On the heels of global stock markets and the U.S. dollar surging, a legendary chairman & CEO overseeing more than $170 billion, who is one of the most respected men in the financial world, issued a dire warning about what is happening in Europe and the United States.
Eric King: “Rob, you’ve seen the chart (below) showing the price of ground beef is soaring.
Eric King continues: “In a way this has to do with the competition that you are involved in because this price inflation is directly related to Fed policies and you’ve advanced to the Championship against Janet Yellen, where final voting started today. But when you look at the chart of ground beef, it hit an all-time record record high in February — your thoughts as you look at that chart.”
Rob Arnott: “It’s sad. Basically we are looking at a world in which inflation is ostensibly benign, but inflation as it’s experienced by the average American is anything but (benign). The consumption basket for the average American is dominated by rent, food, fuel and healthcare. And until the last six-months all four of those had rolling 5-year inflation that was faster than the Consumer Price Index (CPI), as measured by the same people who measure CPI.
Now if those four elements of inflation compromise 90+ percent of what the average American spends money on and if all four of them are rising faster than inflation, what the heck is inflation measuring? Is it measuring flat-screen TVs going down in price, or iPads going down in price? As a number of people have observed, ‘You can’t eat an iPad.’
This chart just vividly illustrates it. You’ve got the price of ground beef doubling in 5-years. But iPads are down by over half if you adjust for their speed of processing. It’s not that the price of iPads are down by over half, it’s that their processing power is doubling.
It's Catastrophic For Americans And Europeans
We’re measuring inflation wrong and the average American is really, really struggling. The zero interest rate policies that the Fed is pursuing and the negative interest rate policies that are being pursued in Europe and Japan, are hurting the average American and the average person in Europe and Japan. They are leading to GDP growth that’s near zero in real terms and wage growth that’s near zero in real terms. It’s catastrophic for ordinary Americans and Europeans.”
Eric King: “We’ve seen a massive destruction of the middle class. We have nearly 50 million Americans on food stamps and the economy is so bad, what are your thoughts on the human aspect of this situation?”
Rob Arnott: “It’s a tragic situation because there is a hollowing out of the middle class. When the Fed is pursuing policies that deliberately create asset inflation, that deliberately create asset bubbles, what the Fed is doing is deliberately making the wealthy wealthier. This is the problem with the stated goals of Ben Bernanke’s policies and now Janet Yellen’s policies.
And in so doing the Fed is creating an increased gap between the haves and the have-nots, as a deliberate policy, and then the Fed is turning around and denying that’s what it’s doing. My goodness, the hypocrisy.
Investors Worry About Interventions And Manipulations
When it comes to zero interest rate policies, what this does is it crushes the incentives to save and to invest. You might think that they increase the incentives to invest, but instead what happens is investors worry deeply about what’s going to happen when market interventions and manipulations associated with zero interest rate policies are eventually removed.
So are companies going to invest in long-term risky business initiatives, or in low-risk stock buybacks funded by zero interest rate funding? Of course they are going to pursue low-risk stock buybacks. Are individuals going to start a business when they don’t know the cost of capital or the regulatory regime they are going to be looking at 5-years hence, or do they park their money in the S&P 500? Of course they are going to park their money in the S&P 500.
It's Deeply Disturbing
Are stocks and bonds therefore set to an artificially high level as a consequence of zero interest rate policies and therefore creating an asset price bubble, at a risk of reverting to an unknown but presumably much lower fair value when the interventions are lifted? Of course they are priced at an artificially high-level at a risk of reverting to a much lower level when interventions are lifted.
And this is happening all over the developed world. It’s deeply disturbing. That’s the problem with all of these interventions and all of these policies — you have manipulated prices. And those manipulated prices lead to distortions. And those distortions are reflected in market values and in forward looking returns, which are likely to be really, really anemic.
The problem is that we elect the people who tell us the prettiest lies. That’s done all over the world. The folks who tell us the prettiest lies are those who tell us that Big Brother will take care of us. Big Brother is us. We’ll take care of ourselves. We always have, we can, and the more we think we can offload it onto some nebulous Big Brother out there, the more we’re kidding ourselves.” Please support KWN below!!
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Rob Arnott schools Janet Yellen below: "Ms. Yellen, Zero Interest Rates Are Not Good For Long-Term Investors Or GDP Growth…"
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