We are enjoying the elegant symmetry of real life.
‘Dollar Soars to 20-year High as Investors Bet on Fed Moves’, says the headline on page seven of Saturday’s Financial Times.
Meanwhile, on page 11 comes this news: ‘Yen Slides to 20-Year Low as BoJ Rejects Higher Rates’.
As ye sow, so do ye reap. What goes up must come down. For every action there is an equal and opposite reaction.
That kind of thing.
We are also basking in the rare glow of being proven right. Inflation has arrived. And the beginning of a recession. And as we saw earlier in the week, the techy high-flyers that did ride so high…doth dismount.
Yes, dear reader. It doesn’t happen very often. We warned for years that spending money you don’t have will bring inflation…and that inflation will bring recession. But it’s like being nice to your grandparents. It takes a lifetime — until you become a grandparent yourself — before you appreciate its importance.
On Wednesday, the US reported that the economy is now going backwards. Business Insider with details:
‘The US economy contracted for the first time since the early days of the pandemic as historic inflation crashed into the otherwise strong recovery.
‘The country’s gross domestic product shrank at an annualized rate of 1.4% through the first quarter of the year, the Commerce Department said Thursday morning. Economists surveyed by Bloomberg held a median estimate of 1.1% growth over the period. The print shows the recovery slowing massively from the 6.9% rate seen through the fourth quarter.’
Naturally, the Biden Team didn’t see the downturn coming. They hadn’t seen inflation coming either. It’s amazing that they can cross Pennsylvania Avenue without getting run over; they see nothing coming. But they keep a bag of fraudulent explanations at the ready, just in case. Bloomberg:
‘President Joe Biden blamed the first contraction of the U.S. economy since 2020 on “technical factors,” saying that employment, consumer spending and investment all remain strong.
‘“The American economy — powered by working families — continues to be resilient in the face of historic challenges,” Biden said in a statement. “While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of COVID-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength.”
‘The contraction came as a surprise, as economic forecasts projected growth of roughly 1%, presenting a fresh challenge for Biden and Democrats heading into the November midterm elections.’
There was nothing ‘technical’ about it. People have less money to spend (the gimmie/stimmies are running out). And wages are rising about three percentage points behind inflation — leaving people with less purchasing power. When people have less to spend, they spend less. And since spending is 70% of GDP, you should expect the economy to contract when spending goes down.
Nor was there anything surprising about it. Economists at several leading banks — along with former Treasury Secretary Larry Summers — have all said a recession is inevitable.
It’s not magic. It’s not luck. It’s just symmetry. The Fed jazzed up the economy. Now, it’s turning down the music.
On the obverse
Meanwhile, instead of dialling back inflation, the Japanese are turning up the knob — to 11.
‘The Bank of Japan said on Wednesday it has decided to offer to buy an unlimited amount of 10-year Japanese government bonds (JGB) at 0.25%, in its third move to defend its yield target since February.
‘The rise in yields comes as the yen weakens sharply to two-decade lows against the U.S. dollar, forcing markets to test the central bank’s commitment to its super easy yield-curve-control policy.’
What a marvellous experiment! What a learning opportunity! It’s ‘inflate or die’ for central banks all over the world. The Japanese, bless their hearts, are going with ‘inflate’. The yen rises as they signal that they’ll let the yen die rather than give up their goofy bond-buying program.
For now, at least, the Fed is taking the opposite side of the bet. It says it will take away the punchbowl; the party will die. Already, the Dow is off 8% for the year. The Nasdaq — where the high-flying techs are — is down 20%. These indices disguise the real damage. The average meat-and-potatoes stock is down some 40%. But the dollar —anticipating higher interest rates — is rising. Bloomberg:
‘The ascendant U.S. dollar headed for its best month in a decade, as renewed yen selling cemented the greenback’s strength against major peers. A Bloomberg gauge of the greenback climbed to its highest level in nearly two years and has risen 4.5% this month, set for its best performance since May 2012. The dollar extended gains versus the yen, hitting a two-decade high, after the Bank of Japan kept interest rates at rock-bottom levels and defended its easy monetary policy. That contrasts with a Federal Reserve that has signaled aggressive rate hikes to combat inflation.’
What will happen next? Who will be the winner? Who will flinch first? The Bank of Japan or the Fed? Will the Fed be able to stick to its ‘tightening’ program? Or will the Bank of Japan be forced to commit hari-kari, a kind of central bank ritual suicide, in which it atones for 30 years of jackass manipulation?
Tune in tomorrow…
For The Daily Reckoning Australia