31. When Dementia Replaces Meritocracy – Enjoy August, October is Coming
July was probably an historically important month. It has been reported that the Department of Justice was busy trying to figure out to “fix” their Hunter Biden problem. If they allow Hunter to be indicted, they have to indict Joe Biden and the rest of the Biden Family. For some reason, following the law is not allowed. If the situation was not so serious, it would be entertaining.
Of equal historical significance to the real world, according to one financial analyst, July saw the destruction of $20 Trillion in value of global commodities, stocks, and bonds. For comparison purposes, the 2021 Global GDP was $96 Trillion. Unlike the beginning of The Great Recession, this financial collapse began in China’s real estate market and is now shifted to global financial assets. The pain will spread to the American real estate market.
Officially, inflation in June increased to an annual rate of 9.1% but inflation at the wholesale level was much higher than the official Consumer Price Inflation (CPI). That suggests that the rate of inflation will probably worsen. Because their wage increases are less than inflation, consumer has eliminated most consumption except for food and gas. On an inflation adjusted basis, sales revenues have declined.
The price of gasoline increased so fast that it reduced the demand for gasoline by almost 10%. That reduction in demand got the supply vs demand curves closer and the price of gas fell. The lower price is temporary because there is a shortage of oil production, the lower price will spur more demand, then prices will rise to rebalance, etc. Because of Biden Administration policies, the continued lack of capital investment by oil and natural gas companies will further tighten the global supply demand equation. One oil analyst is predicting a barrel of oil hitting $200 in 2023. That would mean a gallon of gasoline will cost $9 – $10 and natural gas prices soaring. More inflation will result.
In July the stock market cheered The Fed raising their Federal Funds Rate by 0.75%. Apparently financial market analysts think that The Fed has done enough destruction of demand (Recession) so that the rate if inflation will decline to around 4 – 5% by the end of this year. Therefore, the financial analysts believe The Fed will start reducing interest rates after the first of the year.
To me the financial market analysts believe in the Tooth Fairy. The talking heads keep saying we cannot be in a recession because of low unemployment, etc. They are simply revealing that their skill is reading a teleprompter. The stock market rally is the result of the still historically low Federal Funds Rate of 2.5%. Get that rate up to 4.5% and it will similarly increase the discount rate for stock valuations which will reduce the perceived value of stock and result in a “correction”. That could occur in October when the third quarter financial results are reported.
Employment is a lagging indicator of the economy. The layoffs will appear this fall. In the real estate market, the almost doubling of mortgage rates from 3% to 5.5% has impacted new home sales. The pace of sales of new homes and resale homes is down. New homes sales are a significant economic leading indicator.
The reports from China confirm its economy is melting. Military tanks guard some banks to protect them from angry depositors, the real estate market has collapsed and will become a black hole. Neither China nor the USA have leadership that comprehend even basic economics. The USA is currently led by people with degrees from formerly great American institutions who are totally inept (a nice way of saying dumb as a box of rocks), which radically increases the risks.
Russia and China have announced they have set up a new reserve currency to replace the Dollar. Its value is to be based on a basket of commodities. This is one of the last steps required to complete Obama’s promised fundamental change of the USA, the end to Pax Americana, and it will negatively impact the American economy.
I listened to one investment manager that checks all the right boxes but is totally into Environmental and Social Justice (ESJ) investing. He is a proponent of the “Biden Administration transition” to an all-electric, no fossil fuel future. He should be good with numbers and logic but he has not calculated that to meet our current electrical needs would require (1) a completely up graded electric grid which would take decades to build (2) the equivalent of five Midwest states TOTALLY covered with solar panels, (3) but they only work when the sun shines so the cost of electricity will triple (per Germany’s experience), and (4) without any food production from those five states we will not have enough food. In other words, his utopian world is actually Americans living in the dark, hungry, and cold.
I am not interested.
Here is the highest probability economic forecast for the USA.
- By the end of 2023, the financial markets will witness continued inflation, increased energy prices, and The Fed raising interest rates leading to a selloff in the stock market.
- During the continuing energy crisis, the USA will experience a stagnant economy (growth requires increases in abundant and inexpensive energy) and more high inflation due to higher energy prices.
- To cure the energy shortage will require five years of capital investment which will only occur AFTER we install an administration (2024) that is fossil fuel friendly. It will take another year for the requisite legislation to pass to make the changes we need.
- That combination means 2024 plus 6 years is 2030 when economic recovery begins.
Remember my description of heading into the Bermuda Triangle during a category 5 hurricane on a little sailboat with a senile captain? I am an optimist.
The number of tracts of land on the market is approximately 30% of normal but there is reasonable demand. Commercial banks are getting cautious which is creating serious cross currents in the residential land development market.
Retail land is recovering from the pandemic, but buyers are value hunting. No one is inquiring about office zoned land. The Industrial Market is driven by land zoned for distribution centers – primarily 50-150 acres sites but even here we are finding caution as investors becoming wary of a severe recession.
Please pray:
- That God exercises his control over our government at all levels.
- For the “Forgotten 599” surviving Americans being held as political prisoners by Biden and the Demented Marxists in hell hole conditions in the DC Gulag.
- For honest elections because without them we are not free.
- For the valiant Ukrainians.
Let’s Go Brandon!
(2 Timothy 1: 7) New Revised Standard Version, Oxford University Press)
Stay healthy,
Ned
August 3, 2022
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