Recession Rears Uglier Head Than Inflation – Ep 821 - Transcripts

June 23, 2022

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· Dow Jones just did something it hasn't done since the great depression. · Rates in the UK and Japan headed higher. · Weakness and volatility in crypto markets. · Government moves to ban Juul vapes. · Jerome Powell uses politics as an excuse. -

Transcript

Today's podcast was recorded yesterday. If you want to listen to my podcast commercial free the day I record them, go to Peter Schiff.comals.com and sign up, it only costs $5 a

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Today's podcast is sponsored by Indeed indeed is the hiring platform where you can attract interview and hire all in one place, so sign up for indeed now and get a $75 credit towards your first sponsored job post plus earn up to $500 extra in sponsored job credits with indeed virtual interviews visit indeed dot com slash peter to learn more. It's been a full week since I recorded my last podcast which was on the Wednesday that the Federal Reserve didn't surprise anybody. With its surprise 75 basis-point interest rate hike, something the Fed hadn't done in 30 years in order to get tough on inflation. And in response to the Fed finding its inflation fighting mojo Wall Street celebrated. They thought this was a good thing that the Fed was finally getting serious and that meant inflation problem was gonna be solved. And so it was gonna be good for the market. And it was a big rally across the board. The Dow gained about 300 points. NASDAQ did even better. And as I said on that podcast, I didn't think there was any way that you could really make lemonade out of those lemons that 75 basis point rate hike was not good for the stock market. It was bad for the stock market. In fact it would be even worse for the stock market if the Fed really was serious about fighting inflation because it's gonna take a lot more than that 75 basis point rate hike or even another 75 basis point rate hike in july.

If we even get that defense a long way from getting serious, it may be talking serious, but it's not acting serious. If it did, it would be even more negative for the market. Then the pretend inflation fight has been. And sure enough, I was correct. It was a one day wonder. We got a big drop. The following day. On Thursday, the Dow Jones dropped 740 points. Although intraday it was almost down 1000 points and it went down a little bit more on Friday, it slipped another 40 points or so it closed the week at 29, Below 30,000, the lowest close of the year, but still technically not in a bear market because at its close on friday, the dow was down 19.1% from its record high. Now, even though the dow isn't officially in a bear market yet, it still did set a record, The dow jones has now dropped 11 out of the last 12 weeks. That is the first time it has ever done that. The old record was dropping 10 out of 11 weeks and that happened in 1929.

Now what was significant about 1929. That was the year of the stock market crash. That was the year that officially began, what we now call the Great Depression. So, the Dow Jones has just done something that it hasn't done since the beginning of the Great Depression. And in fact, the Dow out did what it did to begin the Great Depression, because instead of dropping for 10 out of 11 weeks, we've dropped for 11 out of 12 weeks. Now, we'll see what happens this week to see if we can extend that record to 12 out of 13 weeks. But the fact that we're doing something that we haven't done since the Great Depression should tell you something, that should be an ominous warning that maybe we're headed for an even greater depression. And I think what's gonna make this depression greater Is that unlike the depression of the 1930s, where consumer prices went down maybe 30 for the course of the decade, this time, they're gonna go way up, because this is gonna be an inflationary depression. So instead of following prices, easing the pain that americans feel during the Depression, this Depression will be exacerbated by the pain of rising prices. That's why I've been describing what we're entering as an inflationary depression, Because to call it stagflation, I don't think would do justice to what's gonna happen. And I don't think that what we're gonna experience is gonna be anywhere near as benign as what we experienced during the 1970s. Not that the 1970s were good, they were bad.

It's just that what we're about to experience is gonna be so much worse. The S. And P. S. Run is not quite as bad as the dow's 11 out of 12 weeks down, It's only down 10 out of the last 11 weeks. That's something that the S. & P. hasn't done since 1970. So that was the beginning of the stagflation every decade and now it's done it again. So there's a lot of very ominous signs coming from the stock market that investors are ignoring. Now there actually was a catalyst to the big drop on thursday. It's not like it just came out of the blue, you had a surprise interest rate hike from the Reserve Bank of Switzerland which unexpectedly raised its benchmark interest rate from negative 75 basis points to negative 25 basis points.

So, a 50 basis point rate hike from the Bank of Switzerland. Now rates are still negative. And the amazing thing was the market expected no change at all for the Reserve Bank of Switzerland to leave interest rates at negative 75 basis points, despite a year over year inflation rate of 2.9%. Now, most countries would love to have an inflation rate of just 2.9%. Switzerland has one of the lowest inflation rates. But historically the Swiss have a much lower inflation rate than that. And I think they could read the writing on the wall and they realize that the days of negative interest rates are numbered. I believe this bank of Switzerland is going to be raising rates again maybe by 25 basis points next time or maybe 50, but at a minimum will be at zero or positive 25. But what I also expect the Bank of Switzerland to announce and they haven't done that yet, but I think they've indicated that it's coming is a reduction in their enormous balance sheet. But the balance sheet of the Bank of Switzerland doesn't consist of a lot of Swiss government bonds because the Swiss government doesn't have a lot of debt. And so it doesn't have a lot of bonds. And so when the Bank of Switzerland wanted to create inflation and print a bunch of swiss francs to prevent the swiss franc from rising against the euro.

