My suggestion to you, Chair Powell, is “Stop Hiking Rates and Tighten Credit Instead.”
The above suggestion of what the Fed should consider does not mean it would be painless. Once big inflation has been caused by central banks, which are the only durable sources of inflation, it cannot return to normal levels without great pain, especially to those who are uninformed.
Of course, the big smart money knows how to profit from adverse consequences. As one member of Congress pointed out recently, a 10% unemployment rate could occur based on financial history.
As you may know, the inverted yield curve is now the steepest since 1981. Around that time the Fed Funds rate was a massive 20%. That would suggest that currently the Fed is far behind where it should be if it wants to kill high inflation.
In your Tuesday, March 6th, 2023 testimony before Congress, you said that new data shows interest rates will go have to go higher than they had previously thought and that these higher rates will last longer.
We wrote that a year ago when we called the Fed’s outlook a “fairy tale.” Many analysts were and still are talking about a “pivot” with the Fed lowering interest rates, or a “soft landing,” or “no recession.”
Of course, in forecasting, we have to make informed estimates about what the next big mistakes of central banks will be. We can’t predict with certainty what even they don’t know. The Fed and other global central banks say they are “data dependent.” No forecasting required.
About 10 years ago, central banks in Europe did something “unpredictable.” For the first time in world history, they pushed interest rates, via bond yields, below zero. In effect, the buyer of government bonds had to pay for the pleasure of lending their hard-earned money to the government. Ridiculous? Well, it happened.
We warned at the time that eventually the yields would have to rise from below zero to market rates, such as +3-5%. We said that this would lead to a substantial decline in the value of bond portfolios.
That has happened now as EU bond yields are approaching 3%. The losses for investors of these bonds are probably in the billions of euros. This could very well lead to the next round of central bank bailouts.
Now analysts say the “inflation is still stubbornly high DESPITE the rate hikes.”
That is evidence that they have no idea about what causes inflation.
We have written for 45 years that central banks always make the same mistake, or “intent,” by hiking rates in order to get inflation down.
For investors it is important to never think that central bank policy makers know more about the economy than the owner of a small business. In fact, going against their decision is the better strategy.
Our work of over 50 years shows that hiking rates exacerbates inflation. Only tightening credit without hiking rates can reduce inflation.
Demand has to be reduced by making loans harder to get. Current central bank policies, which include the Fed’s policies, are actually stoking inflation.
Without such tight money, smart people continue to borrow in order to buy assets because loans with interest rates below the rate of inflation is “free money.” That is why luxury real estate has had big price increases the past year, while other types of real estate are not doing that well.
One example of how not hiking interest rates helped reduce the rate of inflation comes from Turkey. Recep Erdogan, President of Turkey, understands this. In March of 2021 he fired his new head of the central bank when he embarked on interest rate hikes to fight inflation.
Erdogan doesn’t believe in this “orthodox medicine” and counter-productive process of hiking interest rates.
Now, two years later, we see that it probably worked. The stock market in Turkey soared from late 2021 to one year later by an amazing 125%.
What did the rate of inflation do after the interest hikes stopped? It declined. The table below shows that the monthly inflation rates in Turkey declined from 11% per month to just over 1% one year later (table via inflation.eu).
So then they use “annual inflation,” in which each monthly inflation rate is tagged onto the ones before. On that basis, inflation is still high, but it has not continued to rise at an ever increasing rate.
The stock market in Turkey celebrated this and soared about 154% from its 2021 low in about 14 months.
This occurred at a time when the US stock market started a bear market. See the weekly chart of the TUR (Turkey Investable Market ETF) compared to the S&P 500 Index below:
Of course, no economist dare mention this, even if by accident they know the facts (which we don’t think they do). True research, as we have done since 1977 and continue to do at Dohmen Capital Research, has become an obsolete skill.
Now everyone you see on Financial TV just quotes everyone else without verification, and they usually quote those who have a conflict of interest. We have no conflict because we don’t manage money.
One effective filter is to take news out of Washington and believe the opposite. Everyone seems to think that hiking interest rates is “tightening,” which will lead to lower inflation. The opposite is true, believe it or not.
President Recep Erdogan of Turkey knows this and proved the point. He was strongly criticized by economists around the world. But he has a strong will. Economists of course won’t look at the decline in “monthly” inflation, as that proves their economic theory is wrong.
Another example: When Margret Thatcher became Prime Minister in Britain, inflation was soaring double digits and the Bank of England continued to hike interest rates. We wrote a letter to Mrs. Thatcher at that time and advised that the rate hikes were fueling inflation. In that letter we suggested she should get the Bank of England to stop hiking rates and start reducing them. We predicted that this would reduce the rate of inflation.
We don’t know if she ever read our letter, but that is exactly what she did. Soon the inflation rate started plummeting.
Wouldn’t you think that our 400 over-educated Ph. D. economists at the Federal Reserve would know this? It is logical. Interest rates are a cost of doing business and are thus tagged onto the price of goods and services. To pay for that increased cost, individual and businesses just borrow more money because interest rates are still below the level of inflation.
Mr. Powell, you said late last year that “interest rates across the entire spectrum would have to go above the rate of inflation.”
That is correct, however, analysts and economists don’t seem to remember that. Is it because this is an “inconvenient” fact? Instead the majority of analyst talk about a “Fed pivot,” totally ignoring what you had said.
Perhaps their forecasts are “political” and not derived from historic facts. One big “fairy tale” from government is the labor number of January 2023. The “official” number for jobs created in January was 517,000. We said that was impossible (read our recent article Why the “Bullish” Employment Report is Complete “BS”).
So we went to the website of BLS that creates the numbers. Lo and behold, it revealed that actually 2.5 million jobs were lost. The 517,000 “jobs added” were “seasonally adjusted” and had various other adjustments to produce the “politically adjusted” number above.
Incredibly, every economist and analyst we hear in the media talks about the “robust job market” as shown by the BLS. Why don’t these people take 15 minutes and go to the BLS website? Do your 400 Ph. D. economists use true numbers, or “adjusted” fake numbers?
This coming Friday, these “adjusted numbers” for January will be revised, along with further revisions later this year. The uninformed investors will be shocked to learn that the job market is actually not tight, true unemployment is soaring, and stock prices are much too high for a recession.
The shock to the stock market could be enormous.
We tell our valued clients and readers: Be skeptical of any “official” comments & data and always verify! People have lost confidence in everything they hear from officials, whether at the national, state, or local level. Fake news, corruption, and crime is everywhere.
That is how all great societies end.
Bert Dohmen Founder
Dohmen Capital Research
P.S. to learn more about our investing strategy amid rising inflation and how our members have been successfully navigating this environment, get our latest report “Surviving Soaring Inflation – The Opportunity of a Lifetime”.