The markets are melting | Seeking Alpha

As we all stand around and watch in horror, the markets are melting. It is very reminiscent of that scene in the Wizard of Oz, where the water gets thrown on the Wicked Witch of the West. Except this time, it is the Federal Reserve Bank of the United States that has begun to toss the water, and not Dorothy.

“You cursed brat! Look what you’ve done! I’m Melting! Melting! Oh, what a world! What a world!

– The Wicked Witch of the West, The Wizard of Oz

Look no further than the major stock indexes for confirmation. The DJIA down -13.97%, the S&P 500 down -18.14% and the NASDAQ down -27.42%. Then consider the world of cryptocurrencies. This is a game that I do not play at all. I am involved with carefully investing, not crap shooting. Yet, it is worth noting that the Bloomberg Index here is down 48% for the year.

Other markets are also being affected, and are likely to continue being affected in a serious manner for as long as the Fed is in and raising rates. They say that this is necessary to combat inflation. I take no other position, but they had also better consider – seriously consider – what it is going to do to the economy and the markets and people’s pocketbooks when they are tossing water on the inflation witch. There are consequences, and I hope the Fed is mindful of the overall consequences and not just the inflation ones.

I am afraid that the Fed’s threat – just threat – of containing inflation is having a marked effect on all of the markets and on the economy. I referenced the stock markets earlier. In the bond markets, the direct consequences will also be felt. Prices lower. Yields higher. More red ink. Look around you:

“Lions, and tigers, and BEARS! Oh, my!”

– The Wizard of Oz

Mortgage rates are now the highest since 2009. Anyone that does not think that the residential real estate market will not be affected by higher borrowing costs is living in La La Land. You know, La La Land, another place that is “Somewhere Over the Rainbow.”

Then the rise in borrowing costs will directly impact business loans, earnings, mergers & acquisitions, stock buybacks, commercial real estate, credit card rates and anything and everything where money is borrowed. Controlling inflation is certainly one notable goal, but doing it at the expense of the rest of the economy is a balance – and a balance that should be thoughtfully and seriously considered.

The government could also help in this process. We can all have some kind of Green New Deal as a goal, but it is one that is years off. One way to cut off Russian influence, and at the same time to reduce inflation dramatically, would be to open up our oil and gas fields to more production and not regulate them to less production. New leases, new pipelines, the opening of existing pipelines, tax incentives for drilling, and the price of oil, natural gas and gasoline will come down in short order, in my opinion. It will also have a major impact on our supply chain issues, as the cost of transporting goods would substantially decline, in my view. Further, this would create many new American jobs.

We could also ship these products to Europe and put the Russian economy in a literal doghouse and make their geopolitical ambitions unaffordable. A win for America. A win for Europe. A big loss for Mr. Putin and company. The American Congress should get a move on!

It is often true the bonds and stocks move in opposite directions. So far that has not been the case, and I do not expect that to change. Prices are likely to be down for everything across the board. This is certainly not any fun, and while a stockpile of cash may make you feel better, it puts you about 900 basis points behind the combined PPI and CPI average inflation rate. Cash is also a losing proposition in this environment.

The exchange-traded funds and notes and the closed-end funds in Grant’s Income Strategy are also down, but they are beating the inflation rate with 10%+ yields. Virtually all of the securities that I am using pay monthly, so each month, the money truck arrives. Then it is just a question of using it or putting it back in the markets to increase your principal value and get more money next month, as long as some fund or note has not cut their dividend. This is not the time for bets on appreciation plays, in my opinion. Many of these plays are also down – and some down considerably – with no income to offset the losses, as most do not pay dividends.

“The sum of the square roots of any two sides of an isosceles triangle is equal to the square root of the remaining side. Oh joy! Rapture!”

– The Scarecrow, The Wizard of Oz

Original Source: Author

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