Not only did they buy european bonds because they didn't really have swiss bonds, but they bought a lot of stocks, They bought a lot of big blue chip us stocks, they have a huge portfolio of Apple and meta and amazon and all these big stocks, the fang stocks, all the major S and P stocks and if they're gonna start shrinking their balance sheet, which they need to do if they want to strengthen the swiss frank and fight inflation, which I think they want to do. Well obviously that's very bad for the stock markets because they're gonna be a major seller. They were a major buyer when they were doing quantitative easing. Well they're going to be a major seller when they're doing quantitative tightening again. Most central banks are selling bonds in quantitative tightening. Well the swiss central bank is going to be selling equities and so that is particularly bad for the global equity markets and that contributed to decline as well as the fact that it reminded traders that the Federal Reserve is not the only central bank that's hiking interest rates. It may be the one that's talking the most about hiking rates but all these central banks are ultimately going to have to hike rates. The bank of England moved up rates on thursday as well. But just 25 basis points they moved up to one and a quarter. Now they did that in the face of 9% year over your interest rates. And if you listen to what the bank of England said about this so we're tough on inflation. We're getting serious about fighting inflation.

Clearly they're not serious yet. You got 9% inflation, you're at 1% and you move up to 1.25%. They still have a long way to go in there inflation fight but rates in the UK are headed a lot higher. Ultimately Japan is going to raise rates to now Japan is the one nation so far that held out. You know the Japanese yen did have a decent gain on thursday along with all of the other currencies. In fact, the dollar index tanked by the most since March of 2020 led lower by a 3% rise in the swiss franc, but the dollar was down across the board and in fact, even though the dollar index gained back a good chunk of its losses on friday, it did lose ground again on Tuesday and Wednesday. So it's now about a full point below where it closed on Wednesday, the swiss frank has actually added to its gain. So it's a little stronger today Than it was following that 3% Thursday rise. But the yen tanked by over 2% on Friday because the Bank of Japan decided to do nothing about fighting inflation and the Bank of Japan remains committed to defending the .25% yield on the tenure Japanese government bond because they know that if they fight inflation, they're gonna put the Japanese government in a fiscal bind and for now they're siding with bailing out the government rather than bailing out the country from inflation. And the question is, how much longer can the bank of Japan sacrifice the yen and the value of all the savings of the Japanese people in order to save the Japanese government, the embarrassment of having to come to terms with all the fiscal mistakes that it's made, I think at some point, the bank of Japan is gonna have to give in, you're going to see an increase in rates in japan and the shockwaves of that announcement could produce a tsunami here in the United States. It actually could be more bearish for the dollar and the US economy than it will be for the japanese economy, which I think fundamentally is in much better shape to handle this tradition. Yes, it will be difficult, but it will be sustainable but it will be intolerable here in the United States.

And we also got weak economic news that came out on Thursday, particularly in the housing sector. And then on Friday we got a very weak report on industrial production. It rose by .2%, but that was half of the expectations and factory orders fell by .1%. They had been expecting a .5% gain. But you know, despite all this weak economic data last week, despite the bad news of the Fed raising rates, the swiss National Bank raising rates, we actually had a pretty big rally on Tuesday following the three day weekend, the markets were closed on monday in observance of the juneteenth holiday. This is the second time that we observed that holiday. Remember it was signed into law by joe biden last year and last year juneteenth fell on a saturday. So all of our government employees got friday off this year, the holiday fell on a sunday and so everybody got monday off. Now, I did a podcast a year ago about the juneteenth holiday and the title of it I think is juneteenth is just the beginning and there I kind of outlined my opinion on the juneteenth holiday. So I'm not gonna talk about it at all on this podcast, but I would recommend that if you didn't hear the podcast that I recorded on juneteenth last year, in 2021 after you finished today's podcast, go and listen to that one on shift radio or on youtube. But by the way over the holiday weekend, I finally moved above 500,000 subscribers to my Youtube channel. So it's taken a long time, I think I started that channel back in 2000 and nine.

So what is that? 13 years to get to 500,000 subscribers. I wonder how many more years it's gonna take me to get another 500,000. So I can finally be at a million. I'm getting closer to a million though on twitter, I've been picking up a lot of followers there. I now have almost 767,000 followers on twitter. So I've passed three quarters of a million and I have less than a quarter million to go to get to a full million. So if you're not following me on twitter, you should follow me there, you should subscribe to my youtube channel. I'm also on instagram and facebook, so you should follow me on those platforms as well. But getting back to the markets which were closed on monday. There was a big rally on Tuesday despite all the bad economic news that came out The prior week. And despite the rate hikes we still had this big rise.

The Dow Jones was up 640 points. I think the percentage gain in the NASDAQ was even bigger and I think what's going on in the market now and I think why you're seeing the whip saws going around in fact today That Dow Jones was down almost 400 points I think early on then it rose positive about 300 points before settling the day down about 47 points. I think everybody is trying to position themselves for the new reality which is that the U. S. Economy either already is or is rapidly approaching recession. I'm pretty sure that all the people who thought we were gonna escape recession we were gonna have a soft landing or if we had a recession it was years in the future and then a very mild one at that. I think a lot of people have now resigned themselves including probably a lot of members of the FOMC that the U. S. Economy is either headed to recession or more likely already in recession. And so I think the markets are now bracing for that. Which in some respects is considered good news because a lot of people think that the recession is gonna put the brakes on the inflation fight. And so maybe the stock market ends up benefiting from a recession if the Fed pivots and is no longer as aggressive in fighting this inflation.

But I actually think the markets are still underestimating how bad inflation is and how bad the recession is going to be and the fact that the recession is not going to provide relief from inflation, it's actually gonna make inflation worse. Now. It's certainly possible that in the short run you could see a temporary reduction in the inflation rate so it comes down a little bit before it explodes even higher. But when this recession starts it's gonna be very bad given all of the leverage that needs to be unwound. And the rate hikes that have already taken place are enough to push the economy into recession even though they're barely enough to begin let alone win an inflation fight. So we have more rate hikes to come, this is going to be a very severe recession. And again, if the economy is already in recession and unemployment is so low, imagine how much worse this recession is gonna get when unemployment goes up and remember all recessions start with low unemployment, they end with high unemployment, well this recession is gonna be here for a lot longer than most and by the time it ends, unemployment rates could be setting a record now the way we measure unemployment now, we may never beat the record set in the 19 thirties because just like we no longer Accurately report on the inflation rate, we also no longer accurately count all the unemployed people as being unemployed, so it's gonna be very hard to officially match the numbers of the 1930s. Although unofficially, we could easily exceed the levels of unemployment that we had during that depression in the depression that I believe has already started. And in fact, a lot of other markets are also providing evidence that people have shifted their focus from being worried about inflation to being worried about recession. We had a big drop in bond yields today. Why are bond yields dropping? Because people are anticipating recession, a lot of commodity prices have backed off considerably.

