Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
Today, we have questions on how to negotiate all the “narratives” we read and hear in the media, the Fed’s real end-game, and how to solve the water crisis…
So let’s get started… with this note from Janice, who is understandably bamboozled by all the theories being touted in the mainstream media…
My question today is about the multiple narratives flying around right now about the potential near-future of our economy and the markets.
Some say that a dramatic market crash is coming and that the narrative about upcoming market rebounds are programmed and false and intended to lure people into the markets so that they are financially crushed.
Others say that a market rebound will likely be stimulated by the Jackson Hole Summit and that the narrative about a looming market crash is programmed and false. They say it’s designed to keep smaller investors out of the market and away from large potential gains.
Others say the markets always rebound eventually, that no one can predict timing, and all you can do is dive in now and hang on for the long term.
One thing I do believe is that narratives are controlled and used to manipulate “the masses.” But I am going nuts trying to determine which narrative to trust.
I want to know what your response to this is, specifically about programmed false narratives.
Is it just the mainstream financial media that we need to be distrustful of? Or are there newsletter publishers out there promoting false, programmed narratives also?
What assurances, if any, can you offer?
– Janice O.
Hi Janice, thank you for your email. I can certainly understand your skepticism about so many different narratives floating out there and not knowing which ones to trust.
Here’s the thing… There is no crystal ball to tell us what narrative will ultimately play out.
However, based on how the Fed has acted, especially since the 2008 financial crisis, and how markets have behaved for decades, I believe the Fed will pivot back toward neutral (meaning smaller interest rate hikes) soon.
It has already announced four interest rate hikes this year, starting with 0.25% in March, then 0.5% in May, and 0.75% in June and July. So, in total, it has now increased interest rates by 2.25% this year.
As I said on Fox Business recently, I think we will see the Fed raise rates by less than 0.75% in September.
Last month, the Fed stated that “recent indicators of spending and production have softened.”
To me, that’s the start of the pivot to slowing down the size of rate hikes and moving towards neutrality on monetary policy.
The Jackson Hole Economic Symposium you mention, which kicks off in Wyoming on August 25, will be the dividing line toward that happening.
At the three-day event, prominent central bankers, finance ministers, academics, and financial market participants from around the world will discuss economic issues, implications, and policy options.
This year, the event theme is “Reassessing Constraints on the Economy and Policy.” I think that’s a very interesting title. It doesn’t mention inflation outright.
I think they’ve left the title deliberately vague. Otherwise, why not just come right out and say “fighting inflation” or something similar?
So it could be that they’ll take a stronger stance against inflation (admitting that they didn’t address it quickly enough at the start). Or they could back off their recent stance (because it’s not working)…
And as I said on Fox Business, a lot of leaders are going to be concerned with the higher U.S. dollar and what that’s doing to their economies. I think that’s going to come into play with the verbiage we’re going to hear after that event and into the next Federal Reserve meeting in September.
As a result of a likely softer stance from the Fed, the markets will rebound. Remember, they value cheap money above all else in this period of The Great Distortion.
Don’t get me wrong… There will be uncertainty and volatility along the way, of course.
That’s why the best advice I can give to all my readers is to remain patient with their investments.
And select a strategy that works over the long term. Look for solid companies that can thrive in the five distortion sectors we follow once this period of interest rate uncertainty settles.
I have already recommended nearly 20 such companies to my Distortion Report subscribers. They range from tech companies to mining companies to agri-businesses.
But they all have one thing in common – they are ideally positioned to weather the permanent distortion between the markets and the real economy… and thrive in it over the long term.
To learn more about the distortion and how you can turn it into a profit opportunity, check out this video presentation I released this year.
Next, Erwin wonders where the Fed’s monetary policies will ultimately take us…
I have carefully studied your excellent explanations about the evolving distortion. My question:
Because the Fed is not a charity organization, it is asking the Treasury Secretary to give the corresponding amount of financial assets – mainly Treasury Bonds and mortgage-backed securities – before “printing” more money (or technically speaking, before increasing its reserves).
The Fed asks, in addition, a solid processing fee of likely 2.5% for the process.
As a consequence, the government’s debts are further increasing accordingly.
But it also means that the Fed is increasingly owning the financial assets in question, which means owing the U.S. government, if I am correct.
What is the end game of such an evolution?
– Erwin S.
Hi Erwin. First of all, thank you very much for writing in. Regarding the end game, here is my belief…
In these distorted times, one of the Fed’s unspoken functions is to enable the government to finance the budget (issue debt) as cheaply as possible.
If the Federal Reserve keeps interest rates relatively low (they have been as high as 20% in the past), this keeps the amount of interest the U.S. government has to pay on its debt low.
That’s a game in itself, beginning and end.
In addition, the Fed is in the unique position of being able to flood Wall Street with cash. That’s because it has the ability to decide when to cut interest rates or buy more bonds from Wall Street, without any limit.
And it also helps the government fund itself more cheaply than it might otherwise be able to do, if it just relied on the capital markets.
The government “borrows” money through issuing bonds… the banks sell those bonds (for a fee)… and the Fed is one of the main buyers.
It’s all part of the Fed’s smoke-and-mirrors management of our finances.
Finally for this week, following my recent two-part series on the water shortage crisis (catch up here and here), we got this great suggestion from Stuart that I’m totally on board with…
With a water shortage threatening our country and world, why are we, like other countries, not building more water desalination plants on the West, East, and Gulf Coasts?
With the oceans rising due to a warming earth and melting polar caps and Greenland, now (or the past) is the time to build water desalination plants with water and related benefits. Unless scientists say that doing this will be more harmful to the Earth.
It must be looked at by Congress and federal laws should be passed to begin this process before we burn from the West, our forests gone, our crops gone, and drinking water gone.
– Stuart G.
Hi Stuart, thanks for writing in. It seems my articles on the water crisis struck a chord with many readers, so I’m very glad you brought up this suggestion.
I absolutely believe we should be funding more desalination projects. Particularly in California, and for the West Coast, where our water supplies are so badly depleted.
Our lawmakers are starting to take action. The $1 trillion Bipartisan Infrastructure Law that was passed in November 2021 includes a $50 billion investment to strengthen clean water initiatives.
This is not to say that we should rely on the federal government to deal with all issues of water. But these sorts of allocations generally have, or tend to attract, state and private focus as well.
What was absent from that law, though, was specific funding for accelerating desalination research and development.
And unfortunately, the $750 billion Inflation Reduction Act signed into law by President Biden earlier this week doesn’t contain any specific allocation, either.
That said, there are actually 12 desalination plants throughout California already.
Last year, the California Delta community of Antioch, between San Francisco and Sacramento, broke ground on its first water desalination facility. That will purify water from the San Joaquin River. The project will cost $110 million and is mostly funded by the state.
But the main reasons desalinization has not been more widely developed are cost, time, and misplaced priorities.
In southern California, for instance, it’s taken a decade to even get to a vote for a $1.4 billion desalination plant off Huntington Beach.
But I can tell you this: I will be getting more personally involved in pushing this issue at the state and federal level in 2023.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins