The Bear Growls -Inflection Point
Let's see what's on the summer fiscal and monetary menu.
The Fed, Congress, and the economy are on a collision course.
The USA is clearly in a sustainable recovery mode after being ravaged by the forces known as COVID-19.
What's also becoming clear is that the looming economic debacle and impending inflation seem to be mostly man-made.
The massive amounts of money being distributed are unprecedented.
We are printing and infusing capital into our economy and by keeping rates low, we risk inflation.
Pandemic-inspired monetary & fiscal policy now threatens the objective.
The very policy has become the problem -
It soon may be the straw that breaks the bucks back.
Often thought to be the savior of our nation’s economy, low interest rates can indeed stimulate the economy & buffer a low growth phase or tough period.
But this balance is fragile...and that's why the markets wait on the Fed with such anticipation.
It's certainly not an easy recipe.
The Fed was looking to prevent a catastrophe and had to act to prevent a likely long-run depression.
The fed at this point is taking a well-deserved victory lap.
It was needed.
But the combination of the stimulus money and low rates has caused hyperinflation in many commodities and supply chains.
You can’t keep printing money, flooding the system with cash, and not expect inflation.
The banking system continues to be flooded with trillions in cash, and as result asset prices, and especially commodities have risen on that sea of liquidity.
Congress, never failing to fight the last war, continues to spend out of control.
It's time to change course.
It's time for the Fed to reduce its supports to congressional spending.
And it's time for Congress to do the same with fiscal policy.
It's time to start the long unwelcome tedious process of normalizing interest rates,
It's time to wind down the Fed's asset purchase program (which appears to be unlikely as of this writing)
Since, the financial crisis 12 years ago, the Fed has relied on Quantitative Easing to prop up congressional spending and the stock market.
The Fed has flinched at every attempt to reduce its supports when markets objected. (And politicians)
We learned a valuable lesson After the Federal Reserve brokered the famous bailout of Long-Term Capital Management.
Since that time, it has been clear that the Fed will overplay and overstay its corrective policies in the support of asset prices.
Striking a balance is never easy, and once a new policy is enacted, just like a cruise line on the high seas, it can take time before the ship changes course.
This time, it looks like there's too much punch at the party- and the hangover is coming.
What will inflation look like? Try filling up your car or converting your basement into a game room.
At some point, the Fed and Congress will see the light and act, but as usual not soon enough.
It's looking more and more like they will only act after they get blinded by the light.
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