A trip down memory lane with “transitory” inflation … the Fed’s track record on soft landings … why Charles Sizemore is betting on “chaos” … how he’s investing
We like to pretend that our leaders know what they’re doing. Our fates and livelihoods are in their hands, for crying out loud.
But experience has made it abundantly clear that they don’t.
They really are just putting on a good show, flying by the seat of their pants and hoping the rest of us don’t catch on.
So says Charles Sizemore, Chief Investment Strategist at our corporate affiliate, The Freeport Society.
Charles made the comment as he discussed Federal Reserve Chairman Jerome Powell and the Fed’s battle against inflation.
It’s not hard to understand – even agree with – Charles’ harsh assessment of our political/economic leadership. “Exhibit A” would be the now-infamous characterization of “transitory inflation.”
If you’ve forgotten the full context, here’s Powell from back in March of 2021:
[T]hese one-time increases in prices are likely to have only transient effects on inflation.
As Charles noted, “I suppose ‘transitory’ could mean that it wouldn’t literally last until the end of time.”
But Powell is hardly our only leader with omelet-sized egg on his face. Here’s a fun trip down memory lane for those who’ve forgotten. Enjoy the slow-motion trainwreck…
- “Our experts believe, and the data shows, that most of the price increases we’ve seen are temporary.” – President Biden (2021)
- “We have in recent months seen some inflation … I personally believe that this represents transitory factors.” – Janet Yellen (2021)
- “Inflation is likely to be transitory.” – Lael Brainard (2021)
- “Transitory has different meanings to different people.” – Jerome Powell
- “Fed officials have worked to clarify that their meaning behind “transitory” inflation is quite different from the public’s.” – Washington Post (2021)
- “Powell admits the Fed got it wrong on inflation and says they should stop calling it ‘transitory’.” – Fox Business News (2021)
- “It’s been a rough year for “team transitory.” – Fortune (2022)
- “I am ready to retire the word transitory.” – Janet Yellen
- “Transitory’ has become an embarrassment.” – The Financial Times
- “Transitory’ has become a swear word to my staff and me over the past few months.” – Raphael Bostic, Head of the Atlanta Federal Reserve
Fast forward to today, and inflation has declined significantly.
As we detailed in the Digest, yesterday’s Consumer Price Index came in cooler than expected. And this morning, we learned that the May Producer Price Index declined 0.2% for the month against expectations for a 0.1% increase.
This was a huge swing from the 0.5% increase in April when Dow Jones estimates had been calling for a 0.1% increase.
Bottom line: It appears we’re making great progress toward the much desired “soft landing.”
But given the track record of some government officials, will “soft landing” become the new “transitory”?
A history of the Fed and its efforts at soft landings
While most of us are waiting to see if the Fed can engineer a soft landing, Treasury Secretary Janet Yellen has already declared that we’ve achieved one.
From Yellen back in January:
What we’re seeing now I think we can describe as a soft landing, and my hope is that it will continue.
Well, I feel reassured!
Despite Yellen’s assurance, if we remain unconvinced of a soft landing, what do the data tell us about the Fed’s success in attempting to engineer them?
Well, if we’re going to pull one off this time around, it will be the exception, not the norm.
Since 1961, there have been nine instances when the Fed has raised interest rates to quash inflation without simultaneously steering the economy into a recession – the so called “soft landing.”
The Fed has failed in eight of those nine instances.
In 2022, the research shop Piper Sandler did a deep dive into soft landing efforts. It concluded that 1994 is the only time in which the Fed successfully managed to achieve a soft landing because the 1965 and 1984 soft landings had asterisks by them.
But even if we decided those two additional instances did meet soft-landing criteria, the point would remain…
The Fed usually fumbles the ball.
Remember the old saying on Wall Street – bull markets don’t die of old age, they’re murdered by the Fed.
Back to Charles:
We have people fighting inflation they never expected and clearly don’t understand with tools that haven’t worked, hoping – just hoping – that maybe this month will be different. They’re fighting a fire with a toy water gun.