We've had a big drop in oil prices were all the way back down to 100 and four for a barrel of crude oil. That's a pretty big reduction. We were above $120 a barrel last week. So a pretty big and rapid decline in the price of oil, as investors are anticipating a reduction in demand During a recession. Also, we're not seeing any movement in the gold market, even though people may anticipate that the federal reserve is going to be less aggressive in fighting inflation because the recession is going to do its job for it. We're not seeing people buying gold. I mean, they're not selling gold gold, still hanging out around 1840. It's still slightly positive on the year. That's about where it ended last year. Where just a few bucks higher. I mean gold is holding up better than just about every other asset and in fact in other currencies gold has gained because the dollar is up quite a bit on the year. And so that means the price of gold Is up quite a bit in other currencies.

So gold has done an okay job so far in 2022 especially relative to other assets but it hasn't done what I anticipated it would do because investors still don't understand that this recession is not only not gonna cure inflation it's gonna make the inflation problem worse when they figure that out, the price of gold is really gonna take off. But in the meantime because they haven't figured that out. Look at how weak gold stocks have been. In fact gold stocks had a very week day to day, much weaker than the overall stock market. In fact year today despite a slight gain in the price of gold, the G. D. X. Which is an index of major gold producers is down about six and a quarter percent on the year. And the G. D. XJ, which represents the junior miners is down 14%. Now I think what happened is a lot of people who bought some of the gold stocks because they correctly anticipated inflation would be a problem.

Well now that it is a problem, they're looking to take profits and there's not a lot of people who want to take the other side of that trade because people are not worried about future inflation. They're worried about the Fed fighting inflation, which they think is bad for gold and they're worried about the Fed winning its fight against inflation having a recession. And so there's no need to worry about inflation in the future. So there's no need to buy gold stocks today as a hedge against future inflation, which isn't going to exist. But again, the market is completely wrong on this and this is what opens up the opportunity for investors who actually understand what most investors are still oblivious to. But when it comes to market volatility since my last podcast, nothing tops what happened in cryptocurrencies with Bitcoin with ether we had a huge crash over the three day weekend. In fact it was a slow motion crash. It wasn't one of these collapses where Bitcoin dropped several $1000 a coin, You know, in one or two minutes it was just a slow and steady decline over most of the weekend. In fact, I think we bottomed out on Sunday and then we had a rally but the low that Bitcoin got down to was 17,800, something like that. When I recorded my last podcast Bitcoin had rebounded from not quite touching 20,000 back up to 22,000 and you had a lot of people that were confident that that 20,000 number was gonna hold Because that was the high from 2017. And so people thought that that old high would be the new support. In fact during the whole 11 or 12 year history of Bitcoin, it has never gone below a previous peak.

So every time Bitcoin has made a peak and then sold off sharply and then made new highs, the correction has never brought it below a previous peak until now. So Bitcoin has just done something that it's never done before and that should be a wake up call that maybe the game has changed and we are now in the permanent bear market for Bitcoin that if you hold and hope Bitcoin is not gonna come back and make a new high and I was certain that when it left that 20,000 intact that it was gonna take it out. That even if we were going to have a meaningful short term bear market rally that at a minimum we were gonna have to take out 20,000 and sure enough we did, we even took out 18,000 But then we rallied back by the time the US stock market opened for business on Tuesday, not only was Bitcoin above 20,000, it was above 21,000. And again a lot of people in the Bitcoin community were very confident that the bottom was in in fact, CNBC spent the entire day trying to convince its audience that the lows were in, that it was still a bull market. They had one guy on there and I'm not making this up. He was saying you gotta buy Bitcoin because it has proven itself to be a long term store of value. How has it proven itself to be a store of value? It's just collapsed 75%. I mean if it's gonna go down by 75% it's hard to say that it's proved that it's a store of value when you've lost 75% of the value that you wanted to store. You know, the guy who takes the cake is Michael Saylor, who continues to go on every podcast that will have him no matter how small the audience to brag about how much money he's making a Bitcoin. What a great decision. He had to buy Bitcoin even though he's down like a billion and a half dollars, he's down over 30% on his average cost, which is over 30,000.

As I'm recording the podcast today, we're just below 20,000. Again, we're about 19,900. So it was a horrible decision to put Bitcoin on the balance sheet of microstrategy yet, he claims it's the best investment he could have made. He's still claiming that buying Bitcoin was the best thing that he could have done with microstrategy's money, even though he's down over 30% on his investment and he borrowed a lot of the money. So not only is he down what he lost but he's down the interest that he's paying to borrow the money that he lost. Now sure he got a low rate of interest. But how is that any consolation with what he bought with that borrowed money has dropped by better than 30% and it could drop a whole lot more. There is significant downside risk. Now in Bitcoin the chart looks horrible. The fundamentals are horrible. This whole thing is blowing up and what we haven't even had yet in my opinion are the mass liquidations. I don't think we've had all the margin calls.

I think we've had some I think we've seen some of that. In fact I pointed out on twitter on friday I was watching the Grayscale Bitcoin Trust sell off to a 37% discount to N. A. V. The discount had never been that bad and again that showed me that there's some real pressure to sell. Maybe some holders of the Grayscale Bitcoin Trust had to sell. They had margin calls. This thing has been a complete disaster. It went from a 30% premium to a 37% discount and it completely blows away the idea that institutions are interested in Bitcoin they want to buy Bitcoin because they would be buying the Grayscale Trust because they don't want to buy Bitcoin directly. And the G. B. T.

