FOMC Minutes Confirm Fed Rate Hike Rocket Not Ready for September Liftoff – Ep. 103

Black Monday 1987 Today marks the 30th anniversary of the 1987 stock market crash.  It's hard to believe that it's been 30 years.  I still remember where I was when the crash happened and my reaction to it. It happened just after I had graduated from the University of California at Berkeley. By the time the crash happened, I had already accepted a job in Newport Beach, California.  I was going to be working in the commodity options market, but I hadn't started yet. Lesson:  The Market Goes Up The crash began a few weeks before I was on the job, but I do remember when I first got there, I met a guy who had a lot of S&P 500 puts for clients and for him, anyway the crash was a great thing because he was able to make a lot of money on those puts.  Of course the S&P was a fraction of its current value.  The market is up dramatically since the 1987, which is the lesson that everybody hope that you learn: "Hey don't worry about the market.  If it ever goes down, it's going to come back up." Trade Deficit Tiny Compared to Now I remember some of the catalysts that were weighing heavily on the stock market leading up to the crash of '87 was the fact that the dollar was weakening as a result of a increase in the trade deficit - trade deficits that are tiny in comparison to the enormous one that we run today. Yet nonetheless, people were rightly worried about it back then.  They couldn't care less about the trade deficits now. Interest Rates at 9% Also interest rates were rising. The yields on the 30-year bond (nobody really talked about the 10-year back then) were 9% and they were going up.  So you had 9% interest rate, interest rates rising, the dollar falling, the trade deficits getting bigger and the stock market had pretty much ignored what everybody agreed was bad news at the time.  The stock market kept going up anyway, despite all of that.  Eventually it all came crashing down in 1 day. Good Company One of the things I remember about that was how Alan Greenspan reacted.  I mentioned this on a prior podcast. Greenspan had not been the Fed chair that long when the market crashed. He took over from Paul Volker.  I knew Greenspan, and was familiar with him because he was a libertarian and an Austrian economist.  He had written an essay on Gold and Economic Freedom, which I had read, in addition to Ayn Rand's Capitalization: the Unknown Ideal. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

20 Loka 201739min

Inflation Higher Than Expected Today we got the hotter than expected news on prices - on inflation.  We got the import/export prices.  Import prices were supposed to be up 0.5%, which in and of itself is a pretty big jump, but they were up 0.7. Export were also up; (we would want export prices to go up, because that means we are getting more for what we export) they were expected to rise 0,4%, and instead they rose by 0.8.  Double the expectation. Import/Export Index Methodology More Accurate Year over year, import prices are up 2.7%.  As of last month, the year over rise was just 2.1%, so that's a pretty big jump in the year over year gain.  Export prices were up 2.9% year over year.  Averaging these out, you get 2.8% as the average increase in 1 year of the price of the stuff we import and export.  That's a broad based increase - well above the supposed 2% level the Fed is looking for.  They are looking for consumer prices, measured by the CPI, but the Import/Export index represents things the consumers consume, and I would think these numbers are going to be more accurate than the CPI because there is less subjectivity in there.  I think the methodology is more accurate than the methodology on the CPI.  I think soon we're going to see year-over-year increases import and export prices with a 3 handle. Markets Working Counter-Intuitively When this news came out, the immediate reaction was to buy the dollar and sell gold.  Why?  Why is higher inflation bad for gold?  The main reason to buy gold is as an inflation hedge. If you think there is going to be more inflation, then you buy gold.  Perversely, the way the markets work now, you sell gold if you think there's going to be more inflation, in fact, you buy the currency of the country that is experiencing more inflation, which is counter-intuitive. Inflation by definition, is the currency losing value.  If the currency is losing its purchasing power, why would you want to buy more of it?  You would want to get rid of it to avoid that loss. Will Higher Inflation Produce a Tighter Fed? But the thinking is, if there is more inflation, as measured by these price indexes, that the Federal Reserve is now going to have to fight the inflation, that they are going to be more likely to raise interest rates, to raise them sooner, to raise them more, in the face of higher inflation. So it is the expectation that these higher numbers will produce a tighter Fed - that is what rallies the dollar,  That is what hurts gold - the anticipation of higher rates to fight off the inflation. Fighting Inflation vs. The Bubbles Reality is that the Fed will ignore the higher inflation numbers and do nothing.  Whatever it is going to do with rates, it will do it regardless of these numbers.  Ultimately, if the Fed has to make a choice between fighting inflation and unemployment (because the Fed believes in the Phillips Curve trade-off between employment and inflation), the Fed will always choose to fight unemployment.  It will prop up the labor market and sacrifice its inflation goal. It is more concerned with maintaining asset bubbles, propping up the U.S. government so it does not have to default on its debt. Letting Inflation Burn The reality is, higher inflation is not going to produce a tighter monetary policy.  The Fed is going to have to ignore higher inflation, which means the inflation is going to get even worse.  It is almost like the Fed has to ignore a fire, and because it ignores the fire, it is just going to get bigger, it's not going going to try to put it out because it is afraid that putting it out is actually worse than letting it burn.  If traders understood this, then they would be dumping the dollar and buying gold. Real Inflation vs. Nominal Inflation Even if the Fed ultimately raises rates, they're not going to get out in front of the inflation curve. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

