Postcards from the florida republic : An independent and profitable state of mind.
Six months ago, I sat in a small pub in the West Village in Manhattan with a friend from college. We've been friends for 20 years, and our banter wasn't much different than it had been in 2003.
Old bits. Insider jokes. Changes in social scenes. But the conversation switched when she asked how long it had been since I moved out of New York City.
That was 2008… nine days before Bear Stearns collapsed.
Fifteen years later, I feel odd similarities to that period – and a connection to that time. I became a child and student of the 2009 Financial Crisis. It defined my career and its shift into finance and economics. It's why I run multiple businesses, launch new products, and behave like everything might fall apart.
Our conversation went on a tangent at that West Village table. I explained why interest rates were heading higher, why she might consider taking a second job. My friend barely had any idea what I was talking about. Perhaps she thought I was paranoid.
"Why are you telling me all this?" she finally asked.
"Because we're friends," I said.
This Time Isn't Different
Americans only trust headlines. Plenty of Twitter users are celebrating the June jobs report as a sign of a healthy economy.
I read the entire thing, so you don't have to. It feels very familiar.
There are four takeaways that have me concerned…
First, government statisticians are bad at their job. The April and May jobs report painted a picture of strong employment. The thing is, we just had downward revisions of roughly 110,000 positions. So, they're either terrible at counting… or they're overcounting and changing the tally later when no one is paying attention.
Second, we did see 209,000 net positive jobs created. But about 50,000 of those jobs are in government. Those aren't productive positions per se; they're a cost to the economy and budgets.
Third, and here's the big one - the number of Americans who took on a second job increased by 230,000. In other words, the job creation is happening when people take second or third jobs for economic reasons.
That means, inflation, higher taxes, and rising capital costs due to higher interest rates; that's eating into people's standard of living. They're taking second jobs to be able to afford their lives. And yes, I said higher taxes.
Let's say some American made $135,000 last year and got a raise to $160,000. On paper, that's a nice $25,000 raise. But their take-home still took a bite because the Social Security tax threshold increased by 9%, from $147,000 to $160,000, and other costs like healthcare and other benefits are up year-over-year. Inflation is a kind of
unofficial tax coming in around 5% or higher. Rents are up… as are plenty of other costs.
This brings us to the sobering number. Wages increased by 4.4%, year-over-year. You cannot have such wage growth and expect the central bank to get inflation back to the 2% target.
Markets are disconnected from the underlying economy. We'll get another reading on the Consumer Price Index (CPI) this week. Core inflation is expected to come in at 5% - a frustrating factor that will continue to weigh on consumer sentiment.
We're still not through the first half of the current act in the economic drama. The markets have largely priced in two more rate hikes this year, and the odds of three more rate hikes sit at 7%.
The halfway point comes when we start talking about the likelihood of Fed interest rate cuts. That could be a while, though.
A new working paper at the Kansas City Federal Reserve Bank suggests the Fed may not cut interest rates until 2026.
That possibility would further decimate the already-reeling venture capital industry. It would crush business investment and continue to grind "YOLO," growth, and "zombie" stocks further into the dust. They still have outrageously high valuations and little justification for their price behavior.
The excuses are already coming from central bankers – who are supposed to understand basic economics. There's a new school of "thought" and the Fed, European Central Bank, and the IMF that says "climate change" is responsible for the stickiness of inflation. Several prominent voices have suggested that the costs of the "green transition" and delays in new infrastructure are making it difficult for them to get things under control.
This is, of course, nonsense. Inflation is manmade.
They printed too much money. They're not advocating for reductions in government spending. And they're not pushing for more supply-side solutions to even address the sheer amount of mining production that supports their pet green projects.
I've explained the pathway to beating inflation multiple times.
Cut government spending. Reduce regulatory red tape. Stop pumping money into the system. As I've been screaming, the so-called experts in charge of our economy are ignoring all the warning signs ahead.
But that's unsurprising given their history of policy errors.
They missed Long Term Capital Management in 1998.
They missed Enron.
They missed the Dot-Com Bubble, Bernie Madoff, Freddie Mac, the 2008 housing crisis, the 2015 China crisis, the 2018 bond and equity implosion, the COVID-19 crisis, "transitory" inflation in 2021, the United Kingdom's 2022 fiscal crisis, and Silicon Valley Bank a few months ago.
They'll miss the next bout of inflation too…
We have a lot of commercial real estate that will require new loans at higher interest rates – and those loans will get rolled over at higher costs. What do we think will happen to rents - the largest component of the Consumer Price Index - when that debt is refinanced at higher rates? Rents… and inflation… will go up.
So, are you willing to bet that they finally stick a landing?
Or is it a safer bet that central banks throw in the towel when they finally break something bigger? And they will break more…
Why am I telling you all this?
The same reason I warned my friend in that West Village bar.
Garrett Baldwin (Available on Substack)
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.