C. Which is the symbol is better than buying an E. T. F. Because you're getting it at a 37% discount. So if you like Bitcoin and you can buy it for 37% below market, why wouldn't you do it? Yes there's a 2% annual fee but you can hold the fund for 15 years before that 2% annual fee each way that 37% discount if you just want to buy it for 1 to 3 years you're getting a huge bargain and nobody wants it. The fact that institutions aren't buying shares of this trust despite this enormous discount and the possibility that it could become an E. T. F. They're trying to become an E. T.

F. In which case it instantly will trade at N. A. V. Of course the problem there is everybody's gonna try to redeem and then Bitcoin will crash because right now Gray Scale doesn't have to sell any of its Bitcoin. In fact it can't sell any of its Bitcoin. So if you want out of shares you just have to find somebody who wants to get into those shares. But if it becomes an E. T. F. You don't need to find a buyer, you can just redeem your shares and the E. T.

F. Can go into the market and sell some Bitcoin. Well it's one of the biggest holders of Bitcoin. It used to be one of the biggest buyers. It's not buying anymore. In fact it has to sell in order to cover the management fee. But if it turns into an E. T. F. It's gonna be dumping Bitcoin into the market as everybody is redeeming to try to get their cash and that's gonna put even more downward pressure on the price. But this big discount is a sign that the institutions don't want it. The whole thing was a myth but that big discount on friday told me that something was gonna happen over the weekend.

And sure enough it did. But the technicals and the fundamentals with what happened with Celsius with what happened with tara luna. That's just the beginning these are just the first cockroaches there's more shoes to drop. In fact Bitcoin is probably the centipede of shoe dropping. You're gonna have a lot more stuff. I mean talk about the tide going out and seeing who's swimming naked. I think I said this once before when it comes to Bitcoin, everybody is swimming naked because there's nothing there. So there's so much more to expose in this market than in other markets. So there is so much downside risk in Bitcoin and there's still maximum complacency. So I think once we take out that low That 18,017,800 then we're gonna start the tank towards 10,000 and lower. And in that decline that's when I think we're gonna trigger the margin calls and the forced liquidations then it's gonna go from a very orderly decline. A slow motion crash into a flash crash.

I mean something much bigger where the market just falls through the floor. Now that May put in some type of tradable short term bottom, I don't think it's gonna be the ultimate bottom because I think the ultimate bottom is zero but I do think that there's gonna be some Diehard Bitcoin guys that will trade it so it's not going to go straight to zero, it's gonna go there eventually. But before we have Any kind of a bottom, I think we're headed a lot lower and when we get there we may never see even 20,000 again. I mean that might not be in the cards for Bitcoin. I don't know where the high is gonna be of the next rally, it might depend on how low the low is, but we're going a lot lower and a lot of wholesalers dreams of Bitcoin riches are gonna turn into a real life nightmare. And of course it wasn't just Bitcoin, it was all the cryptocurrencies that got clobbered by the way now we're getting closer to 20,000 of these all coins, we have 19,970 as I'm recording. So just 30 away at one point, the combined market cap was three trillion. And over the weekend it dropped below 800 billion. As I'm recording now we're back above 800 were about 884 billion Ethereum. The number two Cryptocurrency by market cap that fell below 1000 over the weekend. It's now back above it. It's about 1000 and 60 but the high for that token was about 4800.

So that's better than an 80% decline in ether. So that's a bigger drop than I think the 75% plus drop that we had in Bitcoin. You know when I did my debate with Alex Moshinsky, the guy who created the Celsius Ponzi that just blew up. Oh, and by the way, I took some of the highlights from that 1.5 hour debate I did seven months ago on Kitco and I condensed it down to just under 20 minutes and I posted the video on my Youtube channel, so you should go ahead and give that a listen because I really called this guy out and exposed the entire scam seven months before it blew up. But during that scam, he talked about the fact that people had already moved $3 trillion out of fiat and into crypto. Well, just because the total market cap of all the cryptocurrencies was three trillion, it didn't mean that $3 trillion moved into crypto, know a fraction of that actually moved in. What happened was on paper, the market value of all those Kryptos moved up. But since we did that interview, two trillion out of the three trillion is gone, It wasn't pulled out, it disappeared, it went to money heaven. Yes, some people got out, but the majority of the people didn't get out at all. They held onto their tokens as the value collapse. So it wasn't that we moved all this money in any more than we've actually moved it out, but we've seen the value of these tokens collapse and that is going to have a major impact psychologically on the owners who thought they were sitting on a crypto fortune and who are now on their way to going completely broke. You want your next hire to have great problem solving skills and think like an entrepreneur, the problem is where do you find them?

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Dot com slash peter to learn more, claim your credits at indeed. Dot com slash peter. That's indeed. Dot com slash peter terms and conditions apply if you need to hire then you need indeed Getting back to the economy though. We got some more economic news yesterday and today that was bad. Yesterday we got the Chicago Fed National Activity Index. The April number that was originally reported as .47 that was revised down 2.4 And the main number came in at .01 and the three-month moving average went from a downwardly revised .4 in April 2.2 in May and then we got more weak housing data. This time it was existing home sales. They dropped from 5.6 million annualized in the previous month To 5.41 million. The month over month decline was 3.4%. The prior month's decline was revised from down 2.4% to down 2.6% and year over a year. The decline was 8.6% and that follows the upwardly revised 6% decline year over year.

