rates. It's that simple. Yeah,
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I have no doubt that you're correct about that. But Wall Street's had
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one heck of a party over it, haven't they. Yeah, they have.
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And again understandably from a standpoint that having inflation come down is a good
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thing, and the economies continue to hum a law that's about a bullshit of
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a narrative that you can come up with, Yeah, the economy is doing
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good if it's going to cut rates. So with that kind of bullishness,
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you know, now the idea is, okay, we're going to get away
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from the tech stocks, that we're going to rotate into cyclical stocks. And
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and that's really what's been happening on balance in addition to the speculation, if
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you will, in the tech stocks. Again, I think people potentially are
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misjudging the economy carried from a standpoint of you know, the inverted yeal curve
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has kind of been you know, dismissed. Seeah, way I'm at a
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recession by now, it's not going to happen. And what I've been pointing
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out is the average lead time between the inversion and an ounset of a recession
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is nineteen months. The curb and burden in July of twenty twenty two.
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What's nineteen months, that's January of twenty twenty four. So with any average,
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there's been some business cycles where it was longer than nineteen months. Obviously
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some less so. To me, the combination of the inverted yeal curve and
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higher lending standards, and as I said, you know, the longer the
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Fed holds the funds right here, small businesses, they're not getting any relief.
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Treasury bond yields may have come down some, but if you're a small
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businessman, you've got a loan, come and do, you're playing top dollar
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for that loan. Consumers credit card rates, auto loan rates, any personal
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rate which is tied to the prime rate, which is tied to the funds
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rate, you know, they're still as high as they can be. So
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to me, the cumulative weight of what has happened from a monetary standpoint,
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I think we're just entering that window time where the greatest amount of downside pressure
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should be starting to show up. So to me, a year ago,
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when everybody was talking to recession, I'm like, no, we're not having
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a recession in twenty twenty three or twenty twenty two. But now I think
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the risk of a meaningful slowdown if you're now in your end is much higher
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than what most people believe. And that means if that does evolve that way,
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you know, I think Wall Street's going to have a hard time keeping
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the stock market running because it's predicated on the idea that we don't have to
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worry about any stinking slowdown. Hey, remember, once upon a time the
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Fed's primary missions they had two conflicting missions. Number one was to basically keep
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the country out of recession, and number two was to keep the maximum lation
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rate down right, eat the economy humming. Now their third mission, which
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they acquired over the past decade, is to keep the stock market up as
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well. So it seems like they're like the seal with the balls, trying
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to keep all the balls going up in the air and eventually they're going to
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come down right. Well again, the imbalance, I mean, there's incoming
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equality, wealth, inquality as a result of exactly what you just talked about,
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Carrie the focus, or you know, as a result of the policies
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they pursued, in other words, having a negative real rate for almost twenty
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years, the funds rate was below the rate of inflation. Well, that
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means there's no cost to money, and that's why acid prices have performed the
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way they have. You know, they suppressed long rates, which meant they
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suppressed mortgage rates, which is in part why we shaw housing prices do what
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they did. So you're right, monetary policy has had a direct impact on
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goosing acid values, but it's also created the largest wealth inequality environment since the
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nineteen twenties. So yeah, sooner or later, the music is going to
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the stop, and that's going to, I think, prove unsettling because to
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the extent that higher acid values have contributed to spending by consumers, and they
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have. If we see any kind of a meaningful decline in home prices again,
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and obviously the stock market that stretches out for an extended period like one,
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two, three years, you know that's going to have a meaningful depressing
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on economic activity. So there's a double edged short in terms of what you're
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talking about. Yeah, they've really done this goost that acid prices. But
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at some point in time that the music ever stops, the downside of that
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strategy is going to come home to roost. And I think that is going
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to happen over the next five years or so. The chickens will come home
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to roost and not bring any eggs. All right, Well, maybe the
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roosters will come home to roost. It may not be growing quite as loudly,
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but they will be there. All right. What about commodities? What
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about nolation? Well, lation's done, it's over, No, I think
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we're going to see again. We always have to remember that the inflation calculations
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are nothing more than a twelve month rate of change. So twelve months ago
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there was a big increase and this month there's a smaller increase. Inflation is
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going to come down. So as we go out into the spring in summer
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time, the takeaway values from twenty two twenty three are relatively small, so
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we're not going to see inflation continue to you know, fall like it has
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been over the last six to twelve months. In addition, you know,
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we've seen oil prices rally. Gasoline prices are up, obviously, shipping costs
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are up in some places because of what's happening with the Panama Canal and the
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Suez Canal. Wage growth is still over five percent. So I think we're
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about to enter the time where inflation and we've seen it in the last couple
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of inflation reports. We're going to get another one on Thursday, the PCE,
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and I think that also is going to prove sticky. So to your
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point, I think the good news, the best of the inflation news is
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behind us, Carrie, and you know, over the next three to six
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months, inflation is going to be stickier, which is one of the things
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that's feeding into the FED saying you know, we can wait. It makes
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sense to wait. So I think that's going to be problematic, you know
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for those who are expecting the FED maybe even to still cut three times.
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Maybe we'll get enough inflation data that makes people have to accept, Gee,
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maybe they aren't going to be cutting in June and three times in this year.
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So that's going to be I think one of the other problems that could
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surface in the next few months. You know. In terms of gold,
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I think gold, you know, I've been a bullish on gold. I
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believe it will get to twenty three hundred in higher potentially this year. I
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think the dollar is nearing a high, and as the dollar weakens, I
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think that will be supportive for gold. In addition, I think treasure yields
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are going to come down between now in labor Day because I'm in the camp
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that the economy is going to slow more than what people think. So if
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that evolves that way, Carrie, that should be a real tailwind for gold.
