Hey There Income Hunter,
In a shocking report released on Friday, average hourly earnings doubled month-to-month.
Even as labor market participation rate remains at an all-time low.
On top of that, legislation passed last week approved new contracts granting railroad workers 24% pay increases over five years from 2020 through 2024 and immediate payouts averaging $11,000 upon ratification. That will set the earnings bar for labor unions even higher, risking a wage/cost spiral.
What’s more, this is just one aspect of the hidden inflation within the system …
The other is the stealth easing going on behind the scenes at the Fed, Treasury and US government.
And all this is happening while the rate of change in tax receipts just went negative for the first time since 2020.
This puts the US back on a stagflationary track that has not been priced into the market.
Today, we’ll look at the inside statistics at the Fed that are setting the stage for a short-term burst of stagflation …
And the huge market impact that represents.
A Hidden Force Driving Inflation
Fed operating losses = stealth QE?
This is not something you will hear from Jerome Powell, but Fed operating margins have shrunk to a loss for the first time in history. The chart below shows Fed settlements to the Treasury are now negative …
The loss you see above is due to the interest rate the Fed pays banks on the reserves they must keep at the Fed.
As rates go up, the Fed’s interest goes up.
However, most investors are missing the massive implications of the Fed’s operating loss for US inflation and risk asset prices.
You see, the Fed is printing $200+ billion annually that basically goes to the banks to pay them NOT to lend.
That means, the Fed’s shift to an operating loss is effectively a “stealth pivot” to printing money even while it is executing QT.
Now, one way the freshly-printed $200 billion-plus gift to the banks makes its way into the economy is if the banks invest a portion of the proceeds into Treasury and mortgage bonds.
The Treasury knows this could increase its issuance of bonds, allowing the government to increase spending, which would add another inflationary impulse into the economy.
As you can see below, year-over-year trailing three-month Treasury spending is now rising at the fastest pace since 2020-2021 …
Powell talks tough on inflation, but his rate hikes have pushed the Fed into an operating loss … so he is effectively financing excess government spending.
You see, the Fed is inflating bank profits. The banks can then use the proceeds to buy more bonds, which earns greater risk-free interest income. Then the Treasury steps in and increases bond issuance to allow the government to spend more money like they are now by …
Examples include extending the student loan holiday to June and continuing to spend $25 billion a month on emergency Covid relief – about half of it on Biden’s extensions.
There is so much that goes on behind the scenes at the Fed. You have to know the signposts to monitor for subtle shifts in policy
That is why I have been pounding the table on the precious metals breakout.
To me, that was a sign that the banks were unwilling to do what it takes to hold the gold price down.
Realization that the Fed will not be able to get inflation down to anywhere near their 2% target is a likely reason why.
Bring It Home
It is important to remember that these stealth easing moves by the Fed, on their own, all else being equal, can boost inflation.
However, in the coming months the Treasury and the Fed may introduce new tools to counteract the liquidity being injected by its operating loss.
In my opinion the Fed is just setting itself up for its biggest mistake of all: Tightening for too long.
This all makes me even more bullish on gold and silver longer-term. But with silver above $23 and gold over $1,800, I believe they will roll over in the days and weeks ahead and correct before resuming their uptrend.
The impetus for the decline will be a rebound in the US Dollar Currency Index (Ticker: DXY), which has come off $10 in a very short time. The high in the dollar may be in, but we could easily get back to $110 before the real collapse later next year.
Stay tuned, have a great week and as always …
Live and Trade With Passion My Friend,
Griff