The Pomp Podcast - #1054 Pomp Explains The Current Economic Environment

Episode Date: July 20, 2022

Today's episode is a little different that usual, there is no guest joining me. Instead, I give my thoughts on the current economic crises, how we got here, what to expect going forward, and what you can do at home to help your economic situation. ======================= BCB Group is the leading payment services partner for the digital assets industry. BCB Group provides payment services in 30+ currencies, FX, cryptocurrency liquidity, digital asset custody and BLINC, which is BCB’s free, instant settlements network for the BCB client ecosystem. Find out more by visiting bcbgroup.com/pomp ======================= Coinchange is an automated wealth management platform that earns daily compounded yield for you. Earn up to 10% APY on a risk-mitigated basis – your payout doesn’t depend on the volatility of the market and there are no lockups or minimums.  Register now at coinchange.io/pomp and get a welcome bonus of 40 USDC when you fund your account. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Today's episode is a little bit different. I spent about 30 minutes and just sit down and talk about my honest assessment of where we are as an economy, how we got here, and what the Federal Reserve and various other organizations are going to have to do moving forward to help us get out of this situation. I really enjoy sitting and thinking about the current situation and also many of the inputs and outputs as we move forward. I hope that you enjoyed these episodes. Before we move on, I first want to talk about our sponsors. This episode is

brought to you by FTX US. FTX.US is the safe, regulated way to buy and sell Bitcoin and other digital assets. You can trade crypto with up to 85% lower fees than top competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees either. FTX.US is also the only leading exchange that supports both Ethereum and Solana NFTs. Download the FTX app today and use referral code POMP to earn these free crypto on every trade over $10. The more you trade, the more you earn. Go download the FTX app today and use referral code POMP. This episode is brought to you by BCB Group. With a dedicated focus on institutional payment services, BCB Group provides business banking, cryptocurrency, and foreign exchange market

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You can find out more by visiting bcbgroup.com slash pomp today. Again, that's bcbgroup.com slash pomp today. This episode is brought to you by CoinChange. CoinChange is an automated wealth management platform that earns daily compounded yield for you. They've got sophisticated algorithms that automatically analyze and allocate liquidity to more than 25 DeFi protocols where you can earn very high rates of return

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Register now at coinchange.io slash pomp and get a welcome bonus of 40 USDC when you fund your account. Again, coinchange.io slash Pomp. Don't just hold your crypto assets, but earn smart DeFi yield with CoinChange. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests

as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. What I want to talk to you guys about today is what my honest assessment of the current economic situation is. In order to understand where we are right now,

I think that we need to go all the way back to 2020. But in order to understand 2020, I think we need to take a trip all the way back to 2008, 2009. And for those of you who remember the global financial crisis, what we saw was many, many financial organizations brought to their knees.

They literally thought that they were gonna go out of business. Some of them did. Some of them went bankrupt. Some of them were saved at the last second. But during that time, central bankers learned a brand new playbook of quantitative easing.

And in that situation, we had emergency monetary stimulus that was brought forward. Asset prices during the summer of 08 sold off. There was about a six-month liquidity crisis. there was fear and uncertainty all over the place. If you look at an asset like gold, it went down 30%. But of course, once the central banks

and elected officials decided to step in, they were able to create loose monetary policy. They were able to stabilize those asset prices and send them in the other direction. If you look at an asset like gold, it then went up and by 2011, it hit an all-time high. Now, of course, that playbook was measured in hundreds of billions of dollars of monetary stimulus.

