The Ross Rant -- March 30, 2022

The entire rant is posted below. Over the next few days it will be taken down and only data points posted.

 

See source here: https://www.citadelrealty.com/ross_publications.html. 

The Ross Rant

This past week Powell said it would take 3 years to get inflation back to 2%. Most did not notice that comment, but it was a critical acknowledgment that now the Fed finally realizes it made a bad mistake not raising rates and reducing the balance sheet much sooner. That means there will almost surely be two or more 50BP raises starting in May. It might come to a 75BP raise in July if inflation ramps up to 12%, which is very possible with food prices and oil moving much higher in the next 45 days. Don’t get mislead on oil just because Shanghai is closed down for a few says-oil is going up. The big thing in the May meeting will be the program for reducing the balance sheet as that will have more impact on the economy and the stock market than raising rates as it reduces liquidity. Standby for things to get worse in the market in May and June as these things become known, and as the economy is starting to slow. By then there could possibly be some good, or some very bad news out of Ukraine, just to add to the fun.

My forecast, which is just a guess at this point since the uncertainties are so widespread. Fed raises 50 BP May and June, and maybe 75 BP in July. Recession by late Oct, but it will be very mild. At best, GDP will go up by 1% in 2022 if no recession. The housing market is now suffering from excessive prices, over regulation, materials shortages and high costs, and now rising rates. Home prices are topping out now as mortgage rates move toward 5% by April, and home prices up to now have risen purely driven by 3% or less mortgage rates.. Mortgage rates have been on a downward slope since 1984. That is over for many years ahead. This does not apply to FL where sales are all cash in many cases. The Wells Fargo housing index has declined 3 months in a row. Consumer sentiment is down to 59.4 from 84.9 one year ago, a decade low. EU will be in recession later this summer. Emerging markets will be a bad place to invest as food inflation and shortages leads to riots and other uprisings. The only place to invest will be the US this year and early next year. Consumers expect inflation to run 5.4%, highest expectation since 1981. Many believe they will have a reduced standard of living-the worst reading other than the recessions of 1979 and 2008. 32% expect it to worsen-the worst reading since the mid-1940’s. 50% expect a decline in real income. All of this spells reduced consumer spending and higher wage demands. A recipe for stagflation. The yield curve will possibly invert by May. The 5 year and 30 year already inverted Monday. It is already very close to that point especially comparing the 2 yr and 10 yr. If we get a fully inverted yield curve, it is further reason for the stock market to react very badly as it raises the expectation of recession. The only way to materially cut inflation is to slow the economy, so that is what we will have. German PPI in Feb was increased 25% year on year. Worst since 1948. UK has serious inflation. Central banks need to reduce it with high rates. The whole world economy will slow as the year progresses and central banks clamp down.

Ukraine could bleed the Russians so badly they are forced to withdraw to Donbas and Crimea, right where they started. Before this is over, Russia will have 20-25,000 dead and that means 60-75,000 wounded or captured. They already lost around 12-15,000 dead, and wounded normally is 3-1. Total of 40%-50% casualty rate in a short period before this is over. That will lead to major problems for Putin at home, or a bunch of dead generals after Putin takes revenge on them. That may mean Putin dies as the generals might try to kill him before he kills them.

Core durable orders for March were down .6%. Pending home sales down 4%. Mortgage apps down 14%. Consumer sentiment is down to 59- a near record low. We will have to wait to see what the subsequent economic reports show, but this may be the start of the slowdown. The chip issue is now going to get much worse as the neon shortage becomes impactful. That means autos will continue to have chip shortages a lot longer than expected, and some auto plants will lose production. Autos are a key component of economic growth. Add that to a possible housing slowdown as mortgage rates rise, and you have the makings of a mild recession as the Fed raises rates. If you are planning to refi do it now. We will know a lot more by mid-May when we will see how bad inflation is, what the Fed does, where mortgage rates are, and how bad the chip shortage is. Don’t get all excited as some in Wall Street say that we are past the bottom. In my view this is a false sense of relief, and a failure to understand what is really going on. Not unusual for Wall Street. Keep in mind most of Wall Street missed forecasting the crash in 2008. They were still forecasting good times right up to the Lehman BK. Several of us knew the crash was coming as early as spring 2007, but nobody wanted to hear what we had to say. Most of Wall Street is always over optimistic. The new Biden budget and proposed tax increases are just more of the same left wing stupidity, and fails to deal with the real issues. Biden’s budget speech on Monday was filled with lies, misrepresentations, and total nonsense. You are not missing a stock buying opportunity right now. Just wait and see what happens.

