Very Difficult Times Ahead For Everyone – Rick Rule Warns

‘Daniela, the circumstance that confronts us now, was at least 20 years in the making, and it’s not going to be two weeks in the fixing. You’ll recall, or maybe you won’t; you’re probably too young, but many of your listeners will recall that when we decided to cure the inflation problem at the end of the 1970s, the method that we used, which is to say, very, very, very high interest rates, real interest rates, worked with regard to inflation, but they wreaked real havoc on some individual voters, taxpayers, and savers. The recession that was engendered in 1982, 1983, 1984, and part of 1985 was truly one for the record books, with double-digit unemployment and home foreclosures. Things like that would work, if we had the courage to do it.’

Very Difficult Times Ahead For Everyone photo

Well-known investment advisor Rick Rule said the Fed will chicken out on its inflation fight. Rule runs Rule Investment Media and formerly served as the president and CEO of Spratt US Holdings, incorporated. In a recent interview with Daniela of Stanberry Research, the rules said that the Fed could get inflation under control with significantly tighter monetary policy for a sustained period of time. But he said he doesn’t think the central bank has the wherewithal to follow through when the economy starts to crash. He has warned that the Fed won’t have the fortitude to fight inflation. In an interview with Moneywise earlier this year, he said, “I do not believe that the broad equity market will handle multiple rate hikes.” Inflation has been high for months. At the June FOMC meeting, the fed raised interest rates seven to five basis points for the first time since 1994. 

The central bank continues to insist that the central bank contain inflation while bringing the economy to a soft landing. But this promise seems dubious at best. Here’s a reality: the US economy was built on easy money and debt. Taking away the easy money will pop the bubble and collapse the economy. As the rule alluded to, this needs to happen. We need a recession to cleanse all of them as allocations and distortions out of the economy. But that would mean a lot of pain, and for all of the tough talk to Rule, many others don’t think the Fed has the political will to allow the economy to crash.

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‘-The only thing that I have cautioned about, and I have a lot of caution, is that we had more tools available to us then, in the sense that government debt as a percentage of GDP was much, much lower. The ability that we have to stick handle the circumstances with federal government debt at 125% of GDP and a much higher reliance on government with regards to all aspects of the economy than we had then makes me wonder if we have the tools available to us to combat inflation.

– It sounds like you think we don’t?

– I’m not an economist. I am, in fact, a lender. I’m a credit analyst. To me, a healthy balance sheet and a healthy income statement are prerequisites for a healthy economy, and we have neither. On the one hand, between on-balance sheet and off-balance sheet liabilities at the federal level, we owe each other. That’s a polite phrase about $150 trillion. So the balance sheets are in lousy shape as for the income statement, rather than having a positive income statement.

So that we can service the debt, the federal budget is in deficit by $2 trillion a year, so rather than working on $150 trillion of debt, we’re in fact increasing it, so you’re right. Daniela, I am having a very difficult time seeing an easy way out of this. It does need to be pointed out in fairness that we have benefited from 40 years of decent economic growth, very low inflation, and very low interest rates. What’s happening? It is karma. I guess we are facing a reckoning that has to do with the fact that with quantitative easing, as an example, we forward shifted demand with excessive liquidity and very low interest rates. We disinvested saving and we incanted spending, and we got what we paid for. We have a situation now where there are excesses throughout the economy and, sadly, somehow, either policy or time, we’re going to have to work this out, and I don’t know how we get from here to there. I suspect we will get from here to there as we always have in the past, but I do not think it will be pretty. And I don’t think it will be pretty, in particular for people who forgot to save, people who forgot to invest, or people who forgot to equip themselves with the skill sets that will allow their incomes to keep pace with inflation. Unfortunately, that’s tens of millions of Americans.

-You just gave me gooses by saying that you know just the importance of just being prepared for moments exactly like this. I want to get back to your point that you made by saying this is 20 years in the making. It’s not going to go away in two weeks. Should this not be the Feds’ moment to undo the mess? They did when they came up with, you know, this is all transitory to being more transparent and saying, “Listen folks, this is going to get really ugly.”

-I hate to be cynical, Daniela, but I don’t think that being honest is part of the political ethos. People don’t want honesty; they want assistance. I would love it if we had a national dialogue that said that we have lived beyond our means for 40 years and that we have to have 350 million individual resets and, while we’re at it, we have to have a national reset. I assure you that if I ran for president on that platform, I would get maybe 10,000 votes and probably 30,000 death threats. The prescription that you offer up is the correct one, and as a consequence, it’s highly improbable that people get elected these days, unfortunately, by voicing other people’s satisfaction or dissatisfaction. If you are a Democrat, you get elected by vilifying Republicans. If you’re a Republican, you get elected by vilifying Democrats. Nobody gets elected by quoting that great political philosopher, Pogo, in his comic books. In his comic strip, Pardon Me, we have met the enemy and he is us.’

If it feels like your dollar doesn’t go quite as far as it used to, you aren’t imagining it. The reason is inflation, which describes the gradual rise in prices and the slow decline in the purchasing power of your money over time.

The Fed is facing a difficult balancing act as it needs to raise interest rates aggressively to bring down inflation without triggering a US recession. Rising interest rates increase borrowing costs for companies and consumers, weighing on economic activity. Up to this point, the U.S. labour market has been solid, but the S &P 500 18.6% year-to-date decline reflects concerns on Wall Street that the economy may not take spiking interest rates well. The chief measures of US inflation are the consumer price index (CPI), the producer price index (PPI), and the personal consumption expenditures price index (PCE), all of which use varying measures to track the change in prices consumers pay and producers receive in industries across the whole American economy. Americans piled up an estimated $2.5 trillion in extra savings during the pandemic. But now that money is dwindling as people use their cash reserves to deal with the worst inflation in over 40 years. According to a new Forbes advisor survey, a full 2 out of 3 Americans say they’re rating their savings as prices for goods and services spike. 

A fresh government inflation reading shows consumer prices in May were up 8.6% from a year earlier, the biggest annual increase since 1981. Inflation is hurting workers, with wages not able to keep pace from May 2021 to May 2022. Real wages adjusted for inflation dropped 3.0%, widening the gap between earnings and the cost of goods and services.  Add to that rising consumer debt – $266 billion more just from the fourth quarter of 2021 to the first quarter of 2022 and it’s probably no surprise that savings are shrinking. 

Everyone is affected by the recent crypto and general market crashes. If you have savings, please use them wisely; if you have no savings, try and cut down your expenditure as much as you can. What do you think is right to do in this situation?  Do you prefer copy trade crypto or something else?

[This article is a transcription of a video made by Savvy Finance]

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