Speaking of moving on, is the Federal Reserve on the wrong path with respect to the guidance they are administering toward the economy? The money supply peaked in 2020 at 27% but ever since it has slowed down toward 3% making it difficult to promote growth coupled with mild inflation. Unless we see what is referred to as velocity or turnover in transactions that maintains activity. Unfortunately, we are entering a time whereby businesses and individuals are spending less freely.

Inflation, in the ’70s, built up over a 15-year period, from 1964 when the Vietnam war and Social programs needed funding began. Yet with interest rates doubling from 10% to 20%,  a two-fold increase, there was no fiscal decline in government spending. Consequently, today the issues faced have built up over a 15-month period and the Federal Reserve is trying to apply a sledgehammer to achieve previous successes.

Today in a low-interest rate environment, we see rates explode from 0.25% to 5%, a 16-fold increase. As a result, the issue of inflation is much worse, especially toward issues that people might not be aware of. Specifically toward Pension funds that have previously thrived in a high-interest-rate environment.  In today’s reality with low-interest rates, fund managers have used derivatives to achieve results. Previously, LDI or Liability Driven Investing matched one dollar of contribution with an asset of equal value. This is not happening today because the landscape has changed dramatically and models have been built on the assumption that low-interest rates would continue for the foreseeable future. As a result, by using derivatives in a situation with increasing rates, Margin Calls are required to sustain the leveraged positions these Fund Managers are holding. Many cannot meet the Margin Calls because their exposure is too great and would be on the verge of collapse. But in reality, it is the counterparties, the banks, maintaining these positions which become most vulnerable. As a result, the Central Bankers intervene putting everything in play, an all-in game, because losing is not an option.

Therefore what happens in this illiquid environment, the first to go are the most liquid assets these institutions are holding, which are mainly comprised of US Government Bonds. As the Fed continues toward the 2% inflation target by continuing this course of action of increasing interest rates, those that are exposed are trying to deleverage themselves.

Many countries are in similar situations and as their currencies flounder they intervene to support their own money by selling USD into the market. The Federal Reserve has acknowledged that there will be International ramifications but their focus will be America.

Indicators suggest that the Federal Reserve is on a collision course of destruction. In fact, if data is their reason to maintain policies to drive down inflation the accumulation of inventories and debt are telling signs of looming disasters are rising.  In a growing economy, it is productivity in growth that is a strong by-product of strong recoveries. In the meantime, debt is mounting as inventories skyrocket. For example, in the Used car markets, the prices for used cars soared by 54% in April 2021, as people avoided taking transit during the Pandemic. Today that number is <-0.1%>. The issue is that Dealers overpaid and now are sitting on inventories and in an escalating interest rate environment, it is costing them huge money. Prices need to come down, fast and hard. Further, Cooperations are holding a lot of debt, buying back their stocks or paying larger dividends, the costs become unsustainable if liquidity dries up. Lastly, retailers like Nike have inventories up at 68% in North America alone and production in Inventories in transit up by 85%. When there is too much of a commodity, it is common sense that the prices will fall.

Meanwhile, commodities overall are coming down, we saw an Oil peak above $130/B while today we are below the $78/B. The difference today is that the sell-off in markets is accentuated with bonds and equities being sold because liquidity is required to deleverage. In due course, the Federal Reserve will have to reverse its position because it will be the data that is showing accelerated deflation in pricing that will force them to swallow their pride and show the world its arrogance. The USD will eventually implode as timing is everything.

Lastly, retail sales rose by 3% in January vs (1.8%) expected, maybe the bargains are starting? NY Fed Empire Mfg was down only <5.8%> vs expected <18%> and finally, US Industrial Production was unchanged in January, expecting (+0.5%). The USD Index improves toward the 104.0 level as rhetoric, will keep the USD buoyant until the Federal Reserve is forced to respond to the data, which could lead to a market collapse and a total rate reversal in interest rates. Let’s hope accountability and transparency prevail for the benefit of all. The Canadian Dollar hovers around the 0.7450 cent level while commodities take it on the chin, Gold slips toward $1830/oz and Silver around the $21.50/oz vicinity.