There is nothing in the underlying economy that suggests the market goes up from here. Maybe a short term pop, but not sustainable. Powell and others are all enthused that jobs are strong, but that just means much more inflation as there are still 11 million unfilled jobs, and nobody to fill them, meaning wages rise a lot more, but real wages are still very negative, so we are going backwards. My pool guy just told me he lost 4 workers this season and is having trouble finding even one replacement for a very low skill job. That is typical. It is real wages that matters for consumer spending to grow in real terms vs just on price. When they announce consumer spending grew, be sure to inflation adjust, and then determine if real spending declined. How many Stock Keeping Unit’s sold vs how many dollars did it take to buy the same or lower number of Stock Keeping Unit’s. Margins are going to shrink soon, and the Fed is working to slow the economy, so do you really think that is a good combination for the stock market? We know there will be food shortages due to wheat and corn shortages = more inflation of food and less discretionary spending. Even if oil prices do not rise a lot more, gas prices, and especially diesel, are already at unaffordable levels. Fertilizer is in very short supply so farm yields will be reduced, driving commodity prices higher. Farmers in the US are already saying that the combo of higher fertilizer and gas prices, and the severe shortage of fertilizer makes planting much more acreage a questionable investment. There is only so much people can pay for many foods before they find cheap substitute meals. There will be a real food crisis this year worldwide. Expect social disruptions across the world.

The whole war situation can be blamed on Merkel and the German policy of appeasement with Russia, plus the very clear weakness of Biden. Merkel believed that Russia could become a friendly nation, and part of the western ideology, if we all just traded with them and made them part of the west’s economic collaboration, thus membership in the G 20 and G7. Obama and his national security team all went along with the concept of trade and globalization as the key to peace. For companies in the west, it made sense to shift production and mining to China and other Asian nations where labor was very cheap and there were no regulations. This allowed the US and Europe to have nil inflation for the past 30 years. That is what allowed rates to decline over time and fueled the rise in asset values, as debt cost relatively little compared to most of the decades prior, and especially after the Volker Fed increases. (Over decades the ten year was usually averaging around 5%-6% and home mortgages were 8%-12%.) Globalization became the ideology, and security of product and raw materials sources was forgotten as the world was generally at peace during that period based on the theory of nuclear MAD. The decision to allow China to join World Trade Organization and become a regular trading partner was based on the now naïve concept that by building their economy and integrating them into the western economies, they would normalize their politics, culture, corruption, and geopolitical behavior. This is why knowing history and understanding cultures is so critical. World leaders clearly did not understand Russian history of hundreds of years of war and deception, and other than Kissinger, they did not ever understand China, and their history of corruption and trade, and their inherent, centuries long distrust of all outsiders. They never understood who Xi really was.

The other major thing that was happening was Russia was running a vastly successful propaganda campaign in Europe and the US to drive the whole Go Green concept. There is now clear proof that Russia funded and drove this whole concept of getting off fossil fuels to save the planet. It is likely the most successful propaganda campaign in the history of the world. Not that climate change is not real, but it is not the crisis the world now is driven by. By achieving this climate change, anti-fossil fuel ideology, Putin drove Europe to now be totally dependent on Russia and unable to really shut off Russian gas and oil. It also served to underpin the Democrat push to shut off US drilling and end energy independence. So here we are. Russia felt it could invade Ukraine due to the EU dependence on Russian energy, and the utter weakness of the Biden administration. China I am sure feels it can invade Taiwan because it controls so much critical production on which the US and others depend thanks to globalization being the driving ideology. . China could shut down the US by just stopping producing all sorts of goods critical to life as we know it. The US and EU need to go back to produce here and away from China for national security and not have cost savings as the driver. Biden’s total failure last week to provide Ukraine with the weapons it needs to win will just prolong the deaths and problems for the world economy. It is planting season in Ukraine soon.