In the prior month. On the political front, Joe Biden's latest plan to fight inflation is to have a three-month suspension of the federal 18 cents per gallon gas tax. He's demanding that Congress pass this tax. He's also demanding that oil companies not Try to profit from this and make sure that they cut prices by the full 18 cents. So all the benefit goes to the consumer and none of it goes to the oil companies. Now, this is not a smart plan economically, if your goal is to help fight inflation this is all politics. This is all about the midterm elections because really that three month gas tax holiday is gonna take us through the midterms, probably by the time it's passed. And so maybe people will feel a little better if they save 18 cents a gallon if they even see the savings. But the reason that this is a bad plan is because it is a tax cut that is not offset by spending cuts. So it is an expansionary fiscal policy which is inflationary. If you want to fight inflation, you need contractionary fiscal policies were getting supposedly a contractionary monetary policy from the Fed. But if we get an expansionary policy from the government, they're at odds with what the Fed is trying to do now.

Also, if you make gas less expensive, well, you're going to increase the demand for gas, right demand is a function of price. The lower the price, the greater the demand and the higher the price, The less the demand. So if we're gonna make gas 18 cents cheaper, then there's gonna be more demand than there would have been had the price been 18 cents higher. Well, you don't want more demand, you want less demand. This is gonna put more upward pressure on oil prices because more oil is going to be bought than might have been purchased. Had the tax been left in place now, it's not that I'm in favor of taxes, I'm just not in favor of deficits. I want small government, but I recognize that the cheapest way to pay for government is with honest taxation, when you have to pay for government through dishonest taxation, which is through debt or inflation, it ends up being much more expensive. So when I oppose these tax cuts, it's not because I want people to pay high taxes. I don't, I want people to pay lower taxes, but in order to get lower taxes, we need less government spending. You can't talk about cutting taxes without talking about cutting spending because every dollar of spending is a dollar of taxation. It just depends on how the public picks up the bill. I want the bill to be honest, because that way it's lower.

And if the public knows they're on the hook for all this government spending, they won't want the government spending. People only want government programs because they think they're getting something for nothing. The minute they realize that the something they're getting actually cost something, well, they're not gonna want it anymore. So I want honest taxation rather than inflation. But the government loves to tax us by inflation because then they can blame it on Putin or they can blame it on the pandemic or price gouging or whatever they want to do accept accept responsibility, but what's going to happen as a result of this tax cut if it actually passes, is not only will it drive additional oil demand, but by increasing the deficit because it's not gonna be offset, the government's gonna have to make up for this lost revenue. It's either gonna put more upward pressure on interest rates because now the government has more bonds to sell to the private sector. And so now the economy is gonna have to deal with even higher interest rates as a result of these bigger deficits or the Federal reserve is going to monetize these larger deficits which it can't do. If it's going to continue with quantitative tightening, it would have to give up the quantitative tightening and go back to quantitative easing. But assuming at some point this extra debt gets monetized, then we have additional inflation created to make possible this gas tax holiday. The irony of this is is biden's plan to put out the inflation fire is to create more inflation right? He wants to fight fire with fire. Well I don't know if that actually works on fire but I know it doesn't work on inflation.

You can't fight inflation by creating more inflation if you want to fight inflation, you need less inflation. And so we actually need higher taxes, not lower taxes. Of course I would prefer that we get spending cuts. But since nobody wants to cut spending then the only thing that's left is to raise taxes. One more piece of political news that I wanted to discuss today is that the U. S. Government announced its decision that it is going to ban jewel from selling its E cigarettes in the United States. And that had an immediate impact on the share price of Altria, which is the former Philip Morris which split into two companies. There's Philip Morris International which sells all of their brands outside the United States. And then there's Altria which has those brands inside the United States. Well, Altria purchased a 35% stake in Juul which is now practically worthless, they paid $12.8 billion for that investment. I'm not sure how much they've written off.

But the reason I want to bring this up other than the fact that you can highlight that there is a lot of political risk when it comes to investments in the United States. If the U. S. Government can unilaterally just declare that the product that you were selling, you're no longer allowed to sell it and it's now unlawful. And so you basically seen your entire investment wiped out at the stroke of a bureaucrat's pen. But nobody questions the government's right to do this. Where in the United States constitution is the federal government authorized to ban anything? How could they say it's illegal for Altria to sell these e cigarettes? How can they say it's illegal for americans who want to buy these cigarettes to buy them legally because obviously they'll still buy them, There'll be a black market in this stuff that there's a demand it's gonna be filled except now it's gonna be filled by criminals instead of law abiding companies. And so this is going to do all kinds of damage. But the bigger issue is a constitutional issue. Where is the outrage, especially on the part of the liberals, right who want to talk about the right to privacy, right?

Everybody is up in arms now about the fact that the roe v wade decision may be overturned and I'm going to talk about that decision, you know, when it comes out and I'll comment on it at the time. But of course the big thing about Roe V wade is about the constitutional right to privacy and freedom of choice, right? All the people who are pro choice think that women should have a right to choose what they do with their own body, right? Forget about the fact that they're choosing to end another life. It's a choice that we're allowed to make. And we have a right to privacy. The government can't tell us what we can do in the privacy of our own homes. That's what the Supreme Court said. And now you have this Supreme Court potentially overturning that, at least with respect to abortion. But where's all the outrage about people being pro choice on having the right to choose to smoke an E cigarette if you want? I mean, why can't americans make this choice? Why can't you smoke an E cigarette in the privacy of your own home?

Why is the Federal government trampling on the constitutional right to privacy? Why is biden anti choice? He's supposed to be pro choice? Well, what about pro choice and other things? You can't just pick and choose what you think we have a right to choose If you believe in the right to choose, then that right is absolute. We can choose what we want to do as long as we don't harm other people, which of course, is the irony because when it comes to pro choice in abortion, you're harming, right? The unborn child. But who are you harming when you smoke a cigarette? You're harming yourself? Well, the government is not there to protect us from ourselves. The government claims that all these things are bad. They're bad for kids.

