The Fed: Having Surgery With A Dull Knife
Billionaire Ken Griffin argues the groundwork for a recession has been laid, given the Fed’s need to raise rates further and Americans having suffered “traumatic” levels of inflation. But the founder of Citadel said the Fed is limited in how much it can fight rising prices with rate increases, likening the tool to “having surgery with a dull knife.”
(Side story: I once applied for a job as a trader with Griffin’s company. They wanted me bad. But I turned them down! Why? They had a clause in their contract that would not allow me to work anyplace else for two years after leaving their empty plus all the intellectual property I developed while working there would belong to them. Nope. Seeya!)
The only way that raising rates can cure inflation is by plunging the economy into a recession. This causes inflation to decline because it reduces the velocity of money which means that money doesn’t move as fast through the economy.
It doesn’t really stop inflation permanently but does put it on hold.
The only way to permanently reduce inflation is to reduce the money supply so there are fewer dollars chasing the same number of goods. Then inflation turns into deflation.
But the Fed is doing so much more. They are raising rates and, until a couple of weeks ago, were reducing the supply of money. They were saying to the market: We’ve got these dollars for sale. But we are raising the price and producing fewer of them
So the Fed’s policy would reduce inflation and create a recession! The worst of all worlds!
But, hey, what do you expect? They live in a fantasy world.
After the short bank crisis of a few weeks ago, they start to add money to the economy in a dramatic fashion. Like adding hundreds of billions of dollars in a week! Hey, Jay! Throw me a few of those dollars!
So the Fed is doing inflation surgery with a dull knife.
Here’s what is going to happen. My one assumption is that the Fed will stop pumping money into the system. We need a few more weeks to see what they do. Assuming they stop pumpin money again then:
• Inflation will come down from now to the end of 2024
• The economy will move into a long and deep recession, particularly long.
• The stock market will become more volatile
• The stock market will boom near term on the back of the sharp increase in liquidity
• Gold will continue to have a big rally.
• The dollar will decline.
• Bonds will rally but weakly.
So how do we make money?
LOL, just follow the predictions above!