That sure was fun, wasn’t it?
Last year saw a rather amazing 27% rise in stock prices, despite the Covid-19 craziness, and stocks are up 24% a year for the past three years, so that $100,000 put into a simple S&P 500 index at the start of 2019 had turned into $190,000 by year-end 2021.
And now? Not so much. Russia continues its savage invasion of Ukraine, creating uncertainty everywhere else. Oil is near peak prices, inflation is at 40-year highs, and interest rates are on the rise, threatening growth.
The markets have been wobbly all year long, and every time stocks seem to be headed higher they suddenly take a dive and have to recover. The only thing sure to go up the rest of this year is uncertainty and fears of stagflation or a recession.
Not to worry: the seven unelected academics and economists on the Federal Reserve’s Board of Governors have got this. Cue fear, forehead sweat, rising blood pressure, and a racing heartbeat.
The truth is the Fed already has blown it. The inflation genie, dreaded but non-existent for 20 years, is out of the bottle and moving in to a multimillion-dollar high-rise for a long stay. A renowned advisor to central banks since the 1980s now expects a far higher rate of inflation to persist world-wide for years to come, the Wall Street Journal reports.
In the ten years from the start of 2011 to year-end 2020, the inflation rate averaged 1.72% per year and exceeded the Fed’s 2% target only three times. Yet in February 2022, the annual inflation rate soared to 7.9%, the highest since January 1982. Energy up 26%, gas prices up 38%, food prices up 7.9%, new-car prices up more than 12%.
The Fed’s polices are “numble” because they are nimble (as in utterly random) and “anything but humble,” writes Vineer Bhansali, a Harvard Ph.D in theoretical physics who runs Longtail Alpha, a hedge fund in Newport Beach, Calif., where my firm, Prattes Wealth Partners, also is based.
He says the Fed and other central banks are “armed with shady economic theories and prognostications that at best are laughably silly and at worst seriously damaging to the long-term financial health of the countries and economies they govern.”
Hear, hear. The Fed operates without anyone’s approval, on the whim of seven unelected governors who are economists, academics, and theorists, rather than business owners with real-world experience. Yet they possess more influence over the economy than any president.
In late 2007, before the real estate bubble burst and set off a worldwide markets meltdown, the Federal Reserve balance sheet had less than $1 trillion in assets. By early 2022 the total is near $9 trillion—up 900% in a period when the economy grew 40%.
Since 2014, Fed assets are up 100%—all of it invisible money created as electronic credits by the Fed and handed to Wall Street in exchange for government and corporate bonds.
Even as the economy recovered from the meltdown of 2008-09, the Fed kept rates at low levels for more than a decade. On March 16th, the Fed raised its overnight-lending rate for the first time in two years, by 0.25% from zero, and signaled it expects to impose quarter-point hikes at each of the Fed’s remaining six meetings.
In December the Fed governors were projecting a rate of 1.75% by the end of 2023, or seven quarter-point rate hikes in 24 months. Now, just three months later, the projection is
2.75%—11 quarter-point raises in 24 months.
This is a dramatic revision, up almost 60% in 90 days. You get the idea the Fed is witless and without any real strategy, it’s making it up as events unfold.
Meanwhile, federal handouts to counter the Covid lockdown added to the recent rampant run-up in inflation. All told, Congress authorized some $7.5 trillion in benefits, including the $2.59 trillion CARES Act and up to $4 trillion in new lending.
One result is that Americans have almost 40% more cash on hand now than they did two years ago. In February, retail sales were an incredibly strong 17.6% higher than a year earlier, the Commerce Department reported.
It all adds up to this: inflation may get worse before it gets better, and the Fed cannot be trusted to handle the coming de-escalation competently. You are on your own, you must protect yourself and your wealth.
But how to do that? Some ideas on that front are up next.