If you then fast forward to January, 2020, what we saw was historically low unemployment, about 3.4%. The economy was rocking. Now there were some early warning signs in 2019, things like inverted yield curves, a high degree of CEOs that were leaving their jobs and a number of other things that said to people,

maybe we are towards the late stages of the longest bull run in history. But no one, regardless of what claims they make today, understood that a pandemic was on the horizon. And so in March of 2020, we saw the first cases of the COVID-19 virus in the United States. Because of the lack of knowledge around that virus and the good intentions to protect American citizens, the U.S. government, both at the local, state, and federal level, ordered people to sit at home. government-mandated lockdowns. As soon as those government-mandated lockdowns started to be implemented, what we saw was the velocity of money in the economy drastically dropped. When the

velocity of money drops, it means that you, I, and everyone else, we're not spending money. We're sitting at home. And so as that velocity of money drops, that means that businesses aren't driving revenue. If businesses in the virtual world or in a local economy aren't getting as much revenue, puts pressure on them, and they may actually have to lay people off. But also there was businesses that were just outright shut down. They were not allowed to operate by the government. And so businesses began in the latter half of March of 2020 to lay people off. We saw 6.6 million people file for first-time unemployment claims multiple weeks in a row. This was not a good situation. So we have the velocity of money down, we have people locked at home, and we have unemployment

skyrocketing into the low double digits. Of course, the Federal Reserve and elected officials, they look in their toolbox and they say, what can we do? Short-term pain is growing acute and we need to address it. The incentives for central bankers and politicians is to always address the short-term pain

and worry about the long-term pain later. And that's exactly what they did. The Federal Reserve stepped in with trillions of dollars in concert with the Treasury and they began putting money in every exotic corner of the financial system. The fiscal policy came as well. And we saw trillions and trillions of dollars,

either through monetary or fiscal policy, put into the economy. Well, when you go and you stuff money into an economy, you can really only do it two different ways. You can either have the Federal Reserve go and buy assets, be a persistent bidder in the market, or you can send money directly to businesses and individuals. The United States collectively decided to do all of the above,

along with also dropping the interest rates all the way down to 0%. This loose monetary policy, this historic monetary stimulus, ended up leading one of the fastest recoveries from a definition of a recession in history. We, by summertime, were already recovered and we had an asset bubble brewing. From the summer of 2020, when stimulus checks were being mailed directly to people,

when businesses were getting bailouts with no equity or debt requirements, and when there was 0% interest rates and there was a persistent bidder in the market, the Federal Reserve, we saw assets explode upwards. Now around Q3 of 2020, we started to see sophisticated investors on Wall Street

talking about inflation, that inflation may be coming. The talking points from the central bankers, from people in positions of power and influence, and even the mainstream media was that inflation was not something to worry about. And if we did get a little bit higher inflation, it simply would be transitory.

Then by about Q1 and Q2 of 2021, the talk of inflation started to get louder. We still were under 5% inflation, but you could feel that things were changing. There was consumer spending trends that were starting to show up. There was businesses producing earnings reports with record profits and growth. And it felt like the COVID-19 problem was slowly being put behind us. Fast forward to the summer of 2021, and we saw inflation break 5%,

CPI year-over-year growth 5.5 or more. Since that point, we have not seen below 5% inflation. And in fact, it's only accelerated, with the latest reading showing 9.1%. But even though inflation was over 5% in June, July, August, September, and October, the Federal Reserve kept interest rates at 0%, and they were still buying assets in the market. As the central bank continued their loose monetary policy regime, and they continued to buy assets and expand their balance sheet with what eventually became a 10x increase from 2008-2009 to 2021.

We saw all asset prices grow to the moon. Valuation metrics in the public market exploded and were obviously multiples way above where we've historically seen them. Cryptocurrencies like Bitcoin exploded upwards and hit all-time high after all-time high after all-time high. and other assets like real estate continued to grow as well. Finally, in November,

the Federal Reserve started to talk about no MAS. We must address the problem. We cannot have a zero rate environment and we cannot continue to buy assets in the market. At that point, some investors said, I've seen this movie before. When the Fed pivots, you should subscribe to the old adage,

don't fight the Fed. and the Federal Reserve at first talked tough from November of 2021 until March of 2022. They talked tough. They said they were going to do things. Some people believed them and others thought they were bluffing. Finally, starting around March,

we saw the Federal Reserve start to hike interest rates and make capital in the market more expensive. They claimed that they were going to start conducting quantitative tightening. And although they really haven't done that yet, they're at least thinking about it We're trying to start selling assets. As the Federal Reserve began to talk tough

and then eventually raise interest rates and eventually will sell assets off their balance sheet, we have seen asset prices across markets crash. A 60-40 global portfolio is designed to protect investors. If stocks go up, bonds, they might not go up as much. If bonds go up, stocks might not go up as much. And so naturally, having a diversified 60-40 global portfolio should give you the protection, and good times are bad.

