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NOTE: I normally do the podcast first and then publish the transcript, but, after appearing today on Steve Bannon’s Warroom, this is so important I’m getting the transcript out NOW.

Hi.  Peter Navarro here and in this episode of the Taking Back Trump’s America podcast, I’m going to provide a weekend financial market wrap within the broader context of an exciting announcement of the inaugural online economics course offered on Steve Bannon’s War Irvine

By way of background, I taught applied macroeconomics to MBA students at the University of California-Irvine for the better part of 25 years; and in the course of my career, I developed what is arguably the most sophisticated, but easy to understand, strategic macroeconomics course available on the market today.

My expertise in teaching has always been to keep things as simple as possible without dumbing them down, and that is what I have done in my course Strategic Macroeconomics for Businesses and Investing. 

This course is now available on the outstanding Udemy online teaching platform but the best way for you to access the course is by going to my substack where you’ll be able to click a simple link and get a nice discount on the course as a substack subscriber or member of the Warroom Posse. 

In fact, as a salute to Steve Bannon’s Warroom University, for the first 1000 students who enroll in the next four days, the course will be totally free.  Just click on the link below but note that you will only have FOUR DAYS from today to take advantage of this offer.

https://www.udemy.com/course/strategicmacroeconomics/?couponCode=F5D2DBE7F75EF513B143

Now let’s get to the market wrap, and it is not a particularly pretty picture.  Right now, we very much have a stock market and bond market trying to decide whether there is going to be recession and/or inflation – that is, stagflation – and whether the Federal Reserve, Congress, and the White House are going to adopt appropriate policies to combat these problems as well as the bank crisis which has been thrown on top of this.

The current disease in the stock market can be summarized with this simple observation – and it’s the kind of thing that I teach in my macro course. 

In normal times, stock prices reflect an expectation of future stream of earnings.  So, if investors expect robust economic growth and associated stronger earnings, these are the conditions for a bull market and stock prices will rise. 

On the other hand, if investors expect recession and slower growth in corporate earnings, it’s a bear market and stock prices will be falling.

The problem in this particular stock market, however, is that this standard principle is not operative.  Instead, any perceived bullish moves upward are not really bullish at all.  Rather, they reflect two kinds of movements.

First, every time investors think that the Federal Reserve is going to ease up on its rate hikes, investors move a little bit of cash out of their bond portfolios and into their stock market portfolios as part of an asset allocation strategy; and this drives stock prices up. 

But these kinds of asset allocation transfers are not healthy bullish moves but rather the perverse outcome of an asset allocation strategy whereby money is simply moving between stocks and bonds.

Second, the kind of seemingly bullish moves that we are witnessing now after the bank crisis has started are simply bear trap feints: They are the result of an expectation of massive amounts of additional money creation about the flow through the system.

To put this all another way, anything that looks like a bullish stock market these days is a mirage.  The reality is that the stock market is likely in for another sustained bearish lay down over the next 3 to 6 and possibly twelve months simply because inflation is going to erode the real value of corporate earnings and, by the rule I explained above, investors are going to have an expectation of lower real earnings and therefore pull money out of equities.  So look out below.

The last dynamic I want to explain is what the bank crisis has done to the monetary policy war on inflation.  And here’s another key economic principle I want you to master:

The money creation process occurs through the expansion of bank reserves via the Federal Reserve.  By shrinking these reserves, this bank crisis effectively axis contractionary monetary policy.

In some sense, I have buried the lead on this because right now, the bank crisis, which has already spread to Europe, is indeed the equivalent of a contractionary monetary policy shock to the US and global banking systems.

The nature of this recessionary shock is twofold: First, banks are simply becoming far more cautious in their lending practices with the reserves they have, thereby tightening credit.  But second, depositors’ cash is also hemorrhaging from the system – bank withdrawals are hitting records.  Of course, fewer deposits lowering the overall amount that banks can lend, further tightening credit.

The practical result of this has been to stop both the Federal Reserve and the European Central Bank in their tracks when it comes to the war on inflation through rate hikes. 

Instead, here in the United States, the Federal Reserve, in collaboration with the Biden White House, has quickly implemented an unprecedented bailout not just of banks in distress but the entire banking system. 

I have discussed the details of this bailout in an earlier podcast and substack but the essence of it has been to move many of the distressed bonds in the US banking system onto the Fed balance sheet; and the practical result has been a massive expansion of reserves now working as a counterweight to the bank credit crunch but ALSO working at cross purposes with its rate hike policy.

The bottom line:

·         Monetary policy is now frozen and the financial markets are not sure what the net effect of this whole thing is going to be – contractionary or expansionary. 

·         Inflation has reached a tipping point at the same time that Federal Reserve’s war on inflation has effectively ended. 

·         And we out there in MAGA land – the black, brown, and blue-collar Americans and middle-class families who are the bedrock of Donald Trump support – going to bear the burden of all of this. 

So stay tuned.  The best thing I can tell you now is to arm yourself with improved economic and financial market literacy, which I’m trying to help you with in my new Strategic Macroeconomics for Business and Investing course, available by clicking this link.  Peter Navarro.  Out.