There's a lot of things that are bad for kids. Look at all those kids cereals. You think they're good for kids. You know, cocoa puffs? Uh, fruit loops tricks, Captain Crunch. You think this stuff is good for kids? Why don't we just outlaw it and say, no, you can't have these sugary cereals, you gotta eat special k or you gotta eat cornflakes, right? You gotta eat something boring. No, I mean, kids are eating all this stuff. Look at all the junk food. Look at all the sodas that they drink. None of this stuff is healthy yet we have a choice to consume things.

What about the entire fast food industry? Think people going to Mcdonald's or burger king? I think they're having a healthy meal. No, but the government doesn't have a right to ban something just because they determined that it's not healthy. So this whole thing is illegal. There is no constitutional authority. The government, as I've explained in the constitution has very limited powers, they're few and defined it's up to the States if the state government wants to say that it's illegal to sell an E. Cigarette or smoke e. Cigarettes, that's fine, the states want to do it. But there is nothing in the constitution that gives the federal government the power to ban anything. You know, that's why when they wanted to ban alcohol, they had to pass a constitutional amendment. They needed prohibition.

Well, if you want to ban E cigarettes, you got to do the same thing. You need to amend the constitution. I mean, the bands that we have now on marijuana or cocaine or heroin, they're just as illegal, right? If you could have banned alcohol without passing a constitutional amendment, why didn't they do it? It's just because they had a lot more respect for the constitution back then than we have now. But I saved the biggest story of the day for last. And that is the first of the two day congressional testimony by Jerome Powell in front of the U. S. Congress today, he sat with the Senate tomorrow, he's with the House of Representatives. As always. He begins the hearing by reading his prepared remarks and really no surprises. There everything is good.

Yes, we've got this pesky inflation problem but the U. S. Economy is strong enough to withstand the higher interest rates that are necessary to easily put this inflation genie back in the bottle. Of course, none of this is true. Thanks to the Fed's easy money. The economy is so leveled up with debt that it can't withstand even a small inflation fight, let alone a war that is going to be required to get rid of the worst inflation we've basically ever had. We are not prepared at all for that kind of fight. Which is why the Fed is not going to wage it. But rather than focusing on those carefully scripted prepared remarks, I want to talk about the not quite as scripted Q. And a session and of course it all breaks down on party lines. You've got the democrats that want to blame all the inflation on Putin. In fact, there was one democrat that came up with the idea that it's the three PS it's Putin the pandemic and price gouging.

That's why we have inflation because the democrats all want to let biden off the hook and they also don't want to blame the Fed. They want to pretend that the Fed is innocent, that biden is innocent. And all of this problem is coming from abroad, it's all beyond their control because it's Putin the pandemic or those greedy corporations that are price gouging and taking advantage of the american public. And so everything is fine because they don't want the voters to blame democrats or biden and they don't even want to blame the Fed even though Powell was originally nominated by trump, he was reappointed by biden. So he's now biden's guy and therefore if pal screws up well it doesn't reflect well on biden. So the dems want to blame it all on external factors. And in fact one of the things they point out is that there's inflation all over the world. We have inflation in other countries and clearly that's not biden's fault. So you can't blame biden for the inflation in Germany or the inflation in France right or the U. K. So clearly it's a world problem. It's not a U.

S. Problem. And so therefore it's not biden's fault. Now what the democrats don't understand is the reason that inflation is a worldwide problem is because politicians and central bankers all around the world are making the same types of mistakes. So yes it's the U. S. Federal Reserve and the U. S. Government including the Congress not just biden but Congress and of course not just this president but trump and prior presidents everybody had a hand in creating this inflation. But the mistakes that were made in America were made in other countries. Now you can blame those mistakes on ours because we're the issue of the reserve currency. So we're basically setting the monetary policy for the world.

And so everybody is copying what we're doing. It's like you have an exam and everybody is cheating off us but we didn't study and so we're gonna fail the test. But the people cheating off us don't realize that we didn't study. And so they're copying the wrong answers and so everybody is failing because everybody is following the wrong leader So the fact that there's inflation in other countries doesn't absolve the Fed from its culpability in creating inflation here. Nor does it absolve biden for his role in stoking that inflation fire. But now the republicans are very different. They don't want to blame the inflation on Putin or the pandemic and they certainly don't want to blame it on trump. So they never talk about the big deficit spending that occurred under trump or the fact that the initial covid stimulus and the paycheck protection boondoggle, all those forgivable loans, All of that started with trump. They want to focus on the second stimulus that occurred under biden and they want to blame all the inflation on biden. Now, to a lesser extent, some of the republicans also want to blame the Fed. They want to talk about the fact that they warned about how the democrats stimulus was gonna be inflationary because we didn't need it. It was too much, it was too much spending.

They weren't critical of that stimulus when trump was president. Now maybe they can claim that the circumstances were different that we were just going into the covid lockdowns and by the time biden came around the economy was already reopening and so maybe if the stimulus was needed earlier, it clearly wasn't needed at that time. I don't think it was ever needed. But that's a different topic. The republicans want to remain focused on biden's role for obvious political reasons and to some extent they want to blame the Fed because they see the Fed now as cooperating with the biden administration to create this inflation, but they don't really want to squarely point the finger at the Fed because they don't want to let biden off the hook. They want biden to be the fall guy. Now, I think at some point when inflation does run out of control, I think biden is also gonna run against the Fed. So the republicans may blame biden, but Biden's gonna turn around and blame the Fed because he's already said that fighting inflation is the Fed's job, not his job and he's gonna stay out of it. He's not gonna pay politics, he's gonna let the Fed do whatever they want of course, behind the scenes, he's gonna do the opposite, he's gonna make sure That Powell toes his party's line. But if inflation is still a big problem in 2020 for and if he goes for reelection or even if it's not biden, even if it's some other democrat, they're gonna try to blame that inflation on the Fed for not doing its job. And in fact, one of the ways that you can tell that Powell already feels he's a member of the biden administration, just like Bernanke admitted later on that he felt that he was a member of the Bush administration when he was the chairman of the Federal Reserve is that you see all these questions that the republicans are asking how the answer with respect to government spending. And they're asking good questions that they know the answer to.