18 Loka 201741min

Optimism Rules the Day Friday the 13th was not an unlucky day for the U.S. stock market; all three of the major stock market averages closing at all time record highs. Optimism is ruling the day. In fact, there was a consumer confidence number that came out today revealing confidence in the economy - the University of Michigan Consumer Confidence - and this is a measure of the belief that the U.S stock market will be higher 12 months from now than it is today.  By that measure, consumers have more confidence in the U.S. stock market than they have ever had in the past. That would include where we were just before the '08 Financial Crisis and where the market was at the peak of the dot com bubble. Complacent Investors In fact, there are other measures of investor sentiment that have never been this high.  Look at the VIX, for example, which is really a measure of risk, of investors' need to hedge their portfolios.  If you look at that, the VIX is at all time record lows.  Investors have never been this complacent about the U.S. stock market - ever! And all of those measures of fear, confidence, are at the lowest and highest readings, respectively, that they've ever been, even though the U.S. stock market is extremely expensive. Not a Bubble? The U.S. stock market has only been this expensive near the peaks of previous bubbles.  But what's different about this bubble is a) it's bigger, and b) people are even more confident now that it is not a bubble.  You have less fear, less anxiety and investors are more convinced that they can't lose than at any prior time, despite the fact that we actually probably have more risk now than during any of the previous bubbles. Of course, it's not just the investors who are confident.  Consumer confidence is high, in fact the consumer confidence number came out much higher than expected today. Government Inflation Numbers Real?  Not. The dollar rallied on that today. Initially, down because of the lower than expected CPI, which is seen, paradoxically as good for the dollar if there is less inflation.  Somehow, the way the markets react, if there is not enough inflation, they reduce the probability of a rate hike, so the dollar sold off.  The PPI that came out yesterday was a little higher than expected, so people were worried: "Oh, well, maybe there's more inflation, then the CPI comes out and it's lower than expected. Of course none of these numbers are actually real, because we all know consumer prices are rising a lot faster than these indexes purport to show. Fed Confusing Inflation with Employment Of course, then the Fed complains that we don't have enough inflation.  In fact the Fed actually claims they don't even understand why inflation is so low; they expect it to be higher.  Ironically, not because of all the money they printed, they think inflation should be higher based on how low the unemployment is.  They are looking at the Phillips curve and they don't understand why we don't have more inflation when the unemployment rate is so low.  They don't understand that there's no real relationship between employment and inflation. If there was, it's the opposite of what they think.  When people are productively employed, and making more things, that tends to keep prices down. When people are unemployed, governments have to subsidize them by printing a lot of money and making a lot of unemployment benefits or welfare benefits, that will generally lead to higher consumer prices. If anything, they will be correlated together, not opposite. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

14 Loka 201734min

Congress May Not Deliver Promised Economic Growth I think part of the renewed weakness in the dollar may be due to the feeling that all the tax cuts are not going to pass.  The Trump/Republican plan outlined some days ago will be difficult to to get through Congress. Even if it does get through Congress it is not going to deliver the economic growth that is being advertised. Tax Cuts Masquerading as Reform Go back to the origins to the Republican dialogue about tax reform.  They actually wanted to do reform. All the reform is out the window now. All we have is tax cuts masquerading as reform.  But the initial concept that the Republicans had was to try to move toward a consumption-based tax system. They tried to do that through the back door with the BAT (Border Adjusted Tax), which is the opposite of what the Republicans are now promising, which was tax relief for the middle class. That's not what they are delivering. Getting Around Elimination of State & Local Tax Deductions A lot of people are going to get tax increases.  Part of the problem, though is the elimination of the deductibility of state and local taxes. I mentioned on an earlier podcast that the states can get around this by shifting the tax to a payroll tax that will be fully deductible for the employers.  Any resulting reduction in salary would be offset by the elimination of state and local taxes.  If the states react the way I think they will to the loss of the deduction, the governments will not reap the tax windfall that they expect, causing much bigger deficits. Big Deficits Ahead At the end of the day the bill may not pass because Congress may not be willing to sign on to anything that raises taxes.  They want everybody to get at tax cut.  How are you going to do that? How are you going to cut income taxes and not cut spending on anything without having a huge increase in the deficit - which of course is what is going to happen. Recession Ahead You can try to assume that some of that increase is not there because of dynamic scoring, you can assume that tax cuts are going to lead to economic growth.  Maybe they will, but I think regardless we're going to have a recession.  There is no recession in any of the forecasts. Nobody thinks a recession is coming at any point during the next 10 years, whether we cut taxes or not. I think, whether we cut taxes or not we're going to have a recession, and if there is a recession, you can throw all this dynamic scoring out the window! Production Equals Stimulus Even if the recession is not as severe as a result of the tax cuts, the results will still be huge increases  in the budget deficit. They are losing some Republican support and they are going to have to reach across the aisle, and there is no way the Democrats will sign on to any tax cuts for the "rich".  If they take away tax cuts on corporations, they take away the reduction in the marginal tax rate, then you lose any hope of economic stimulus. That is where the stimulus comes from.  Real economic stimulus comes from more capital investment, more job creation, less consumption. That is what you get when you reduce marginal taxes on people with the highest propensity to save and invest. Inflation Ahead The Keynesians have it backwards.  They think stimulus comes from consumption - it doesn't.  Consumption doesn't stimulate anything.  Consumption without production just leads to higher prices which is what is going to happen.  We are going to get more inflation. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

