For the Events Horizons section of MarketShadows “As Far As the Eye Can See” (10/14), I interviewed the extraordinarily gifted blogger, Jesse, of Jesse’s Cafe Americain, to see what he thinks lies ahead.
Ilene: Jesse, thank you for doing another interview with me. I’m continually learning from your rational, and brilliant, insights into the markets, and more importantly, the human nature upon which they are built. It’s always a pleasure to explore your thoughts as events unfold.
Previously, when we discussed ‘flations, you believed we were heading into a stagflationary period. Not hyperinflation–you didn’t think prices would spiral up uncontrollably. Has the Fed’s new QE-Infinity program changed your mind?
Jesse: No, not at all, QE infinity was always within expectations, because of the way in which it has been constructed, in addition to the failure of the fiscal side of the house. The President and the Congress control fiscal policy, and the Fed controls monetary policy. “Fiscal” is how the government obtains and allocates money. It also involves setting priorities, tax policies, tariffs, etc. Fiscal policy is failing to do its part to reform the system that caused the financial bubble and collapse in the first place, and the Fed is manipulating monetary policy and its regulatory powers largely in the service of the financial sector.
Hyperinflation would result from a precipitous loss of confidence in the US dollar against some other measure. What is the dollar to be compared to? Europe’s Euro? China’s Yuan? The US has the cleanest dirty shirt. Gold and silver are lightly owned, and much afflicted by the status quo. But still they are greatly feared by the financial engineers. The Anglo-American financial cartel is adamantly opposed to changes in the SDR, or anything else that threatens the dollar currency regime. But it is eroding through bilateral and regional agreement. So things change slowly, for now.
High inflation does not equate to hyperinflation, and we do not have high inflation yet. The Fed is effectively bottling up its money printing within the financial sector, as indicated by the heavy growth in banking reserves and the very slack velocity of money supply.
Effectively speaking, the monetary and fiscal stimulus has been designed to prevent further deterioration from the bottom. The Fed’s monetary stimulus is primarily another bailout to the effectively insolvent Wall Street banks. The flip side of this is the slack growth in GDP and the low growth in the median wage.
The Fed stabilized the patient, but the patient remains in the ICU because the doctors cannot agree on the treatment. And of course, the medical directors are stealing the medicine and selling it on the black market. So we have quite the dilemma.
Ilene: Would you describe the economic condition as “stagflation” now?
Jesse: Yes, given the very low GDP and employment growth, and the inflation. The inflation, while not presenting itself broadly, is rather high in necessities like food, healthcare, and energy. It is not very pronounced but that is what I would call it. I would also accept “stagnation” for those who are fussy about how to measure inflation.
Ilene: Will this continue?
Jesse: Yes, stagflation, as far as the eye can see. It will take policy changes or an exogenous event to get us off this low growth track wherein the vast majority of the income goes to the top 1 percent. How people can look at this arrangement and see anything good or sustainable shows how far we have strayed. I have looked over John Williams’ scenarios again, and I don’t see the case for hyperinflation unless there is a significant exogenous event like an oil embargo or a war. It could be economic or military, but war is ahead in the path we are taking now.
Ilene: I’ve read many contradictory arguments about the economic numbers – good, neutral, bad. What do you think? These numbers are more tied to the economy than to the stock market, but investment-wise, a combination of the Fed’s action and the economy affects our options. What do you expect for the economy, and for the stock-market?
Jesse: I think the economy itself will continue to suffer from weak aggregate demand, which is no surprise because most consumers are hurting. Weak median wage growth goes back to before NAFTA, but people were able to turn to the tech and housing bubbles for additional income. Now that those have failed, we are up against the wall, for the most part.
The stock market is going to inflate IF the Fed steps up its monetization beyond supporting the banking system by subsidizing its mispriced assets. But earnings may provide significant headwinds to equities, and companies are sitting on record amounts of cash overseas. Global trade is failing, as well it should. It is a rigged game.
Ilene: Will the QE-Infinite money supply flowing from the Fed to the primary dealers end up raising the stock market, or will equities eventually selloff due to a poor economy–what wins: liquidity or fundamentals (if they even matter)?
Jesse: It depends on policy decisions. That is what make this so damn hard to forecast.
Really, it is an extremely difficult time for investors. The financial predators have effectively destroyed most of the normal market mechanisms, both international and domestic. Good investments are difficult to find and assess, due to improperly priced and hidden counter-party risks.
Ilene: Several other very popular financial bloggers argue that we are in a recession. Do you agree?
Jesse: No, we are in a sluggish recovery. I don’t think we will fall back into recession unless we do something quite senseless, like austerity.
Ilene: Do you have any ideas on fixing some of our nation’s biggest problems, such as the health care system?
Jesse: A modified single payer system that provides good basic healthcare with prevention. The notion of forcing private companies to provide insurance from monopoly health providers and suppliers, many of whom are vertically integrating the supply chain, is almost unbelievable. The US has a very good healthcare system for some, but overall it is about 30 percent overpriced and highly inefficient. People without access to affordable insurance are forced to use emergency rooms. That is expensive and ineffective.
Most of these problems come back to political and financial reform. Everything stems from that partnership between politics and big money that blossomed under Clinton and reached its maturity under Bush. Obama is a huge disappointment in this regard. I am not quite sure why, but he is, and the Democratic party stopped functioning as a balance to the increasingly rigid Republicans. The solution is a real reformer. It would take a Roosevelt, either a Franklin or a Teddy, to put the corporations and monied interests back into balance with the rest of the country. That might require a third party movement, and the system is heavily set against it. Just ask Ross Perot what it was like.
Ilene: You’re not very optimistic that a true reformer will show up and begin the process?
Jesse: No, and I am increasingly concerned that the powerful few are going to provoke a false flag or some draconian response to even modest and non-violent demonstrations. That will remind us that the reforms of the 1930s were born out of some serious conflicts that we have not seen in the US in quite some time. Typically these historical cycles overshoot, and this case looks to be no different.
What will provoke that change I cannot see. What that change will be I cannot say yet.
Ilene: Wait and see?
The credibility trap is preventing genuine reform, and the financial system is continuing to distribute the bulk of all new income growth to the wealthiest few, which leaves the vast middle with little discretionary income to fuel demand and organic growth. It is a false equilibrium, but these can last for a decade or more. It really depends on what causes things to change. But change will come.
Visit Jesse at the Cafe Americain. Previous interviews:
This week’s Market Shadows Newsletter, “As Far as the Eye Can See,” features Chris Vermeulen and Springheel Jack on Gold and Silver, Lee Adler on Sentiment, and Mish Shedlock and Bruce Krasting on Currency Wars.