Heading into 2023, the macros look anything but pretty.
The core themes, percolating over time but now becoming both unsustainable and undeniable, are simple: Debt, war, inflation and currency destruction. The evidence is literally all around us as trust in political and central bank leadership heads steadily south.
This is true despite a comical Nobel Prize awarded to Bernanke and desperate attempts by government-aligned media outlets and data agencies to misreport everything from CPI inflation to the very definition of a recession.
Having reached a 40-year high of 9.1% in June of 2022, US CPI inflation fell to 6.4% by January of 2023, prompting an almost galvanic euphoria in the so-called “war against inflation.”
As we see it, nothing could be further from the truth and the inflation war, as well as data, is anything but over or honest.
In fact, the entire inflation narrative is so riddled with mis-information, dis-information and omitted information that it is nearly impossible for the average citizen to know what or who to believe despite the fact that everyone can “feel” inflation whenever they open their wallet or purse.
For now, of course, the official narrative coming out of DC is a comical mixture of false blame and fudged data interspersed with a pathological failure of leadership accountability—hence the declining trust.
THE OFFICIAL NARRATIVE - BLAME OTHERS
Rising CPI has been blamed, of course, on Covid and a bad guy in Russia.
As energy and food prices reached double-digit price increases in 2022 (coming down temporarily now), the pundits and politicos pointed toward petri dishes and Putin to escape culpability.
Furthermore, the Bureau of Labor Statistics (BLS), which reports CPI inflation, uses a magical scale which comically ignores the proper weightings of food, energy and housing. If the BLS used the same scale to measure inflation during the Volcker era, actual inflation today would be above 15%, not 6.4%.
Furthermore, even if one were to believe in the 6.4% figure, it is nothing worth celebrating and is anything but close to the Fed’s 2% target inflation rate. In fact, even this bogus 6.4% CPI print effectively makes any bond (from corporate to sovereign) a negative-yielding asset in real, inflation adjusted terms.
Negative yielding bonds, by definition, are defaulting bonds. Just saying…
THE REAL INFLATION NARRATIVE- MONEY SUPPLY GONE WILD
But none of these distracting but genuine issues really touch the heart of the inflation matter, which all boils down to mouse-click money creation and the criminal negligence of US and global central bankers post 2008.
Macro economics and micro market forces are admittedly complex and highly interwoven forces which require more than a single article to unpack and explain. Nevertheless, and despite this complexity, the core of the inflation matter is in fact quite simple: When nations print or mouse-click trillions of dollars, yen, euros or pounds to monetise their debts, the end result is inherently and unavoidably, well: Inflationary.
In the US, for example, the M2 money supply has tripled, and is up 40% from 2000. This, ladies and gentlemen, is not a good thing.
Throughout the 20th century, the evidence is unequivocal that: 1) such increases in the money supply are always inflationary and 2) price inflation always and eventually (even after years of lagging) catches up with money supply inflation. As we see it then, price inflation, even when mis and under-reported by 50%, will continue to catch up with money supply inflation, which means we are anything but close to “beating inflation.”
Or stated more simply, we are not even close to peak inflation, no matter how fictionally it is reported to us out of D.C.
THE DESPERATE ‘’GOOD NEWS’’ NARRATIVE
Those faithful to Powell or unwilling to look deeper into the hard math, will, of course, argue otherwise.
The headlines, for example, are giddy with positive spin, reminding the world that: 1) US CPI inflation is coming down, 2) that the M2 money supply between March and December of 2022 fell by over $500B, and 3) that Powell’s valiant QT and rate hiking policies to combat inflation are confirmed by a brave Fed balance sheet reduction from $8.9B to $8.6B in 2022.
Unfortunately, such “good news” when placed into something called “context” is in fact openly, well, pathetic…
First, to boast of a $500B decline in M2 ignores its $14T increase in the preceding years. The mis-match is appalling and amounts to far too little, far too late. Additionally, bragging about a $300B (2%+) reduction in the Fed’s 2022 balance sheet is simply laughable when measured against its $8 trillion climb from $800B in 2007 to $8.9T in early 2022.