They're saying would it be helpful to the Federal Reserve if we in Congress cut government spending or if we froze government spending, would it make your job of fighting inflation easier? The answer is obvious because pal admitted that he is focusing on restricting demand that these rate hikes are designed to reduce consumption to reduce spending by increasing the cost of borrowing by bringing down the value of assets. Pal is hoping to influence demand to bring demand down in line with supply and that's how you control inflation. Well, another way to control inflation is on the fiscal front. You can try to reduce demand with monetary policy and you can also try to reduce it with fiscal policy. So if the government cooperated, if the government froze a reduced spending, it would clearly make the job of fighting inflation for the Fed easier. Because the government right, the executive branch and Congress will be working in cooperation with the Fed. They would have the same type of policy, They would have a single goal to reduce inflation. But clearly the government doesn't want to do its part in reducing inflation. It just wants to blame third parties for inflation and it wants to pretend that the only government entity capable of dealing with inflation is the Federal Reserve. When a lot of the inflation is emanating from deficit spending by the United States Congress. But when the republicans ask Powell that question, would it be helpful if we get a control of spending?

Powell refuses to answer the question. He says, well, I can't answer that question because I can't get involved in politics. What do you mean he can't get involved in politics? He's testifying in front of senators. I mean, that's politics. I mean, he is there to give advice. That's the whole point of these hearings is so Congress can talk to the chairman of the Federal Reserve and get some advice, supposedly this guy is a brilliant economist, right? That's why he's the head of the Federal Reserve. It should be, hey, what can we do to help? We have this big inflation fight, we want to be in the battle with you. What can we do to help? And so these republicans are asking pal, how can we in Congress help you and pals like I'm not gonna tell you, Yes, maybe I know how you can help, but I'm not gonna tell you, I don't want to get involved in politics.

Why not? I mean, if he has an opinion, if he thinks there's something that Congress should do, then tell Congress what he thinks. Now. Congress can go ahead and ignore it. But give them the advice. That's why you're there. Of course, really. This is all about theater. This is all about politics, Nobody actually wants any advice. They just want to try to score points with their constituents and win some votes. But the fact that Powell refuses to answer the question because he knows yes, of course, it would help if we had some contractionary fiscal policy to go along with some contractionary monetary policy. It would definitely help.

He knows that, but he doesn't want to admit that because he doesn't want to embarrass his boss joe biden. He doesn't want to embarrass the other democrats because now that he is the chair of the Federal Reserve when the democrats control the White House. Well, he's now part of that party. He is now beholden to the president and the democrats in Congress. And that is the problem because the independence of the Federal Reserve is a complete farce because they always do the bidding of whatever political party happens to be in control. Because how did pal get appointed? He got appointed by a democrat. And how do you get reappointed? Will you help re elect that democrat. Now, the minute the party in power changes, well, now you flip, the Federal Reserve always tries to help the incumbent party because that's how it maintains its power. Now, one of the biggest hypocrites when it comes to inflation in the U. S.

Senate Elizabeth Warren, she was there and she was complaining to Powell about how americans are struggling with inflation. Yes, of course, they're struggling with the cost of government americans are paying for all the big government programs that Elizabeth Warren supports and votes for through inflation rather than taxation. Warren was particularly outraged at the higher food prices and the higher gas prices that americans were paying. Of course she attributes those higher prices to Putin and to price gouging. But she was asking Powell what he was hoping to accomplish by raising interest rates. And when Powell informed her how he was trying to reduce demand, she was very worried that this was going to cause a recession. And she basically wanted Powell to change his strategy because she said your rate hikes are not gonna do anything to bring down the price of food or the price of energy. But what they are going to do is bring up the cost of borrowing money, you're gonna raise people's mortgages, you're gonna raise the cost of servicing debt. And she said you might end up putting the country into a recession and so it's not worth it. Maybe it's better to have inflation than recession. And she was basically trying to push the Fed chairman into making that choice. And you know, I think one of the interesting things about this whole hearing today, we'll see if that changes tomorrow was that, to me pal kind of acknowledged that a recession was gonna happen.

I mean he didn't say that the Fed was forecasting one, but he didn't say that they were trying to avoid one pal basically said that our forecast is not for a recession And we're not deliberately trying to create a recession. We're trying to fight inflation. We've got to bring the rate of inflation down to 2%. He said if that ends up causing a recession well so be it because the number one priority is fighting inflation even if that fight results in a recession is something that we have to deal with because the bigger problem is bringing inflation back down to 2%. So to me, he's basically now admitting that it's really not even going to be a soft landing that he kind of knows it's a recession. He just doesn't want to come right out and say we're going there. But he's leaving the door open to the possibility and basically saying it's ok with the Fed we'd rather not have a recession but we need to get rid of inflation. And if that means that we have a recession then we're gonna have a recession. And you know, on another note when Powell was talking about the need to get inflation back down to 2%. In reality he's supposed to get it below 2%. Because if you recall when inflation was last below 2% the Fed wanted to change its policy because it didn't want to stick with 2% inflation because it wanted to create more. So it decided to change its mandate from 2% inflation to an average rate of inflation of 2%.

