What if They’re Wrong? – Daily Reckoning Australia

What if They’re Wrong?

Last week, Massachusetts signed onto the Great Transition crusade. From The Washington Post:

Described as a “landmark bill,” the Massachusetts climate legislation notably includes a provision — the first of its kind for the state — that would allow 10 municipalities to legally ban fossil fuel infrastructure in new and major construction projects. With this policy, certain cities and towns in Massachusetts could soon join others across the country that have taken similar steps to change local building codes to block the use of fossil fuels, such as natural gas — meaning many people who want gas stoves or furnaces are probably out of luck in these places.

What if they’re wrong? What if trying to change the Earth’s climate is a wild goose chase?

The Pentagon was in the news last week too. In what CovertAction calls the ‘Most Bloated Military Budget in History’, Democrats and Republicans joined hands to deliver defence contractors a US$850 billion payday — a US$45 billion increase.

Supporters say the US needs to spend such huge amounts of money to counter the many threats they’ve managed to stir up — Russia, China, terrorists, gender inequality!

A lifetime setback

But what if they’re wrong? What if all that spending actually weakens the US economy…frightens foreigners…and causes potential enemies to ‘gun up’ themselves?

Terrorists…Chinese…Russians — aren’t we pushing them to find new forms of money…new weapons…new friends?

What does it matter if you’re wrong?

Marry the ‘wrong’ person, for example, and you might dread every breakfast.

Making the wrong career choice, too, could be a lifetime setback.

In matters of public policy, the consequences of wrongness are directly proportional to the ambition of the undertaking. Generally, the grander the project, the greater the damage. Many public policies are just reflections of a consensus — drive on the right (in the US)…don’t throw trash out the window — and do little damage.

Otherwise, they’re threats to life and property. They impose the fads of the ruling class upon everyone else and divert time and resources from what ‘the people’ actually want.

Does that make sense? We hope so; if not, we’d have to revise our entire weltanschauung.

And now…you’re faced with a choice. You can believe the ‘inflation has peaked’ narrative, for example. If it’s true, the Fed can now ease off its ‘tightening’, and soon return to doing what it does best — inflating.

If so, you might want to load up on stocks now…counting on a repeat of the money printing, interest rate falsifying, bubble extravaganza of the last 13 years.

But what if you’re wrong?

Of course, you could be wrong in either direction. If you stay out of stocks, you could miss another big upswell. But if you jump in, you could get whacked…losing half your money. Maybe more.

That which we do not know

We have no idea whether stocks are going up or down in the short term. Nor do we know what will happen to prices of consumer items. But we don’t sweat the small stuff…nor fret about things we cannot know. Will we be happier if we lower carbon emissions? Should the people of the Donbas be free from Ukrainian control? Will Bitcoin [BTC] go back to US$30,000? Darned if we know!

What we aim to do here is to look at what OUGHT to happen. We connect the dots to see a bigger pattern — the Primary Trend. If we get that right, we won’t worry about the ups and downs along the way.

Since the late ‘90s, the primary trend has been driven by two things. First, Fed liquidity boosted asset prices and queered the entire economy. Second, globalisation (or more particularly, the entry of hundreds of millions of Chinese into the world’s manufacturing economy) helped to keep consumer prices down.

Now, it looks as though both of those things are played out. There aren’t many more peasants moving to the cities to find work, and the feds seriously disrupted output with their COVID lockdowns, stimmy cheques, and other measures. Those drinks have been poured; they’re not going back into the bottle anytime soon.

This puts the Fed in a tight spot. It’s ‘inflate or die’.

It can’t ‘inflate’ because it would risk runaway inflation. (Gasoline, for example. Even after the price decline of the last month, it is still 50% higher than it was last year. Producer prices ‘in the pipeline’ are still going up at nearly 10% per year.)

Since it can’t inflate, the bubble must die. And the Fed is puncturing it, with tiny daggers…50–75 basis points each. The Fed Funds rate is still about 600 basis points (6%) below the CPI (now 8.5%). It needs to get ahead of inflation…not tarry 600 basis points behind. Otherwise, it has no rates to cut in the face of a recession.

And if it stops raising rates, or even reverses course as the recession deepens, consumer prices will go up…and the whole system risks going into an Argentine-like chaos.

Either way – killed by inflation or by rate hikes – the Primary Trend of the last 35 years is a goner.

It will be a long, slow, on-again, off-again, confusing show. Stocks will slump. Then they will bounce up again. Consumer prices will go up…down…and up again. ‘Experts’ will be right…and wrong.

Only years from now will we see the new primary trend clearly.


Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia

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