11 Loka 201732min

Government Is Not Measured by What It Taxes, It Is Measured by What It Spends Democrats promise free stuff; Republicans promise free tax cuts.  What's a free tax cut?  That's a tax cut that happens even though you don't reduce government spending. In a recent panel discussion with Steve Forbes, I made the point that government is not measured by what it taxes, it is measured by what it spends. So, if the government is spending money, there is a cost associated with that, whether or not we pay for it through taxation, we're still going to pay for it. Cutting Taxes, but Borrowing and Printing the Difference Is Worse We're going to pay for it through more debt, higher inflation, and ultimately higher taxes in the future to not only repay the debt, but to pay the interest on the money we borrowed to finance the tax cuts.  So cutting taxes, but borrowing and printing the difference is worse.  I would rather pay for government with taxes than debt and inflation and higher taxes in the future. That is the argument I made with Steve Forbes is: If the Republicans are going to tell their constituents that they can get tax cuts even though the government continues to grow, they how do they have the political ability to generate the swell of public opinion to shrink government? You Can't Have Big Government and Low Taxes What I want the Republicans to do is make it all about less government.  I want the Republicans to say, "You've got a choice. You can have big government and high taxes, or you can have small government and low taxes."  That's it.  You can't have big government and low taxes. That's what the Republicans want to sell and that's what Steve Forbes was advocating, but if people think they can have their cake and eat it too, they they will vote for that.  But if you put it in those terms: "You want lower taxes, you need less government. If you want to pay less for government, then government has to cost less. Yes you can have a big tax cut, more take home pay, but these are the government programs you have to eliminate in order to make that possible." You Can't Tell the Voters They Can Have Tax Cuts First and Cut Spending Later You might be able to generate support for cutting government spending if people realize there is a reward for that. You cut government spending and then you get the tax cuts.  Steve Forbes was arguing to give the tax cuts first. If we get the tax cuts first, you will never get the cuts in spending.  It's like young kids who want dessert first, but if they want dessert, they have to eat their dinner. If I give my kids dessert first, they'll never eat their dinner! So you can't tell the voters they can have their tax cuts first and then we'll cut spending later because we we'll never get smaller government.  The tax cuts must be contingent on the spending cuts. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

7 Loka 201737min

Gun Laws Do Not Prevent Crime The answer to preventing mass killings is not more gun control; Stephen Paddock would have been able to get those guns regardless of whether or not owning them was illegal. He would have found a way to get those guns. Heroine is illegal, cocaine is illegal - there are all kinds of things that are illegal - it doesn't stop people from getting them. Criminals Will Break Any Law If you are a criminal, you are going to break the law, and clearly, if you're willing to murder, you're willing to break the law about gun ownership. Had the police not found him when he did, who knows how many people he would have indiscriminately murdered?  He still had a hundreds of unused bullets that he was intending to fire at the crowd. He didn't even know who he was shooting; he did not care who he hit. So clearly, someone who is willing to commit that kind of murder is willing to break the gun laws. Another Person With A Gun Could Prevent the Murder So gun control would not have prevented him from committing this crime.  Maybe if someone with a gun in the hotel had found him earlier they could have shot that guy in the back of the head before he had the chance to shoot as many people as he did. Beware of Overreaction What really scares me, though, too, is what kind of backlash we might have, what kind of overreaction for additional security at hotels. Will it be confined to just Las Vegas hotels, or hotels all over the country? I get visions of checking into a hotel being just like the TSA lines at the airports. There is no way to be sure that a hotel can keep guns out of a hotel room.  They don't have cameras inside hotel rooms.  Is it possible that if they had had extra security at check-in Stephen Paddock would not have been able to get his guns up to his room? He might not have, but this was obviously a premeditated act that took days of preparation, and he could have found a way around the safeguards, or devised another way of killing. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