But that's not what we've seen. Stocks, bonds, real estate, various commodities, cryptocurrencies, and much else, all suffering at the hands of one big trade that the Federal Reserve is in control. Now, the problem is that since March or so, as interest rates have risen, we have not seen inflation come down.

Instead, what we've seen is that inflation is actually accelerating. We breached 8%. And then in June of 2022, the data shows 9.1% growth. Now that 9.1% headline number really grabs people's attention. It's unsustainable for the average American family. Food at home is up 12% year over year.

Gasoline is up 60%. If you look at the things that people buy on a day-to-day basis, they're much more expensive than they were 12 months ago. But that 9.1 headline percentage from the CPI is on top of the 5.4% last June. So if you were to go back to June of 2020 and then look today, the prices in the consumer index are actually up double digits over a two-year period. That is compound growth of inflation.

And so naturally the federal reserve is stuck with a really hard problem If they continue to aggressively raise interest rates with 50 and 75 basis point hikes If they begin and successfully continue to pursue quantitative tightening creating those tighter financial conditions They may get inflation down But maybe they won't But either way they will be able to destroy demand which is the whole purpose of what they're doing and they could push the United States into a recession. Now, there's a lot of critics that say

we are not headed towards a recession. Just look at all of the consumer behavior. Spending is up. Transactions are up. The use of credit hasn't exploded higher. The consumer is healthy. The consumer is spending money. They're spending it on experiences and travel.

We've seen that in the recent bank earnings. But in Q1 of 2022, there was a GDP contraction. Economists, forecasters, and mainstream media thought that we were going to have a positive GDP growth in Q1. Instead, we got an annualized negative 1.4% initially. It's now been revised down even more. And so if we had Q1 GDP contraction, and then if you look at something like the Atlanta FedNow system

or GDPNow system, you can see that it's predicting Q2 is going to be a negative GDP number as well. Two straight quarters of negative GDP growth Is a recession And so whether consumers are acting like we're in a recession or not Isn't actually the point That we've got two consecutive quarters of GDP contraction There has been very few times in history

That the Federal Reserve is aggressively hiking interest rates Going into a recession And the Federal Reserve continues to stick with the talking points That they're not done yet and that they're going to continue to hike those interest rates. They're going to continue to pursue tighter financial conditions.

If we have multiple quarters of GDP contraction and we are raising interest rates, it's likely just to push us further and further in the wrong direction. But again, it's a lose-lose hand because if the Federal Reserve does not raise interest rates, they do not conduct that quantitative tightening, inflation will only continue.

Most people point at that 9.1% number from June of 2022 in the CPI, and they claim victory. Inflation will have peaked, they claim. But as my friend Darius Dale over at 42 Macro has pointed out, if you look at the trailing three months of inflation growth and you annualize it, the real inflation rate right now is accelerating. It's actually over 10%.

And so naturally, the Federal Reserve, as they've tightened those market conditions, have not had an impact on inflation. Inflation is getting worse at the same time that they're tightening. That means that one of two things has to occur. Either the Federal Reserve takes a baseball bat to the market and they continue to do everything in their power to destroy demand, to bring down that inflation number,

which is now compounding at a very high percentage year over year. Or they wave the white flag and they say, we will not push the United States of America into a deeper recession. We simply are going to let inflation run high for a period of time. A high inflation environment is bad news and a deep recession is bad news as well. And as if this was not complex enough, what we see is that in a time of loose monetary policy, where they were drastically increasing the monetary supply, There was all sorts of disruptions to the supply chain. You can think of this on a supply-demand equation.

