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June 21, 2021 | The Feds’ Five-Year Economic Forecast

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

YOUGHAL, IRELAND – Midsummer has arrived! Yesterday was the longest day of the year in the Northern Hemisphere. The farther north you are, the longer the day. Here, it was light until almost 11 p.m.

We went over to the little seaside town of Ardmore, where the church has reopened for the summer season.

“It’s Father’s Day,” explained the white-haired priest. “I scarcely ever saw my father until I was 9 years old. It was World War II, and he was in the Royal Air Force (RAF).

“When he came back to Ireland… he brought his ration of chocolate with him. That endeared him to me forever.

“It was a long trip back then, from London to Ardmore. You had to cross England by train, take the boat across the Irish Sea, and then take the train down from Dublin.

“I found out later that part of the reason I saw so little of him was that he became violently seasick and hated the trip.

“Nowadays, we would just get on a plane.”

Out on the streets of Ardmore, flowers were in bloom everywhere… even bursting out of the cold, stone walls.

Lovers strolled arm in arm. Birds sang in the trees.

Irish Summer

But this morning, cold winds blow in off the Atlantic. Clouds scoot over the treetops. The temperature will barely make it into the 60s today.

“In Ireland, you can’t wait for a real summer; you have to take what you can get,” says a neighbor.

And so, people go about in shorts and t-shirts… appearing not to notice the chilly winds. Families go to the beach… and wrap themselves in towels to keep from freezing.

The public pools are open, where children take swimming lessons and turn purple.

Yes, it’s an Irish summer… and it is delightful.

FOMO

But we must turn our attention to the world of money… where two dark clouds hang over the summer fun.

First, with stocks at/near all-time highs, there is the threat of a major selloff in the markets.

Michael Burry, hero of the mortgage bubble crisis, says it will be the “mother of all crashes.” Business Insider is on the story:

“All hype/speculation is doing is drawing in retail before the mother of all crashes,” the investor tweeted. “When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries.”

Burry added that people’s fear of missing out has propelled asset prices to unsustainable levels. “#FOMO Parabolas don’t resolve sideways,” he cautioned.

Nope. Prices don’t go up, like a baseball off a bat… and just stay in the air. Gravity brings them back down to Earth. The higher they fly… the further they fall.

Dark Cloud

But wait… What about the other dark cloud – inflation?

Won’t it keep them aloft? Won’t the Federal Reserve’s money-printing guarantee higher stock prices? And shouldn’t a prudent investor stick with stocks, at least until the inflationary threat is over?

Earlier this month, we found out that inflation in the U.S., officially, is running over 5% – for only the second time in 30 years.

If they calculated it the way they did in the 1980s, it would be over 10%.

Tim Congdon is one of Britain’s leading economists. Last week, he released a report, Where Does U.S. Inflation Go From Here?, in which he concluded:

The annual rate of U.S. consumer inflation between now and end-2022 will typically run in the 5%–10% band.

Like a tornado, inflation picks up everything in its path, sends it swirling high into the air… and leaves the ground littered with debris once it has gone. It destroys markets, economies, governments, and whole societies. And with such a funnel cloud approaching, you’d think the feds would want to head for a storm shelter.

Instead, they’re spreading out a picnic blanket and spraying on the insect repellent. The Fed is continuing its $120 billion per month money-printing.

The “dot plot” of anticipated rate increases shows none are likely, neither this year nor next, with two expected in 2023.

And Senate Democrats are pushing ahead with plans for a $6 trillion “go it alone” spending extravaganza.

The EZ money will keep coming, in other words. And all of this money will eventually show up in prices. Where else could it go?

Five-Year Forecast

But in the meantime, as the twister draws closer, investors will become unsettled.

A study by economists at investment research firm Gavekal shows that rising inflation levels means falling stock market gains:

For the last 130 years (the period for which we have data both for U.S. prices and for the U.S. stock market), all the excess return on U.S. equities relative to cash have been realized during periods of decelerating inflation. The excess returns during periods of accelerating inflation have been a robust zero.

They go on to say that since World War II, every major bear market (with a drop of 50% or more) has come during a time when consumer price increases are speeding up.

Which should investors fear – a crash or inflation?

The answer is… both.

And herewith our simple Five-Year Forecast:

The feds will inflate. The stock market will deflate.

And then… the feds will inflate even more…

…until the inflation tornado has made a wreck out of everything.

Regards,

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Bill

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June 21st, 2021

Posted In: Bill Bonner's Diary

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