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All right, So, and what do you think the odds are that
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it's going to happen that way, that gold's going to rally. I think
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we're comfortably north to fifty to fifty in terms of the stock market, you
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know, and if anybody would like, you know, I have special reports
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on a couple things, talking about the seventeen year cycle in the stock market
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and going back to nineteen thirty nine, every seventeen years the markets hit a
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significant high and had a decline of at least fifteen percent in most instances over
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twenty. But you go from nineteen thirty nine, nineteen fifty six, seventy
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three, ninety two, thousand and seven, seventeen years is twenty twenty four.
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So to me, it just makes me want to be more on guard
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and warn people that, hey, we're in an environment where we could see
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a much more significant decline. And secondly, if you go back to twenty
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fourteen carried, there's been a high in either January or February every two years
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followed by declines. I think the smallest was about seven percent, and the
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biggest obviously would have been twenty twenty, which was north of thirty percent.
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In twenty twenty two obviously was a very significant decline. But in those other
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years, you know, the economy was just fine. The Fed wasn't doing
17:11
anything with monetary policy, and you still had fairly decent size decline. So
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to me, these things are all lining up given the level of speculation.
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We're saying in these cycles that I think we're near at least some kind of
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a high in the equity market right now. Wow. So you think we're
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getting to the high and it's running out of gas? Huh? I think
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so. I mean, I think the initial correction could be limited to three
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to seven percent if I'm right about the economy slowing as we get closer to
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midyear, that's when I think the market would be more vulnerable. If you
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think about it, coming into this year, the market was standing on two
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legs. You know, the economy was going to be fine and the Fed's
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going to be cutting race. Well, one of those legs has already been
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kind of removed. If we remove the other leg and cast out in terms
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of whether or not the economy will avoid a recession, I think that leads,
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you know, to some selling pressure. And the other thing is the
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world is becoming more and more dangerous. So the risk of a geopolitical event
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someone ru in the world, I think is much higher now than it has
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been in many, many years, and those can't be predicted. And that's
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why you know, some people, well that's seventeen year cycle. You know,
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it's you know, they kind of pooh pooh it. The reality is,
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if you look at all those instances, they have been for different reasons,
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which means it's kind of beating to its own drummer for whatever reason.
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But yet it's been very accurate. So that's why I think it's important to
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talk about geopolitical events, obviously because of everything that's already going on in the
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world and the risk of escalation. Okay, so about the real estate because
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real estate has like that eighteen year cycle as well. Right, yep,
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the march macrotides. I'm doing this a phaeramount on commercial real estate and the
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other reality is and shir Powell in it on January thirty first, in his
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Press Concerns use the term downtown real estate is going through a secular change.
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Secular change means it lasts a lot longer than a cyclical change. That's a
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euphemism there, right, we euphemism it might be at the same time.
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To me, the way I'm going to react to it is office buildings have
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lost thirty to thirty five percent of their value. Now, obviously the a
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building is hasn't lost as much, and you know, older buildings have lost
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more. But the point being is that banks have typically adopted the extend and
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pretend delay in praise strategy. We're okay, well work out the loans even
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though you're not behind. Well, yeah, give us a little more and
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you know all the rest of that. I think the odds are that returning
20:04
to the office is dead. I mean, so companies over the next two
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or three years, as leases come do, they won't need as much space.
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So the downward pressure on pricing is going to I think remain more significant
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than it has in any other commercial real estate cycle going back to the last
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thirty forty years, because that was no idea extended pretend because evasically, when
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the things we get ugy during the recession, we extend and pretend. Then
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the recovery takes hold and lo and behold we grow back out of it.
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I think that's going to be far more problematic this time around because of the
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structural changes we've seen in the way people were. So you know, to
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me, I'm glad you brought that up, because I think later this year,
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next year, commercial real estate is going to be a problem. Now
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people are like, well, you know, the Fed's looking at it,
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the regulators are on top of it. People are talking about it, so
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we don't have to worry about it. Fine, but it's definitely not going
21:07
to be a plus for the economy. And invariably, as you know you've
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been around for a while, you know, you go through these periods and
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stuff happens. There was stuff that we couldn't anticipate. Yeah, we thought
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there was going to be a problem, and then it kind of blew up.
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Remember in two thousand and seven, Bernanke, who was Chairman of the
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FED at the time, said he thought that the self print mortgage crisis was
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contained. Yeah, and it wouldn't represent a real problem, you know,
21:33
for the banking system. They were on totterly, remember that, Yeah,
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you know. And so my point is if the economy goes into a recession,
21:45
it makes a big difference in terms of the stress level on those who
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are okay now but close to the abyss, you know, and so you
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never know what develops that we cands just show up in a recession, and
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sometimes you can't understand so in terms of regional banks. They have a small
22:08
banks, they have a disproportionate exposure to this. Well, if you instead
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of just two or three regional banks going down like we saw last March,
22:17
and that was due more of your just kind of poor management on those three
22:21
banks part, but a more widespread problem with regional banks around the country that
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have exposure to commercial real estate that have to be absorbed, they go a
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lot of business. You know, I just think that those kinds of headlines
22:37
aren't the kind of headlines that spur consumers to run to the shopping mall.
22:41
I could not agree with you more. Hey, Jimmacrotides dot com best place
22:47
to find you. There's a link to what we've been talking about in the
22:49
show notes of this interview on Financial Survival Network dot com and you'll get that
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free report. Just click that link. Always appreciate you coming by, h
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Hey, make sure when you go to the site Financial Survival Network dot com
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just sent it out this week. But if you send me an email to
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will send you out the latest email report as well. Jim always a pleasure,
23:22
Thanks for stopping by My pleasure, Carrie, and welcome back. Thanks
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for listening to Carrie Letz's Financial Survival Network, your solution to today's trying times.
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