That’s our reality.
Pulling back wider, regardless of what happens with inflation and a soft landing, Charles says that the “real economy” is showing distress
As just one example, Charles points toward commercial real estate and the potential for a new wave of bank failures:
Pimco, one of the world’s largest bond managers, reported yesterday that more regional bank failures are in the cards.
“The real wave of distress is just starting,” according to John Murry, Pimco’s head of global private commercial real estate. “The combination of rising rates plus recessionary pressures creates real challenges for commercial real estate, from both a capital markets and fundamentals perspective.”
In other words, the properties themselves are in a real mess.
Their borrowing costs are resetting higher, but their tenants are in no position to pay higher rent…
And most are still happy to make do with less square footage than they had before the pandemic.
These rough fundamentals make the loans toxic. Few investors are willing to buy commercial real estate debt at anything close to face value.
To illustrate, Charles highlights the Burnett Plaza tower in Fort Worth, Texas. Three years ago, it sold for $137.5 million.
Well, it just sold at a foreclosure auction for a measly $12.3 million.
Back to Charles:
When you have downtown office towers selling for less than 10 cents on the dollar, you have the potential for major, systemwide chaos.
What adds to the potential for chaos is that our highly complex economy is both strong and weak at the same time, which complicates the Fed’s response
Inflation/high prices have been crushing lower-income Americans, forcing them to take on two jobs just to make it month-to-month.
Meanwhile, the very same inflation/higher prices are inflating the asset values of higher-income Americans while putting more passive income in their pockets via higher interest rates.
Here’s more from Forbes:
The United States economy is currently exhibiting a “K-shaped” dynamic, which means that the wealthy are benefiting from asset appreciation, while middle and lower income groups are confronting higher costs and financial strains.
The upper swoosh of the letter “K” represents the small minority of people who greatly benefit in this current economic environment and the downward drop of the letter “K” reflects everyone else who finds their finances rapidly deteriorating.
The wealthy, who own assets like stocks, real estate and other investments, have seen their net worth and equity grow and soar higher, insulating them from inflation’s impact.
Meanwhile, lower and middle-income earners are being squeezed by higher costs for essentials, like food, gasoline and rent, with their wages not keeping up with inflation.
How do you ease painful financial conditions for lower-income Americans without simultaneously goosing higher-income Americans and their spending (leading to inflation)?
How do you throw a wet blanket on wealthier Americans without it simultaneously crushing lower-income Americans (leading to a recession)?
There’s not a clear “one size fits all” answer, which opens the door to more “chaos” as Charles put it.
We’re seeing fingerprints of this chaos throughout the world
At this point, we haven’t even mentioned the geopolitical and social issues that impact today’s investment landscape. But they all point toward the same thing…
Growing chaos.
Here’s Charles:
Apart from inflation, Fed incompetence, and a slow-motion meltdown in the regional banking and commercial real estate sectors… we have a potential hot war with China on the horizon.
The recurring theme here is chaos.
We live in an Age of Chaos, and that’s not changing. We can either bury our heads in the sand or we can accept this as true and invest accordingly.
In an Age of Chaos, it pays to stay nimble… and to follow the money. It also pays to consider an age-old investment strategy from a completely fresh – dare I say “revolutionary” – perspective.
And if you throw in the input of one of the top fintech companies in the world… you have a quant-driven strategy that could help you not only survive this Age of Chaos, but thrive despite it.
I’ve just released a new video detailing how this works. Be among the first to watch it here.
Coming full circle, thanks to two days of cool inflation readings, hopes are high that inflation is on its way out and a soft landing is on its way in
But if that’s to be the case, it will only be the 2nd in 10 times since 1961 that the Fed will achieve such an outcome.
Meanwhile, a higher probability bet is that more chaos is on the way – the issue is simply “in what form?”
For more on how Charles is assessing our volatile state of global affairs, and preparing for it from an investment perspective, click here.
Have a good evening,
Jeff Remsburg
