The Fed Is (Still) Clueless
- The Fed is (still) clueless
- “Spooky season” for stocks
- Central bankers shop ’til they drop
- McDonad’s jingles all the way
- Postscript: EVs and BS
The Fed Is Clueless
“The Fed will leave its target rate for fed funds unchanged at 5.50%,” says Paradigm macro authority Jim Rickards, referring to the FOMC policy meeting today.
“Over the course of 13 FOMC meetings beginning March 16, 2022, we’ve been correct in all our forecasts including the ‘skipped’ rate hikes at the June and September 2023 meetings.”
During his press conference at 2:30 p.m. EDT today, Jim believes Fed chair Powell will telegraph whether the Fed has reached the terminal rate — “the rate at which [prior] interest rate hikes will do the job of lowering inflation to the Fed’s target of 2.0%.
“Of course, the Fed will leave itself some wiggle room,” he says. “If inflation gets worse instead of better as the Fed now expects, they reserve the right to raise rates in the future. But as of now, they do not expect that to be necessary.
“This does not mean the Fed will cut rates anytime soon,” Jim emphasizes. “The famous ‘pivot’ is still a Wall Street pipe dream. The Fed will cut rates someday, but as of now, a mid-2024 pivot date seems most likely.
“There are several serious problems with this policy…
“The Fed’s fight against inflation is not over,” Jim says. “It’s undeniable,” he says, that the Fed has made headway — “the Consumer Price Index (CPI) has cooled off considerably since the peak of 9.1% (annualized) in June 2022.”
However, according to the Fed’s favorite inflation measure, core PCE, we’re still entrenched above the Fed’s 2% inflation target.
“The Fed is betting… if a mild recession is on the way, then inflation will come down on its own,” says Jim.
“It’s not true that recession is the cure for inflation,” he adds. “It’s entirely possible that inflation can have a life of its own even in a recession.
“The second problem is that the Fed is relying on long-term rates to do the dirty work of killing inflation,” says Jim.
“The Fed controls short-term rates through its fed funds target rate, also called the policy rate,” Jim explains. “[But] as investors move to U.S. Treasuries with longer maturities, the influence of the Fed is diminished, and the influence of market forces increases.
“The 10-year Treasury note currently yields 4.875%. Long-term inflation expectations are around 2.5%. The difference between the two is called the ‘term premium.’
“A term premium of 2.4% is high by historical standards,” Jim says. “The Fed is counting on the high term premium in long-term rates to slow the economy and reduce inflation without the Fed having to raise the policy rate on short-term rates.”
Nonsense, says Jim. “If yields are higher, it’s because the market is experiencing some supply-and-demand imbalance” — for example, “institutions hoarding the notes instead of trading them actively, hedging activity, etc.
“In short, there’s a reason for higher yields in the longer maturities, but it has nothing to do with the Fed’s invented concept of a term premium,” Jim claims.
“The bottom line is that the Fed doesn’t really know what it’s doing,” he says. “That’s one more reason to be concerned that inflation may return even if the economy is in recession.”
[As this issue hits your inbox, the global economic war will be in full swing.
And if you have money in the markets or dollar-denominated assets you need to protect…
Then I suggest you watch this now.
Because after MIDNIGHT, you may not get a second chance.
View Jim Rickards’ urgent warning now.]
“Spooky Season” for Stocks
“It’s spooky season — and slippery stocks are starting to scare the pants off investors,” says Paradigm’s chart hound Greg Guenthner.
“The absence of new highs, poor breadth and sluggish action is taking its toll on the bulls. It’s gotten so gloomy out there that World War 3 and Black Monday have been trending on social media.
“Last week’s action was especially difficult,” Greg notes. “The S&P lost 2.5% to close at its lows on Friday, hitting levels we haven’t seen since late May… The large-cap index has dropped more than 10% from its highs.
“While we’ve yet to witness a significant breakdown,” he says, “the averages remain mired in a choppy, sideways trend.”
Stocks today are making a nominal comeback, with the Nasdaq leading the way. The tech-heavy index is up 0.60% to 12,930 while the S&P 500 has gained 0.40% to 4,200. In last place, the staid Dow is up 0.20% to 33,100.
And on the last day of October, we wondered if the powers that be would allow gold to set a monthly close over $2,000.We got our answer…
Gold today? The yellow metal is down 0.25% to $1,977.80 per ounce, according to Kitco. At the same time, silver’s down about 0.80% to $22.60. Crude, on the other hand, is up 1.50% to $82.23 for a barrel of WTI.
- October’s ISM Manufacturing Index shows PMI fell 2.3 points month-over-month to 46.7, badly missing the 49 economists anticipated. If you recall, a number below 50 indicates contraction of the manufacturing segment of the economy.
“Demand remains soft, but production execution is stable compared to September as panelists' companies continue to manage outputs, material inputs and — more aggressively — labor costs,” says ISM chair Timothy Fiore.