Increasing the monetary supply and handing it to the market and to individuals drastically increases demand in the market for consumer goods and services. If demand is exploding, the producers of goods and services, naturally in a free market, would increase their production to meet that demand. The problem is that the producers were not able to increase production because of supply chain disruptions. Those supply chain disruptions, whether for goods or materials that are involved in services,

ended up constricting the production on the supply side. So we have demand exploding from the consumer and we have constraints on the supply side. That is a cocktail for a high inflationary environment. Now add in, in February and March of 2022, geopolitical conflict with Russia invading Ukraine. All of a sudden, that region, which most people in the American economy didn't pay a lot of attention to, now they have to get up to speed because there's double-digit percentage of oil and natural gas in the globe coming from that region. wheat production, fertilizer, and many other core ingredients for everyday life originating

from the Russia-Ukraine region. Now, as geopolitical sensitivities, conflict, and uncertainty drastically increase, we see many, many countries starting to look around and say, Houston, we may have a problem. Now, of course, you can put another filter or overlay on this situation, which is that for the last couple of years, we have seen the ESG narrative take hold. And there has been tons of pursuit of virtue signaling. It sounds good to say that you care about the environment, regardless of whether the decisions you're making actually are good for your citizens, your society, your economy, and your population. Now we see countries like Germany, which have run around and shut down power plants and claim that they won't pursue

nuclear, begging Russia for more oil. We see the United States, where we refuse to build more nuclear power plants, where we refuse to drill for oil within our own country, running off to Saudi Arabia to beg for more oil. The ESG narrative has been delivered a death sentence. It does not work in practice. What it does is it forces countries to give up on energy independence and it creates all sorts of manipulation in the market price of various commodities because ultimately the ESG narrative is a form of market intervention. And when you have market intervention, you cannot have free markets. If you do not have free markets, you do not have efficiency. Ultimately, an entire generation is learning that free markets are smarter than

economists, they're smarter than politicians, and they're smarter than URI. Free markets solve problems. We need to return back to a free market economy. The Federal Reserve today is faced with a no-win situation. They allow inflation to run high, we're in trouble. They raise interest rates were in trouble. They cannot solve the geopolitical conflict. They cannot address many of the ESG concerns. They simply are in charge of monetary policy. Now what we are facing is either a recession or high inflation. My guess is that the Federal Reserve will wave the white flag. There will be a Fed pivot at some point, maybe before the end of the year, or maybe it leaks into the beginning of next year.

But at some point, the Federal Reserve will have to acknowledge they cannot push the United States of America deeper and deeper into a recession. You simply may have to let inflation run wild. Now, of course, there's one last complexity that usually gets lost in the analysis of what's happening right now.

Midterm elections are on the horizon. If any of the local elections or any of the public narrative is a sign, it looks like it's going to be a bloodbath for those on the Democratic side. Now, of course, that doesn't mean that the right can't go ahead and make many blunders between now and then. But there seems to be a wholesale rejection of the ESG and woke narrative across the United States. And naturally, if you are the current administration, if you are the party that is in power. You feel the midterm elections are important. And one of the death sentences

to head into a midterm election is with gasoline prices skyrocketing, with the average consumer experiencing 9% inflation, and also psychologically worried about a potential recession. High inflation does not equal good results for your political party in a midterm election. But even worse, a recession doesn't equal good results either. And so my guess is that when the president of the United States calls the Federal Reserve Chairman Jerome Powell to his office, it's kind of like the principal calling a teacher in and saying, I want you to teach whatever you want in your classroom,

as long as you subscribe to my general philosophy. And so naturally, the central bank is supposed to be independent, supposed to be predictable and reliable. But what we have learned over the last two years is that it is none of the above. We have seen presidents on both the right and the left go ahead and rail on the Federal Reserve about what they should be doing. We've seen a lack of predictability and a lack of reliability in the central bank as well.

