Ideas about how to minimize Losses among widespread Asset Price Declines

Monthly Market Commentary: September 1, 2022

Recently, 94-years old Henry Kaufman (the original Dr. Doom), stated in a Financial Times Interview that the Fed has “long way to go” on inflation because the Federal Reserve chair Jay Powell waited for too long before supporting higher rates. He added that “today’s Fed under Jay Powell is failing to combat inflation with the resolve displayed by Paul Volcker, who aggressively raised interest rates while leading the central bank in the 1970s and 1980s.

Kaufman opined about Fed Chair Jerome Powell that: “I am still waiting for him to act boldly – ‘boldly’ means he has to shock the market. If you want to change someone's view, if you want to change someone's action, you can't slap them on the hand, you have to hit them in the face. Today, the inflation rate is higher than interest rates. Back then, interest rates were higher than inflation rates. It’s quite a juxtaposition. We have a long way to go. Inflation has to come down or interest rates will go higher” (emphasis added).

Traditionally, whenever a recession got underway, the best strategy was to purchase US Government bonds. The ownership of bonds during recessions and stock bear markets used to offset some or all the losses from the equity portfolio. Now, as I explained in last month’s report, I own some US government bonds but I am not so convinced that they would rally in the coming recession. By historical standards, Treasury yields – though they moved up over the last two years –are still depressed. Moreover, it is far from certain that inflation will slow down considerably within the next 12 months. Don’t forget, Mr. Biden’s “Inflation Reduction Act” is a stimulus package, which is inflationary and not deflationary.

The usually Biden friendly Wall Street Journal’s Editorial Board wrote under the title The Tough Politics of Student Debt Forgiveness that, Biden’s Half-Trillion-Dollar Student-Loan Forgiveness Coup “is an abuse of power that favors college grads at the expense of plumbers and FedEx drivers.” It should be obvious that irrespective of the fact whether Republicans or Democrats are in power, federal spending goes up, and with them regulation, taxes, and inflation, which will be unfavorable for corporate profits and stock prices. With respect to higher taxes, I need to advise my readers that the “wise” Biden administration plans to hire 87,000 new IRS agents. The Heritage Foundation notes that, “Auditing every single taxpayer with annual income over $1 million would require only 25,000 new IRS enforcement agents, but Democrats’ bill calls for 87,000 new agents. What will all those extra agents be doing?”Sooner or later these agents will be knocking on your doors!

As an investor, the question is the following: could the negative impact of these programs on the economy bring about a serious recession and, therefore, lower inflation or are these programs so inflationary that even in a recession, prices would continue to move up?

The answer to this question is that it is entirely possible that we would have a recession and inflation at the same time. My view is that we are already in recession and we also have high inflation.

This is not a favorable setting for asset prices….. and therefore, it may be a good idea for my readers to brush up their knowledge about Stoic philosophy and read some of the writing of Lucius Annaeus Seneca (4 BC – 65 AD). Seneca wrote:

“True happiness is to enjoy the present, without anxious dependence upon the future, not to amuse ourselves with either hopes or fears but to rest satisfied with what we have, which is sufficient, for he that is so wants nothing. The greatest blessings of mankind are within us and within our reach. A wise man is content with his lot, whatever it may be, without wishing for what he has not”

and

“Until we have begun to go without them, we fail to realize how unnecessary many things are. We've been using them not because we needed them but because we had them.”

In the spirit of Seneca, let us get rid of our central banks and let us all enjoy a wonderful autumn.

With kind regards
Yours sincerely
Marc Faber

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