Finally, the crypto market is in red. At the time of writing, Bitcoin is down 0.25% to $34,415 and Ethereum is down 0.60%, just $2 shy of $1,800.
Central Bankers Shop ’Til They Drop
“Central banks have loaded up on more gold than previously thought this year,” Bloomberg reports, “offering crucial support to prices that have faced pressure from global monetary tightening.
“Countries expanded bullion reserves by 337 tons in the three months through September, the World Gold Council said in a report Tuesday. That follows an increase of 175 tons in the second quarter, which was bigger than the council’s previous estimate of 103 tons.
“Central bank purchases for the first nine months of the year now total 800 tons, driven mainly by China, Poland and Singapore, as well as unreported buying.” Erm… Russia?
“The pace has exceeded the amount for the same period of last year,” Bloomberg concludes, “which ended with record demand.”
McDonald’s Jingles All the Way
“Two All Beef Patties, Special Sauce, Lettuce, Cheese, Pickles, Onions on a Sesame Seed Bun” — went the ubiquitous jingle for McDonald’s Big Mac. But a uniform price for the burger is not at all ubiquitous.
On Monday, McDonald’s reported its revenue for Q3 was up 14%, a surge the company attributes to “strategic menu price increases.”
The New York Post notes: “McDonald’s — which has 13,513 restaurants in the U.S. and over 38,000 abroad — did not disclose how much the franchiser has increased its prices, which generally vary between locations.”
While prices vary from location to location, during Monday’s earnings call, CFO Ian Borden confirmed the company has categorically raised menu prices 10% this year… on top of 10% price hikes last year.
So might this be the most expensive Big Mac in the U.S.? “One branch in Darien, Connecticut, charged as much as $18 for a Big Mac combo meal, which includes medium fries and a medium soft drink.” the NYP says.
It’s official: I’m getting old… And inflation is out of control.
Postscript: EVs and BS
“I appreciate your response to my comment, but I still think you’re reaching with your $17 per gallon equivalent,” adds our BS-calling reader.
“First, the government uses monetary incentives in many industries, supposedly for the benefit of the public (of course, we know who usually benefits). Of course, Tesla is benefiting from the climate change scam, but Tesla would be foolish not to take advantage.
“Assuming 200 million taxpayers, I'm paying 1/200,000,000 for the taxes and getting the benefit of the subsidy; those driving ICE cars are not getting the benefit while paying for it. That is irrelevant to the cost of ownership.
“I can buy a BMW ICE for $100K or I can buy a BMW EV for $100K. If I drive 1,000 miles it will cost $333 in gas (15 mpg x 66 gallons) or $33 in electricity charging at home after midnight (333kWh x 10 cents/kWh).”
Emily: I spotted a flaw in our reader’s math: Today, the average price of gasoline in California — where our reader resides — is $5.24 per gallon, according to AAA. Using his 66 gallons, then the total cost of gas would be $345.84. (If I were trying to make an argument against EVs, I realize, I just shot myself in the foot.)
Even so, here’s another nit to pick: That 10 cents/kWh is suspiciously low. From what we could find, the average rate in California is more like 30 cents/kWh.
But back to our reader…
“Insurance might cost more for an EV, but no oil changes, no smog, no pollution (hydroelectric) and a ton of other benefits. Registration might cost more because the states add a surcharge because they are not collecting gas tax.”
Emily: That’s a big assumption: “no pollution (hydroelectric).” Citing the Energy Information Administration (EIA), about 60% of the electricity generated in the U.S. was from fossil fuels in 2022. Only 6% of electricity was generated by hydropower.
Our reader notes: “People have been buying Teslas since 2012. There is a reason the Model Y is the most popular car in the world. That might be a good angle for you to write about.
“Here is another idea for you: What if terrorists take out all the refineries (not many exist) at one time? Also, go to a Tesla dealer and test-drive a Model S or X.”
Emily: Both Dave and I have been passengers in Teslas (the models escaped notice). I’ll certainly give the Tesla cool-factor points, but Dave thought the vehicle’s fittings were flimsy and cheaply made. Just sayin’.
To my knowledge, we’ve never explored a terrorist attack on refineries; we did, however, report attacks on electrical substations last year.
Speaking of risks to the grid, here’s something we related in 2014 — a report issued to the Federal Energy Regulatory Commission. It spun a harrowing tale in the event that saboteurs were to strike: “Destroy nine interconnection substations and a transformer manufacturer and the entire United States grid would be down for at least 18 months, probably longer.”
That’s just nine substations out of 55,000 total nationwide. Assuming oil refineries would be offline, that would sideline ICE vehicles and EVs alike.
On that rosy thought, we bring our issue to its conclusion today. Until tomorrow, take care!
Best regards,
Emily Clancy
Associate editor, Paradigm Pressroom's 5 Bullets