How do we expect the average citizen or the average business to plan one, two, three, four, or five years in advance, let alone 20 or 30, if the monetary policy continues to change on what appears to be a quarter-to-quarter basis, and if the economic environment can go from good times to bad times to amazing times to dire times, all within a two-year time span. If there is one lesson that we have learned over the last hundred-plus years, It is that free markets solve problems We do not need a system Where central bankers and politicians

Continue to intervene in the market As the great economist Milton Friedman once said Government should be a referee Not an active participant The reason why that is so important Is because, as Friedman also said Many times the government solution is just as bad as the problem itself.

And so what we continue to watch play out over and over and over again for the last 15 years or so is that the central banks step in. They mitigate short-term pain. That sounds great in the short term, but it creates long-term problems. And those long-term problems

end up being more painful for folks, especially those most vulnerable in our financial system. Today, we do not have just a wealth inequality gap. That wealth inequality gap is getting worse and worse, and we should address it. But we also have a financial education problem. The lack of financial education in the United States of America

should be a national emergency. 50% or so of all citizens in this country have zero investable assets. That means during times of high inflation, they are sitting there with 100% of their economic value and their wealth exposed to an invisible threat that is eroding their purchasing power and ultimately stealing that wealth from them. If we simply were able to educate the average citizen on financial principles like personal finance, spending less than you make, and ensuring that you invest in investable

assets. We could drastically improve their situation over the long run, and we could help them protect themselves. Which assets they invest in is less important than simply explaining to them that although your grandparents or your great-grandparents could save their way to financial security, you can no longer do that by saving in any fiat currency around the world. You have to become an investor because the guarantee is that every single fiat currency in the world will continue to be debased because we have a debt problem globally. In the United States, debt to GDP is around 130%. Globally, it's more than 350%. The only way that countries can service that debt is to continue to debase their currency

so that they can pay off the debt with future devalued dollars. As you have seen for years and years, regardless of Republicans or Democrats being in power, we continue to raise the debt ceiling, which is just code for using your second credit card to pay off your first. We cannot pay back the debt, and we are not growing GDP fast enough to actually service that debt. And so naturally, the incentive is to devalue the currency, to continue to take on more and more debt, and to simply keep the game going. This spells for long-term problems. The only way to solve these problems is to have a first principle solution. We can either drastically increase our GDP growth, or we can transition to money not based on debt. As we watch the problem unfold,

there is very little that you as an individual can do. You will not be able to complain influence or hold accountable those who are making these decisions. Most of them are not elected officials. They do not work for the American people. They simply are appointed by politicians and there is very little accountability that you yourself have. So naturally what you have to do is focus on what you can control. No amount of complaining will change the situation. You simply have to understand that we are transitioning to a world which is looking a lot like our past where individual responsibility

and personal independence is incredibly important. You need to make sure that you're educated. You need to take the time to understand how the world actually works, how the economy and monetary policy works. You need to understand that a strong balance sheet and strong cashflow allow for insurance in good or bad times.

And you need to make sure that you're prepared for the worst. Although it pays to be optimistic And you should hope for the best The worst is always around the corner And making sure you're prepared is incredibly important Unfortunately, the analysis of the Federal Reserve And various other central banks around the world

Is not good The outlook is dire And we continue to see problems of inflation and recession But you as an individual You have no ability to change that You simply need to learn the timeless principles of personal finance Make sure that you spend less than you actually make Ensure that you can get out of debt as quickly as possible

Make sure that you've got some sort of rainy day fund Make sure that you're able to invest in great assets That you feel you can hold for a very long period of time And simply stay disciplined and patient and allow those timeless investing principles to play out year after year after year. The economic situation is not great. There's nothing that you're able to do about it.

You can only control your micro situation. The more that people realize that, the better off that you'll be.