In short, bragging about a few hundred billion in tightening while ignoring the eight trillion of easing is an open insult to the collective intelligence of those actually doing the real math of the Fed’s policies. It’s also worth noting that the measly 2% reduction of the Fed’s balance sheet in 2022 resulted in the worst nominal return for US stocks and bonds since 1871.
If Powell continues to tighten at a rate of $90B per month, what we saw in 2022 will be far worse in 2023 as credit and equity markets sink in tandem, leaving investors with almost no place to hide. Thus, if you think Powell’s “war on inflation” is both winning and sustainable, we would openly beg to differ.
In fact, we see macro conditions and inflationary forces getting worse, much worse in the year(s) ahead. Why? Simple.
THE HARD MATH OF HARDER TIMES AHEAD
As indicated above, debt is a core theme of the current and coming macro disaster. It makes discussions on interest rates, markets and inflation easier to clarify and predict, as debt is predictable throughout history.
In short, debt destroys economies and markets—slowly and then all at once. Keeping things painfully simple, just consider the painful reality of a US public (i.e., government) debt of $31+T and $19T in cumulative deficits since 2001. Already, the US is looking to add nearly $1T to that deficit in Q1 of 2023 alone, meaning we could see at least another $3T to $4T added to that deficit pyre in 2023.
Given these hard facts, who or what is going to pay for those debts in a declining and debt-soaked nation of anaemic GDP and declining tax receipts? The answer, despite a currently hawkish Fed, is painfully and historically obvious: More fake money and an eventual rise rather than fall in inflationary and mouse-clicked M2.
Meanwhile, of course, Powell is continuing with rate hikes and QT into a debt crisis. We think he will stick to his doomed (Volcker-wannabe) course of raising the Fed Funds Rate to well above 5% into 2023. But eventually, the destruction these rate hikes will have on the bond and then stock markets will become too painful.
Far more importantly, the destruction such a hawkish policy will have on Uncle Sam’s IOUs (i.e., the US Treasury market) will be devastating. Given the trillions is USD-denominated debts held globally, the rising USD on the back of rising US rates will force more selling of USTs globally, which will add insult to the US’s debt injury.
Even Janet Yellen, the former Fed-Chair turned Treasury Secretary (imagine that…) is openly confessing the need for more “liquidity” to support an increasingly unloved and distrusted US sovereign bond market. Eventually a choice between evils will be forced upon the Fed and the markets.
THE HARD CHOICE- ALWAYS ENDS THE SAME
In simple terms, Powell’s strong USD and rising rate policy will backfire. At some point, the Fed in particular and the US government in general will have to make the hard choice of seeing its Treasury market die or its currency market inflate. Throughout history, the choice was always made in favour of inflation (viz. currency debasement) and we think this time will be no different.
The only way to save (i.e., monetize) the UST market is to debase (i.e., inflate) the currency via more mouse-click money creation and hence a steady rise, rather than temporary and minor decline, in the M2 money supply.
This move will be inflationary by definition, and not even the dis-inflationary forces of an engineered recession or a bogus CPI figure will be enough to prevent the real inflation which investors will feel in the continued decline of their currency’s purchasing power.
GOLD- A BETTER CURRENCY
Gold, of course, is a monetary metal. Its duration is infinite and its supply nearly finite. It was not created by an anonymous code writer and it can’t be mouse-clicked at a local central bank.
Instead, central bankers, especially in the east, are buying more physical gold, not BTC or USTs. There’s a reason. The world is changing, currencies are dying and gold’s role is rising. Throughout history, gold has held its purchasing power as every fiat currency from ancient Rome to DC has failed.
Investors hoping paper gold held in trusts, ETFs or even in IRA’s will save them need to understand that those instruments are backed by leverage not actual metals and that the only safe and historically confirmed way to own gold is physical gold stored in the safest vaults and most trusted jurisdictions.
We’ve known this for decades, and so have our clients in over 80 countries. Yes, the world and macros are complex, but the solution to openly dying paper currencies is in fact profoundly simple. EG