The Bubble Monitor is printed mostly in red for the week ending Thursday, July 14, 2022. They say we are not in a recession, yet we have an inverted yield curve (the 2-year treasury yield exceeds the 10-year) which is a somewhat reliable predictor for recessions. Further, the 2Q22 GDP decreased by -1.9% after decreasing -1.6% during 1Q22 (adjusted down from -1.4%). While 1Q GDP results may be partially attributable to inventory adjustments, 2Q results look more like a traditional decline in economic activity. Having said this, it is hard for us to understand how the Fed can think of hiking interest rates again during an ongoing contraction. Isn’t that how the Great Depression started – by shrinking liquidity? Perhaps this sounds quaint, but isn’t it better to lower prices (inflation) by increasing supply rather than by destroying demand? We live in a highly leveraged world that has already been demoralized by everything covid and we don’t need a sharp increase in borrowing costs which will overwhelm so many vulnerable members of our society. Rather, we suggest that the country get busy finding ways to add domestic supply in clean fuels, food, and housing. That’s the intelligent, humane way to lower inflation!
The CPI-U increased +9.1% over the past 12 months which happens to be the largest increase since November of 1981. We know the knee-jerk reaction is for the Fed to further hike interest rates, but we question this strategy when today’s inflation spike is not a demand issue, but a supply issue. In any case, before these interest rate hikes, people that owned assets were experiencing a “wealth effect” as their homes and stocks inflated in value with all the Fed money printing. Now we are beginning to see all this wealth evaporate with important consequences for the economy. Not surprisingly, these economic woes are causing the auto industry to suffer, especially the car dealers who are being squeezed by the manufacturers who seek to save costs by reducing car inventories to almost zero. Can economic and auto industry problems be solved by a transition to electric vehicles (EVs)? We explore the pros & cons of EVs and conclude they are not necessarily the answer for many American consumers. This is especially true as we consider whether the existing electric power grid can even handle this transition. The US is in desperate need of an energy renaissance, and the answer is not to reduce the demand but to get busy searching for new innovations that may offer better solutions for our society.
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