It Is Still a Dilemma for Investors

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Editors’ Note: The author’s warning and advice at the end of this article are so important. The economic problems plaguing much of the world are related to Democrat and Biden administration governance in many areas of public policy and economic management. The Inflation Reduction Act (misnamed – it is the Green New Deal Slush Fund Act), environmental and energy policy with its war on fossil fuel, cozy energy relationships with China enriching a determined enemy (solar panels, windmills, battery technology, critical minerals, et al), misguided and dangerous foreign policy (Russia/Ukraine) and other error prone policy areas are all contributing to a slowing national and world economy with punishing inflation for all. The November 8th midterm election truly is a critical one for this nation. Both the U.S. Senate and House must be replaced by the ‘other’ party and elections at every level of state elections must also force this change (down to the local school boards). This election must address and stop the damaging and dangerous progressive policies hurting our nation and all its citizens.


We wrote an earlier series of articles on markets and the economy where we talked about the investor’s dilemma.


Put briefly, we saw the FED having to raise interest rates to fight inflation, which would take the easy money environment away that supported the “everything bubble.” This bubble included sharp simultaneous price increases in stocks, bonds, cryptocurrencies, commodities, and real estate.

We were correct in that just about all these markets began to retreat and a reversal of negative trends does not seem yet at hand. We are likely still in the middle innings of this ball game. Retreating to cash which we recommended, has buffered against severe losses, but cash is losing value at 8%-10% a year, so there has been no really good place to hide.

The stock market rallied this summer but stalled out at important resistance. It would seem more pain is to come.  Bonds are falling to new lows. Real estate prices are starting to weaken. Even oil, which had provided good profits in a generally retreating market has now stumbled. Prices as of this writing have dropped from about $130 bbl to around $82 bbl. It would seem the markets are starting to factor in demand destruction stemming from a worldwide slowdown. Factoring in a drop in corporate earnings seems the next logical step.


The economy itself is putting out contradictory messages; flirting with a recession, but not really in one. Real GDP has been down for two quarters, yet the official arbiter, the National Bureau of Economic Research has not rendered an official verdict. Employment data still looks strong, but freight rates are weak, container prices are falling, and lumber prices are weak. The US leading economic indicators have now been down for five months in a row. By the time the NBER gets around to its official declaration, we could already be well into recession. Meanwhile, it is important to remember markets move six months to a year before the economy. Their job is to discount the future, not necessarily reflect the present.

Equally important, the FED continues to tighten in the face of growing weakness. Some feel the FED will soon whimp out, others suggest they are serious about curtailing inflation. Markets move spasmodically on every FED statement.

Precious metals, which historically have generally gone up while other things are going down, have not worked well as a hedge, at least so far in this cycle. The reasons for that remain mysterious and are a subject for another day.


Our general thesis was correct. The dilemma is that there is not really a good place to go to make a decent positive return. This recalls one of the dictums of the great market analyst Richard Russell: in a bear market, he who loses the least is the winner. That may be about as good as most of us will be able to do.

However, some things have come along that we did not anticipate.

The war in Ukraine in particular has created great additional expense for defense and will be hitting government budgets already hemorrhaging from Covid lockdown, wild socialist spending, and an energy crisis. This is adding hugely to government deficits around the world and we have likely not even seen the worst of it. How will central banks finance such additional deficits and fight inflation at the same time?

In addition, many governments are now rushing to subsidize drastically higher energy costs stemming from a lethal combination of war disruption of supply, excessive reliance on Russian energy, and the green attack on traditional energy sources. These subsidies are also causing fiscal deficits to expand.

If all the bonds to finance these deficits were sold in the marketplace, it means lower bond prices (higher interest rates), which presses the fragile everything bubble even harder. If the central banks buy the government debt, it means they have to reverse their stated policy to reduce their balance sheets. The credibility of the central bank’s efforts to fight inflation is on the line, and the risk of policy error on their part is uncomfortably high.

Soaring energy costs and outright shortages for winter pose a severe problem for Europe in particular. Government spending for added defense measures plus likely more spending to stabilize a contracting economy still lie ahead.

We did anticipate the bursting of the Chinese real estate bubble, and policymakers there are making things even worse with the unjustified continuation of Covid lockdown policies. It is not clear how the second largest economy in the world is going to cope with the economic blowback generated from these events. Recently, China lowered interest rates, while everyone else in the world is raising them. Why would they do that?  Because things are weak at home.

We also did not fully anticipate that policymakers would be so fanatically wedded to the “Green New Deal”, and impose energy production contraction on top of war-related shortages. There seems no evidence capable of dissuading these fanatics from imposing an additional burden on the economic system of the world. 

Even with self-evident soaring electricity costs, soaring natural gas prices for winter, and the destruction of industrial capacity,  European policymakers march forward towards their mythical environmental goals like they are characters out of the Walking Dead.

Not only will they freeze likely millions in the process, the shortage of fertilizer and restrictions on farmers, are likely to create food shortages. There was already supply disruption, particularly in grains, due to the Ukraine war. As a consequence of rising food and fuel, unrest is spreading in many countries and political stability issues will become an additional burden for markets to figure out.

It is worth emphasizing that war, Covid lockdown, the destruction of cheap available energy, and food shortages, are all products of government policy. But watch, they will be eager to blame the free market for these maladies.

The bad news is these policy errors will likely make what was already a tough economic cycle even worse.

One of the areas little covered by the financial press is currency rates. Generally, moves of 5-10% are considered large in these markets. The reason is it can throw international trade into turmoil.

So far, the British Pound is down 20% from recent highs, the Japanese Yen is down 28%, and the Euro is breaking the buck down 20%. All this and we are not even into winter when the self-induced energy crisis will have its full impact.

If the Yen is down 28%, then Japanese goods are 28% relatively cheaper than US goods in the global market. If you were a company in Brazil, would you buy Komatsu or Caterpillar equipment?  What if in the US, you could buy a good Japanese product cheaper than US made? But it also means Japanese goods are more competitive with Chinese goods, and with Korean goods as well. See the problem? There will be fierce competition for dwindling demand. These currency moves are massive and will have an impact on world trade.

In some ways, we are seeing an echo of the “beggar thy neighbor” policies; competitive currency devaluation, which made the Great Depression of the 1930s much worse.

These are really big currency moves and have the potential to create a world trade crisis, which again, will exacerbate economies already contracting.

In an economically integrated world, you can’t have huge economies like Japan, Europe, and China all get into trouble and not have an impact on us.

These conditions have also created an ultra-strong US dollar, which makes US exports more expensive and will hurt the earnings of many US-based multinational corporations. This very strong US dollar is also a factor in causing gold to misbehave.

There are some signs of sanity. Japan will be reopening many closed nuclear power stations, but the German greens would rather burn coal and wood than concede their mistaken policies towards nuclear power. Britain’s new government just allowed fracking once again. California may delay taking offline just one remaining nuclear plant, while at the same time mandating the use of electric vehicles. They are already importing a third of their electricity.

Chile thankfully rejected constitutional changes that would have ruined one of the few good economic stories out of Latin America.

In the US, the fall voters will make absolutely pivotal decisions whether or not to reign in the wild spending, energy-destroying regulations, and Constitutional overreach of the Biden Administration. Its abuse of power, and its terrible economic policies, need to be solidly rejected.

If you care about your household budget, having a car and air conditioning, and your 401K; you better make an extra effort in the next few months to have your voice heard.

The markets and the economy will still be in tough shape, but stopping Biden and the Democrats may be our only hope to keep things from getting even worse.


As we move through 2023 and into the next election cycle, The Prickly Pear will resume Take Action recommendations and information.

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