{"id":72414,"date":"2022-04-23T02:15:18","date_gmt":"2022-04-23T09:15:18","guid":{"rendered":"https:\/\/lenpenzo.com\/blog\/?p=72414"},"modified":"2022-04-26T07:23:56","modified_gmt":"2022-04-26T14:23:56","slug":"black-coffee-23-apr-2022","status":"publish","type":"post","link":"https:\/\/lenpenzo.com\/blog\/id72414-black-coffee-23-apr-2022.html","title":{"rendered":"Black Coffee: The Fed Is Flying Blind"},"content":{"rendered":"

\"\"It’s time to sit back, relax and enjoy a little joe …<\/em><\/p>\n

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.<\/p>\n

I hope everybody had a wonderful week. And with that, let’s get right to this week’s commentary, shall we?<\/p>\n

Until the government can so identify its interests with those of the people, and refrain from defrauding the masses through currency depreciation for the sake of remaining in office, the wise will prefer to keep as much of their wealth in the most stable forms possible — forms which only precious metals provide.<\/em><\/p><\/blockquote>\n

— Elgin Groseclose<\/strong><\/p>\n

Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; and debt is the money of slaves.<\/em><\/p><\/blockquote>\n

— Norm Franz<\/strong><\/p>\n

Credits and Debits<\/strong><\/p>\n

Debit:<\/strong><\/span> Did you see this? After missing subscriber growth forecasts for the seventh time in eight quarters, Netflix’s share price imploded<\/a> this week; on Wednesday the stock plunged 37%. For the year, the streaming service is down 62% – which is bad news considering that it’s only April. And from its November 2021 all-time high, Netflix shares have lost 69% – erasing more than four years of gains<\/em><\/strong>. That prompted Zero Hedge to ask if it may be time to “kick out the N” from the until-now seemingly-invincible “FAANG” stock portfolio. Um, wait … on second thought, let’s not<\/strong><\/em>.<\/p>\n

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Debit:<\/strong><\/span> Speaking of plunging numbers, the US Housing Affordability Index hit its lowest level in 14 years, with current affordability plummeting over the past two months. In fact, with mortgage rates now above 5%, we can expect another big decline in affordability this month, as new homebuyers are getting 25% less house for their mortgage payment compared to a year ago. Because of this, Mish Shedlock points out that “many people who were trying to buy a few months ago are now out of the bidding<\/a> – priced out.” If affordability is falling at this pace, it’s only a matter of time before homebuyer bidding<\/strong><\/em> turns into home seller begging<\/strong><\/em>.<\/p>\n

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Debit:<\/strong><\/span> Of course, it wasn’t too<\/strong><\/em> long ago that card-carrying members of the doom-and-gloom tin-foil-hat brigade – including yours truly – were warning that massive currency supply growth resulting from the government’s response to COVID would lead to price inflation. This was at odds with government economists and their mainstream media shills who assured the public between the summer of 2020 and early 2021 that inflation wasn’t a threat. Obviously, prices for many items have since become unhinged – while inflation-adjusted wages for production and non-supervisory workers is nearly the same today<\/a> as it was in February 1973. Hey … I’m not sayin’! I’m just sayin’.<\/p>\n

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August 2020<\/p><\/div>\n

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March 2021<\/p><\/div>\n

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Bonus Cover: The one that marked inflation’s nadir. (April 2019)<\/p><\/div>\n

Credit:<\/strong><\/span> As for the stock market, financial analyst Lance Roberts reminds us that “in 2008, 2000, and 1929, stock valuations were incredibly high – and each time it was widely believed ‘this time was different<\/a>‘ – but ultimately, it wasn’t. Since 2009, the belief that low-interest rates justified high valuations was the primary catalyst supporting the (current) ‘this time is different’ narrative. However, with rates now rising, that support for over-valuation is at risk. Historically, the Fed hikes rates until something breaks, which resolves the over-valuation problem” … which, unfortunately, quickly morphs into a whole slew of other problems.<\/p>\n

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Credit:<\/strong><\/span> Sprott’s macro analyst John Hathaway is also waiting for the interest rate tripwire to be triggered. This week he warned that, “the level that interest rates need to rise to compensate rational investors is likely to be high enough to cripple the economy<\/a> and deflate financial assets. The road to equilibrium interest rates promises to be far more torturous than that contemplated by consensus, and respected observers have concluded that it’ll be impossible for the Fed to thread the needle between taming inflation and causing a recession.” Then again, with the rate hikes still coming at a snail’s pace, the Fed may never get to that point.<\/p>\n

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Credit:<\/strong><\/span> So what is the “magic rate” that will break the markets this time? Asset manager Michael Pento notes that, as the amount of debt increases, the rate it takes to break the economy<\/a> falls. To illustrate, Pento says that “in 2000 it took a Fed Funds Rate (FFR) of 6.5% before the market melted down. For the Great Financial Crisis (GFC) of 2009, that level dropped to 5.25%. It then took a FFR of just 2.5% to cause the credit markets to freeze and stocks to falter in 2018.” And Pento thinks an FFR of less than 2.0% will be enough to trigger the next meltdown. The trouble is: at that level, there’s simply not enough altitude to recover …<\/p>\n