So the Fed was saying that because we had inflation below 2% for so long we needed to run inflation above 2% for a while in order to bring the average 22%. Well we've now been so far above 2% for so long and even if the Fed gets us back down to 2% it will take several years. Clearly if you spend a lot of time way north of 2% if you still want to have an average inflation rate of 2% you need to spend a lot of time south of 2%. So I think that whole idea of inflation averaging is gone. The Fed is not going to try to average inflation back down to 2%. So that averaging was only there because we had low inflation for a long time now that we've had high inflation, they're never gonna have a goal of sub 2%. So apparently that concept only applies if inflation has been too low. It never applies when inflation has been too high. One of the senators was concerned about how unaffordable housing is. You had a big increase in prices and now you have a big increase in mortgage rates. And so he asked Powell what the Fed is gonna do to make sure that the rate hikes don't make housing even more unaffordable. And of course there's nothing the Fed can do.

But there's something the market could do. Housing prices are going to fall. That's what's gonna happen if people can't afford to buy houses because the cost of borrowing money has gone up. Well, the only way you're gonna sell a house is if you lower the price and that is ultimately gonna happen, except a lot of people don't want to sell their houses because they don't want to give up their sweetheart mortgages that they've got. Thanks to the Fed thanks to the Fed keeping interest rates artificially low for so long. You've got so many people that have 3 3.5% mortgages, they're not selling. Not in a world where mortgages or 6% and going higher. So you've restricted the supply. And of course what Congress did. And I went over this on my last podcast, They really destroyed supply with their rent moratorium during covid by raising the risks of being a landlord and forcing a lot of landlords to withdraw their properties from the market. So instead of asking Powell, what the Fed is going to do to make housing more affordable. This senators should look at what the Senate can undo because it's the U.

S. Government that has pursued policies that have both increased the cost of home ownership and the level of rents. Then you got one of the senators who was particularly upset by the fact that not a single one of the Federal Reserve Bank Presidents had been hispanic and he really wants this oversight corrected somehow. He believes that the economic needs of Hispanics are not being represented because there are no americans of hispanic descent who are presidents of Federal Reserve Banks. Of course, there is no monetary policy that you can pursue that is tailored to an ethnic group. There is no monetary policy that is going to benefit Hispanics at the expense of anybody else. I mean every american benefits by sound money and every american suffers by unsound money. So all americans are suffering because of the irresponsible policies that were enacted by this Federal Reserve. It wouldn't matter if those same irresponsible policies were enacted by Hispanics, that wouldn't make it any less bad. And if we're gonna get good monetary policy, then it doesn't matter what ethnicity or what gender, what race or sexual orientation the people making that policy are, what matters is what policies are pursued. It's what these individuals no, not where they come from or what their background is. Yet for some reason, you have all of these senators that think that Hispanics would actually be better off that somehow the monetary policy would impact the lives of Hispanics to a better degree.

If somebody of Hispanic descent was pursuing the policy that is racism. But I think the most interesting question had to do with the losses that the Federal Reserve would realize as a result of its quantitative tightening program, where it is forced to sell securities into the market, most particularly the mortgage backed securities, because the Fed has said that it wants to completely divest itself of the mortgage backed securities on its balance sheet and just own US Treasuries. And one Republican Center pointed out that he thought the losses, I think in the MBS portfolio, maybe about $500 billion were the Fed to realize them. And so he asked Powell, if realizing these losses would in some way be an impediment to the Fed pursuing its policy with the Fed, be reluctant to sell securities to fight inflation because it would want to avoid those losses. And in fact, if the Fed really wants to get serious about fighting inflation, it's going to have to shrink its balance sheet rather dramatically. You're talking about a $9 trillion $1-2 trillion dollars of losses. If you were to shrink that balance sheet down to a size that would actually bring the inflation rate substation a ble back down to 2%. And pals answer was he couldn't care less about those losses. He said no, it doesn't bother us at all. We're not worried about losing $500 billion. No, big deal, nothing's gonna get in the way of us pursuing our policy. We couldn't care less.

And I thought that was a very cavalier statement. He couldn't care less about those losses because he personally isn't going to be paying him now. He did try to say, you know, in the past we've sent about a trillion dollars of profits to the U. S. Government. So if we have to start sending losses or you have to take the good with the bad, we're just offsetting some of the gains. See a lot of people don't understand but any money that the Federal Reserve loses on its balance sheet by selling securities that it bought at a loss. It sends a bill for those losses to the United States Congress. And that means the U. S. Taxpayer is on the hook for 100% of those losses. Now Powell pointed out that in the past as the Fed was doing quantitative easing and building up its balance sheet, it was realizing gains and it was giving those gains to the U.

S. Government which the U. S. Government spent. The U. S. Government used those gains to pay for the military to make Social Security payments for all sorts of general purposes. It was a windfall. But now they're staring at these huge losses. I think all those gains are going to be offset by the ultimate losses. But there are no line items in the budget right now. Nobody is prepared for this huge expenditure that is gonna be part of the federal budget for years to come.

It's going to be making up for losses at the Federal Reserve. This is going to substantially widen the budget deficits because none of these losses are included in the current projections for the budget. These are going to be all off budget items. None of this stuff is being accounted for. But of course we know it's there obviously the Fed is gonna take losses and we know that the US government meaning the U. S. Taxpayer is on the hook for these losses. So pal doesn't care about them. But average americans should care about them because they're a big deal. And by the way, how is the U. S. Government going to afford to pay these losses if the Fed is not they're bailing them out.

The Fed is not monetizing all this debt. Because if the Fed is shrinking its balance sheet and passing the bill for the losses to the U. S. Congress, the US Congress is gonna have to pay it on its own meaning it's gonna have to sell more bonds into the market, putting even more upward pressure on already rising interest rates. Or it's gonna have to raise taxes or it's gonna have to cut spending neither of those things it wants to do. But this is a huge problem that absolutely nobody is talking about. And even though it was right there for everyone to see even though a senator and pal specifically talked about this problem, it got exactly zero coverage in the financial media. Despite that this was the single most significant point that was made, and nobody is discussing the significance other than me.

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