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b"Stagflation
\\nNobody realized just how bad the economy is, but they're about to find out.\\xa0 All of the economic data that came out this week points to stagflation, if you look at the data.\\xa0 Look at the Philly Fed - dropped down to 19.\\xa0 It is the biggest drop in 4 years; the lowest since the election. Look at the manufacturing PMI - those numbers came out yesterday - dropped to a 7-month low, the lowest since November 2017.\\xa0 If you look at the actual numbers - new orders fell sharply but input cost rose to their highest since September 2013.\\xa0 So you have rising input costs, yo have falling orders; to me this is all stagflation.
\\nThe Fed's Stress Test was too Easy
\\nAs I pointed out, even Alan Greenspan, not too long ago on CNBC talking about stagflation. He can see it.\\xa0 But you know who can't see stagflation?\\xa0 anyone at the Federal Reserve.\\xa0 The Federal Reserve announced the results of their stress tests, and surprise, surprise! Everybody passed. So the Federal Reserve designed tests to measure the banks that they regulate would perform under adverse economic scenarios. First of all, if a teacher gives a test, and everybody gets an A, then the test was too easy.\\xa0 Clearly the Federal Reserve designed this test so that everybody would pass, which of course, is why the test means nothing. Obviously they don't want to announce that the banking system is not sound, so they want to run these bogus stress tests to create a false sense of confidence in the banking system.
\\nLook at the Fed's Assumptions
\\nI want to actually look at the stress test.\\xa0 You really can't tell anything unless you look at the assumptions.\\xa0 What type of stress is the Federal Reserve assuming the economy might encounter? First of all, you have the most likely scenario they assume - their base case.\\xa0 Their base case scenario, which is their forecast is that everything is great. The economy continues to grow 2 - 2.5%/year - a little bit more this year but then it slows down.\\xa0 Inflation stays right at 2%, interest rates stay about where they are, unemployment goes a little bit lower - everything is great, right? Now, their adverse scenario goes as follows:\\xa0 the U.S. has a mild recession, and during that mild recession the Federal Reserve is able to lower interest rates down to about zero again.\\xa0 The yield on the 10-year falls to about .75%, so 10-year yields fall below 1%; Inflation falls; they don't say how low but it falls below 2%, unemployment rises and peaks at 7%. This is their adverse scenario.\\xa0 Interest rates go back down to zero. That doesn't sound that horrible. Inflation goes down - what is so horrible about lower inflation? This is not that bad.
\\nThe Elephant in the Room is Stagflation
\\nBut then, you've got to look at their extreme.\\xa0 In that scenario, we have a bigger recession, and according to the Federal Reserve, there is a global aversion to buying government debt, like bonds.\\xa0 So because of that aversion, the yield on the 10-year doesn't fall to .75% the way it does under the adverse scenario, it stays where it is - right around 3%. So because interest rates do not fall, there is a bigger decline in asset prices - I think they have a 65% decline\\xa0 in stock prices, a 30% decline in real estate prices, unemployment rises to 10%, and inflation falls to 1%. I can't help but laugh at this severely adverse scenario, where inflation is only 1% and the Fed is able, again to lower interest rates down to zero. What is the Fed missing? The elephant in the room: stagflation.
\\nThe 2008 Financial Crisis Was Not Even Close to the Worst Case Scenario
\\nThere's an old saying that generals always prepare to fight the last war, and the same is true with central bankers.\\xa0 What was the last war? It was the 2008 Financial Crisis. What happened during that crisis? Interest rates went down, inflation went down,\\xa0 the dollar went up (by the way, the adverse scenario also assumes appreciation of the dollar,\\n\\nOur Sponsors:\\n* Check out Rosetta Stone and use my code TODAY for a great deal: https://www.rosettastone.com/ \\n\\nPrivacy & Opt-Out: https://redcircle.com/privacy"