As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well.
Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.
Investor expectations for inflation are being rekindled by the Fed's recent change in direction regarding interest rate policy. Investors are betting that any potential downside risk in the markets (stocks, bonds, and commodities) is offset and minimized by the potential of higher prices for most assets. Buying more overpriced stuff at all-time highs is in vogue.
The expectation is that the higher prices for investments will match and exceed (by a large margin) the effects of inflation. Most investors have gotten quite comfortable with the logic that they will make more money in an inflationary environment than one in which inflation is less obvious and not so onerous.
Prospective good fortune for investors is dependent on the premise that the Fed acted appropriately and at the right time. As a group, investors apparently believe this to be the case.
POSSIBLE PROBLEMS
The Federal Reserve, regardless of current investor sentiment, is usually too late to stop or reverse declines in economic activity; especially when weak economic activity ends in recession. Historically speaking, recessions begin sometime after the Fed stops raising rates. The Fed stopped raising rates almost two years ago. That means that a recession could very well have already started and/or that continued weakening economic activity might receive an "official" designation shortly.
The decline in economic activity is well underway and is steepening. At some point, asset prices will reflect that. Depending on how severe and broad-based a recession is, the potential for significant declines exists and the risk heightens. (see If The Markets Turn Quickly, How Bad Can Things Get?)
Another problem is that market averages are skewed by the outperformance of a select few stocks. This distorts analysis of stock market activity and trends. Something similar happened in 1999 with the dot.com stock craze and selective over-emphasis on certain high-flying growth stocks vs. the rest of the market. That was followed by stock price declines of 50-80%.
CONCLUSION
Whether the United States economy is officially in recession or not, economic activity is trending down. Retailers continue to cut prices, credit dependency has increased at all-time highs, and most of the signs and signals of a recession are evident.
The Fed is powerless to stop the worst from happening. They can only react to something after it has happened. Each time they do so, they run the risk of having to deal with other variations of the same problems.
Those problems are the result of more than a century of intentional inflation created by the Fed as a result of continuous expansion of the supply of money and credit. The inflation results in a loss of purchasing power in the U.S. dollar and leads to higher prices for most goods and services.
The effects of inflation are cumulative, highly volatile, and unpredictable. Financial and economic crises have increased in frequency and severity over the past century as the Fed continues to inflate, manipulate, and interfere with the currency and the financial markets.
A day of reckoning is at hand. A new day, but not necessarily a brighter one. (also see Fed Cuts Rates but Bond Rates Are Rising).
Kelsey Williams
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!