By Kateryna Kordubailo @ Adobe Stock
Your Survival Guy’s August RAGE Gauge is in, and it’s not pretty. What did you expect me to say? The post-Covid bucket list trips are over. Main Street can feel how the government taxes through inflation. Government is in the business of taxation with less and less representation. Now is the time to protect your assets by focusing on safety and income.
Not a Robust Economy: Plan Your Investments Accordingly
Your Survival Guy and Fam were recently up in the tourist areas of New Hampshire. Word on the street is visitation is down significantly compared to previous summers. Big trips to New England from afar aren’t nearly as high as the post-Covid catch-up trips.
The Biden checks have dried up, and inflation is eating what’s left over. The Fed allows the value of a dollar to bounce around like a rubber ball, and then it is surprised when markets tank.
I can tell you from my recent trip to Paris just how different things felt, especially the lack of big retail spenders from China. When so much of the world economy depends on consumer spending, any change is noticeable.
The Great Money Flood, and Its Consequences
In the July 2010 issue of Richard C. Young’s Intelligence Report, subtitled The Great Money Flood, Dick Young wrote:
Inflation is a disease. After WWI, hyperinflation—when prices sometimes doubled and more than doubled from one day to the next—prepared the ground for Communism in Russia and Nazism in Germany. The story is told in Milton and Rose Friedman’s Free to Choose. As the Friedmans correctly point out, no government is willing to accept responsibility for producing inflation. The Friedmans present readers five simple truths that embody most of what we know about inflation. First, inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in the output. Second, government determines or can determine the quantity of money. Third, there is only one cure for inflation: a slower increase in the quantity of money. Fourth, it takes time, measured in years not months, for inflation to develop; it takes time for inflation to be cured. Fifth, unpleasant side effects of the cure are unavoidable.
The Problem Starts With Government
Milton and Rose point the bony finger of blame at government. I have agreed with the Friedmans for decades. In 1978, I began Young’s World Money Forecast to write about inflation and inflation’s cousin: gold and currency debasement. In 1987, I wrote a book, Young’s Financial Armadillo Strategy, to further the discussion of inflation, gold and currency debasement in terms of investment portfolios. In the years since, I have found no reason to change or adapt my original approach to portfolio management based on the basic Friedman conclusions on government and inflation.
Government is where the problems start. And the bigger, more intrusive the central (as opposed to state) government becomes, the greater my concern for your and my welfare in both financial and personal security terms. An ongoing study and appraisal of central government is the only place to begin analysis of the climate for investing, business in general, and certainly your family’s personal security. An incorrect appraisal of the intentions of those charged with governing our country makes proper action regarding financial and personal security impossible. It’s just that simple.
Let Your Survival Guy reiterate the Friedmans’ first point, that “inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in the output.” With the above in mind, read through what John Greenwood and Steve H. Hanke explain in The Wall Street Journal, that monetarists are warning of a recession, and that in similar instances of constricted money growth in the past, the U.S. has entered recession. They write:
For more than a year, monetarists have been warning that the economy would likely enter recession this year. That is because the Fed has over-constricted money growth between 2022 and 2024. The stock of money is now lower than it was in July 2022. Since the Fed was established in 1913, such contractions have only occurred on four occasions: in 1920-22, 1929-33, 1937-38 and 1948-49. The second episode resulted in the Great Depression, and recessions followed the other three.
You can see the recent rapid reduction in M2 money supply and its slow rate of growth (historically) since then on the chart below.
Greenwood and Hanke also note the recent recession signal by the Sahm Rule, created by Claudia Sahm. Responsibly, they remind readers that even Sahm herself doesn’t place much stock in the indicator. It wasn’t built to predict recessions, but instead to trigger automatic stimulus payments. Greenwood and Hanke write:
The tide has suddenly turned on the economics consensus among everyone from Keynesian professors to Wall Street commentators. Their expectations for a soft landing have fallen to earth.
The immediate trigger for the shift and the selloff in equity markets was a run of adverse data last week. It began on Wednesday, with higher claims for unemployment insurance, followed on Thursday by weak purchasing-manager indexes for manufacturing and services. Then on Friday came disappointing nonfarm payroll data and a higher than expected unemployment figure.
To explain why the consensus changed so fast, the economic chattering classes and press have latched onto the Sahm rule. That tool, created by economist Claudia Sahm, correlates an increase in unemployment with the onset of recessions. According to Ms. Sahm’s research, if the unemployment rate climbs by half a percentage point or more relative to its low during the previous 12 months, we will be in the early months of a recession.
This index has identified all recessions since 1953, but Ms. Sahm rightly emphasizes that the rule is only an empirical regularity, not a theory. Since January the unemployment rate has risen from 3.7% to 4.3%, fulfilling the Sahm criterion of a 0.5-point rise. The 3.7% low qualified, as it represents a low that has occurred within the past 12 months. This suggests the economy may already be in a recession.
You can see the Sahm Rule trigger here:
Action Line: Only the NBER can officially designate a recession in the United States, and that’s usually done well after everyone has begun to experience its effects. Making predictions about the beginning and end of a recession is tedious, and Your Survival Guy is not in the predictions business. But I do want your investment portfolio to be prepared with a plan no matter what the economy is doing. If you need help building a plan that’s right for you, I’m here. In the meantime, please click here to subscribe to my free monthly Survive & Thrive letter.
Originally posted on Your Survival Guy.
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