Where's the Money Going?

Where's the money going to be tomorrow when reality is nothing like today? Inflation. War. A high-tech economy. The first one to know is a billionaire.

David Ben Horin                

A magician asks where is the money?

The 1970s stagflation era. That was an entirely different world, and certainly different kinds of markets. There were no ETFs back then. Mutual funds were a new idea and the 401(k) hadn't been invented yet. Online trading was science fiction. So, it's hard to visualize how that kind of recession will combine with today's kind of markets. We haven't seen anything like it.

When I was in basic training, every moment of my life was accounted for. I woke up at a specific time. I went to brush my teeth at the same hour. Cleaning my gun took place at the appointed moment. Daily runs would be within a certain frame. For some tasks, we had an hour to complete. For others, our commanders gave us a few seconds.

Every moment I was in uniform, I was part of a mission.

In guarding freedom, there was no such thing as free time.

After a while, you become programmed to it. You expect your day to be dictated to you, second by second. You don't know what comes next, but you always know something comes next.

Until field week. On day three of maneuvers, there was a mixup in logistics. Our commander needed to back up another unit. It took him twenty minutes to set everything straight.

For those twenty minutes, we had no standing orders. Those 1,200 seconds was unaccounted time.

We stood there in bewilderment, not knowing what to do.

It was kind of like this:

There is No Plan for the Next Moment

We have no historical measure to tell us what comes next.

We are dealing with an economy where demand has been artificially pumped up beyond the economy's ability to supply. This means full employment. It means wage inflation.

We have an inverted yield curve telling us that under no circumstances should we raise rates. We are at the end of an enormous monetary expansion.

The plan for 2022 was like a month in basic training. The powers that be planned everything to a tee.

We would gradually raise interest rates and stop injecting new money into the system. Supply bottlenecks would slowly subside as would inflation by Black Friday.

I guess Vladimir Putin only likes economic plans to take place in Russia.

Ukraine and Russia account for more than a quarter of the world's wheat and half of Europe's energy. Sanctions mean prices for both food and energy will be on the rise for the foreseeable future.

When the bond market is telling us the worst course of action is to raise interest rates, we are at the cusp of a series of what looks to be 6-7 rate hikes of 50 basis points or more.

We either raise rates to stop inflation or we let it be and prices continue to soar. It will take time for the increases to be enough to make a dent and kick in. Even if Fed Chair Powell does pull on the breaks, you cannot stop a supertanker on a dime.

Where’s the Money Going? I Have No Idea

In 1975, US debt accounted for 32% of the size of its economy. In 2021, debt was 137% of GDP. A 1% rise in interest rates can add $200 billion to the American yearly budget deficit.

What comes next if the Fed cannot print more money due to inflation and raising rates will blow out its budget?

Maybe nothing. Perhaps we can afford to go farther off the cliff this time.

In 1975, there was no globalization. There was no internet. There were no computers, email, even portable phones. Productivity gains over the last half-century have been greater than at any other time in human history – combined.

In 1975, the economy of China was smaller than Italy. They didn't have the manufacturing capacity to export deflation to the world. There was no technology to export deflation.

Will there be a terrible recession to clean out all the excesses of the last forty years or are we a lot stronger than we think? Could it really be different this time?

Will the forces of deflation led by China, debt, and technology keep things from getting out of control? Will too much currency in circulation, a supply crunch, and war in the breadbasket (and oil well) of Europe create the first serious inflation crisis since Angelina Jolie was an infant?

Do we rush into hard assets or are there inflation-prone alternatives?

Stay tuned.

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