3 Loka 201736min

Record Highs in the Markets This is the last day of the third quarter; S&P 500 and NASDAQ ended at record highs.  I am not sure what made the Dow miss an all-time record - it was close but no cigar.  Other broader measures did hit record highs to close out the quarter, in fact, Donald Trump was tweeting about the record highs in the stock market earlier this morning.  Of course, when we were having record highs under Obama, it was a bubble and it didn't matter, but now that it is his bubble, it's now a bull market and it simply shows what a great job he is doing as President. Weak Dollar Boosts International Markets Of course, U.S stock markets were overshadowed by international markets, thanks in large part to the weakness in the U.S. dollar. The dollar did recover some of its losses in this closing week of the quarter (I believe, again, a bit of a dead cat bounce).  I think the dollar is going to have its weakest quarter of the year in the fourth quarter, so we'll see if I'm right on that. But even with a little bit of a bounce, the dollar index back up to 93.o7. Despite that, foreign markets still well out-performed the U.S. stock markets in Q3 as did gold stocks.  If you bought gold stocks, they did better than the S&P in Q3. Gold Seeking Key Level I think the divergence between the gold stocks and the S&P is going to accelerate in Q4.  Obviously 1300 was not really the breakout; gold got all the way up to $1350 before turning back, and it's now back below $1300; it was off another few bucks today. So I think maybe $1300 wasn't the key level.  It's probably $1350 or higher before we get the breakout.  I think we're at $1280 right now. Personal Income and Spending Weak More bad economic news: the big number was personal income and spending.  It met expectations, relatively, except they did revise July down.  It was originally reported at +1.4% and they revised it to +1.3%, so, weaker than they had originally reported.  For August it was up .2% and consumer spending was up .1%.  Last month's +.3 was unrevised but this month met expectations of +.1% and these are low numbers Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

30 Syys 201737min

Estate Tax is Out Today President Trump announced some of the details of his highly-anticipated tax reform, which is really not tax reform, it's more of a tax cut masquerading as a reform. I would say the best part about it is the elimination of the estate tax.  That, in and of itself is a very substantial improvement. That tax should not be there;  it raises very little revenue but does tremendous damage to businesses.  It impedes the ability of a family business to be passed down from generation. It leads to the destruction and dismantling of businesses, the loss of know-how, ingenuity and jobs. Fewer Tax Brackets As far as the rest of the plan, I like lower taxes, I like fewer brackets (I'd like to have just one bracket - I'd like to flatten it all the way down to zero). Under the President's plan, the brackets are 12, 25 and 35%.  I'd just as soon it would be one bracket of 25%.  If we are going to have an income tax let's let everybody pay the same rate. The new plan is an improvement over the number of brackets we have now. But again, remember, some future President can just expand on these brackets. In fact they're already talking about a fourth bracket because the highest bracket, 35% represents a reduction of the current top rate of 39.6%.  Of course you have to add the 39% Obamacare tax and, of course a lot of people have to add the state income taxes. State and Local Taxes No Longer Deductible By the way, if this version of the bill passes, state taxes will no longer be deductible. That was the one deduction that they were willing to give up, state and local taxes, but they preserved the home mortgage deduction. Personally, I'd rather see it the other way around: get rid of the home mortgage deduction and allow people to deduct their state and local income taxes.  I have a problem on taxing people on money they never got.  If the state taxes you, you never get that money.  Why should the Federal government tax you on the money the state took from you before you had a chance to get it?  I did a podcast on that idea. I think you can't take income that was taken from the citizens by the state.  In fact it may even be unconstitutional. Home Mortgage Deduction is All Politics Why keep the home mortgage deduction? It's all politics.  That deduction is bad economics. If we're going to have an income tax, you don't have a choice about whether or not to pay state and local taxes, but you have a choice about whether or not to buy a house. You shouldn't get a deduction on your income tax based on the way you choose to spend your money. That's the government trying to micro-manage buying decisions, trying to distort and influence the economy. But the housing industry is a strong lobby and they influence the tax code. It's because of the swamp creatures that the mortgage deduction is there. Standard Deduction is Doubled Now the standard deduction is doubled. What this means is more people utilize this standard deduction, fewer people will itemize.  Itemizing is less advantageous because you can't include your state and local taxes. Now if you own real estate, right now you deduct not only your mortgage but your property taxes. If you can no longer deduct your property taxes, obviously that will reduce the value of real estate because it increases the after tax cost of owning it. Our Sponsors: * Check out Infinite Epigenetics: https://infiniteepigenetics.com/GOLD * Check out Justin Wine and use my code SCHIFF20 for a great deal: https://www.justinwine.com Privacy & Opt-Out: https://redcircle.com/privacy

28 Syys 201734min