The problem now is there is no labor in the US to onshore all of the key manufacturing and mining needed, and the Biden administration will not allow us to do what is needed because of their obsession with the environment and the regulations that policy elicits. Russian money has funded some of this. Now we have Larry Fink who in essence controls proxy votes board elections, and the MSM pushing climate calamity.

So for the past several decades we lived in a make believe world. Trump was the first to realize the US needed to look after itself, and to rebuild its ability to defend against the evil people who populated the rest of the world. He also tried to get Germany to start paying for its own defense instead of having American taxpayers cover it. Biden is more interested in consensus than doing what needs to get done in a timely manner. Like Obama, he leads from the back. He is still coming with new sanctions a full 4 weeks after the war began. Why were they not put in place 30 days ago? Ukraine still needs the MiGs and harpoon missiles.

To repeat what I have said before. The top 1% pays 40% of income tax, and the top 10% pays 70%. The bottom 57% paid zero in 2021. But the Democrats still push we don’t pay our fair share, and they are back to trying to tax unrealized wealth creation. The real issue is they are just envious of those of us who created wealth with our own efforts. It is why BLM and now professors at some universities preach that hard work and sacrifice is a racist white concept, and the government should take from the successful and give it to the lazy. Nobody gave me any privileges, and I am sure that applies to many of you. We earned it.

There are reports the EU is pushing Ukraine to settle the war, and maybe give Putin some land to get a deal, just to end the refugee crisis. Macron is pushing hard for this as is Poland. Ukraine is not agreeing to any Russians on Ukraine soil after all they have been through. This is going on for a long time. Biden did nothing at all in Europe to really make a difference for Ukraine. By not doing what was really needed he prolonged the death and destruction. Refugees are one of Putin’s best weapons. I can’t imagine they will give Putin Mariupol after the deadly battle to save it. I believe the Ukrainians will continue to fight until they win now that they have fought the Russians to a standstill and some retreat around Kyiv as well as some areas in the south. The successful sinking of the Russian ship and damage to the port will create even more serious supply issues for the Russians. If NATO gives them all the weapons they need, and quickly, they can win now. Biden had a chance to lead at the NATO meeting but he blew it. He should have said, Ukraine has stopped the Russian advance and is now pushing them back. They can win and the US and NATO are going to give them all the weapons and support they need to drive out the Russians. If the Russians use chemical or nuclear weapons we will change the whole situation, and we will retaliate with a very different level of support for Ukraine. He could then have left it unsaid what that would be. Let Putin worry instead of the way it is now with NATO fearing Putin. What did Biden mean by “it depends on the nature of the use’ when asked about a response to chemical weapons. Very weak response. He also should have said, I have a message for the officers conducting the attacks on civilians -to the officers in the Russian army-you will be killed or captured, and when captured you will be charged with war crimes and imprisoned for life. That might have made the Russian commanders think twice. It is becoming clear Biden and the EU just want this to end and they are not giving Ukraine all it needs to win. Zelenskyy just called out Biden and NATO again as cowards for letting Putin intimidate them, and for not providing all the weapons support he needs, and he again asked Biden to lead without using Biden’s name. China is watching all this. Biden is failing miserably to do all he should to stop Russia and to prevent the invasion of Taiwan due to his very apparent weakness and fear of Putin. Biden/Obama is very dangerous to world peace. The whole trip by Biden to Europe was a disaster. It is no wonder they never let him out of the basement during the election.