Hello everyone!
I started writing this last week and it seems that the price of complacency that I am about to discuss (and was worried about) is showing some effect this morning. But I will jump in anyway…
I believe that the issue of public complacency is so big that I want to share it as widely as possible. As you can guess, I will summarize a general ethos I notice today and tie it back to financial markets. And why not, most of our basest emotions - greed, fear, curiosity, ego etc - are often fed/magnified/exploited through financial markets aren’t they?
As I write this, governments are borrowing endless amounts of money, and central banks are printing money to fund that borrowing. At the same time, outside of the biotech field and certain tech, business reinvestment is not happening. R&D is frowned upon especially by investors who want stock buybacks and bigger dividends NOW.
This is all of course old news. What is new though, is the recent growing acceptance of the idea that deficits do not matter. That we can print as much money in our own currency as we like. This idea - “MMT” or Modern Monetary Theory - which started with some professor somewhere is not really a new idea. Those who study fairly recent history see examples of this in Argentina many times in the 20th century, Zimbabwe in the 1980s, 1990s etc, Weimar Germany in the 1920s and 1930s. They thought it was fine too until of course a wheelbarrow full of money wasn’t worth the wheelbarrow it rolled in.
See this Bloomberg article: Call to Arms to Avert Global Solvency Crisis
As a student of economics knows, you truly eliminate the price discovery process - and hence the ability for producers to gauge what is needed by the consumer ALL ACROSS the marketplace. This is not economically healthy. We now have price discovery being eliminated from financial markets (if you want to read in depth how passive investing flows, and use of derivatives like options keeps US stocks moving up, listen to this podcast with Grant Williams and Bill Fleckenstein interviewing Mike Green, an expert on US flows of funds into markets ).
What Bothers Me
But that is not what bothers me the most right now. What bothers me the most is the result of all of this - total complacency and indifference among the average person to such reckless behavior. We know government types will do whatever they have to to make the short term - the current situation - good (i.e. to make. Even at tremendous expense to the long term. We know that. But now, people don’t even care. Even most republicans don’t even nominally care about deficits. They know that it helps their re-election too!
Reckless behavior:
We are plowing full speed into experimental times in the US economy. We are adopting 3rd world financial strategies to help us avoid any hint at current pain - at least for those with assets. We will do whatever it takes to keep the plates spinning - or to paraphrase Citigroup’s CEO during the "Great Financial Crisis - when the music is playing you have to keep dancing.” We won’t let housing crash, stocks fall or US companies suffer.
And I suppose we’ve painted ourselves into this corner. Every pension, retirement account or retired person’s home is their “retirement security.” Any longer term disruption to financial markets wrecks all of these things. Any substantial rise in interest rates would cause the same wreckage. Because we have put ourselves into this position, it is probable that we can NOT go back. There is no way now to walk back what we’ve done. We either face our debt/currency reckoning as the British did in the 1920s when the First World War bankrupted them, or we somehow figure out a way to monetize without the consequences the Brits faced. Britain had a rising power/currency to “lose to” in the USA, so until another country has the stable economy and low debt stable currency alternative (India?, China?) we can perhaps avoid that fate for now.
But the damage done to the “psyche” of US work ethic and financial morals is quite severe in my opinion. The complacency atmosphere is in fact dangerous. And can damage an entire generation of Americans. It has happened before (just about everything has happened before). Here is Ben Hunt - author of the blog Epsilon Theory - on the concept of living for the now:
Today I’m starting a new series of notes called The Long Now, focused on the further transformation of our social institutions into political utilities … into smiley-face Panopticons of self-censorship where our marrow of autonomy and free will is sucked dry by the Nudging State and the Nudging Oligarchy.
Our money, too. Yes, this will be “actionable”, just maybe not in the way you’re used to.
The Long Now is everything we pull into the present from our future selves and our children.
The Long Now is the constant stimulus that Management applies to our economy and the constant fear that Management applies to our politics.
The Long Now is the Fiat World of reality by declaration, where we are TOLD that inflation does not exist, where we are TOLD that wealth inequality and meager productivity and negative savings rates just “happen”, where we are TOLD we must vote for ridiculous candidates to be a good Republican or a good Democrat, where we are TOLD that we must buy ridiculous securities to be a good investor, where we are TOLD we must borrow ridiculous sums to be a good parent or a good spouse or a good child.
It’s all happened before.
Powerful thoughts. In effect, we are setting ourselves up to be victims of the Paris effect.
The Paris Effect
You remember the rich debutante daughter of the hotel empire don’t you? Question for you - did she build up the family name? or did she just cash in on it? No blame to her but if done the wrong way, “cashing in” could cause some problems. Problems like loss of family reputation, who could lead to loss of trust or disgust which eventually hits the bottom line hard. Now Paris never really cost her family. But there are other better examples of people who have.
We in the USA have been doing the same thing. Our growth in the 19th century laid the foundation of a relatively stable economy. We went through the speculative era (we were an “emerging market” for English investors). Our geographic location and stability after both world wars cemented the stability of our currency and our industry. Lots of people worked, suffered, and died to get the US to this point.
The mid to late 20th century, however saw a different trajectory. Excessive military spending (remember Eisenhower’s farewell address? yeah we didn’t listen to him there), odd monetary policy and the growing deficits from the 1980s on put us on the trajectory of being the debutante - borrowing and spending with no regard for the future, how our currency will hold up, and no regard for the antifragility and durability of our country. It’s all about the NOW. And this isn’t just because of the virus. We’ve been focused on the NOW, to the detriment of long term durability. And it’s not because our taxes are too low either. They’re not. Try adding all of the taxes, sales taxes, gas taxes, tolls, taxes on all your bills and fees, etc you pay and tell me if you pay too little.
We spend too darn much. And then on top of it, we borrow too much. Some to pay for “defense” spending, some to prop up companies that need to go bankrupt, some for general silliness. But here’s the real Paris problem now. We’ve done this so long, that we can’t stop.
We’re Trapped
So many parts of our economy are now entangled in the financial system. And since we’ve so overinflated asset prices (this is where the “inflation” that all the academics have searched for has gone), we can’t afford volatility. We are now as FRAGILE as we’ve even been. No durability. rates rise 2% in 2018, market crashes in the 4th Quarter. Fed reverses that - NO DURABILITY. Airlines, prodded by shareholders to buy back stock to the point they have relatively no cash in the bank, need a bailout in 2020 - they can’t operate 3 months without government help - NO DURABILITY. Local pensions in states like Illinois and in many counties and cities are well underfunded after an amazing 10 year bull market in stocks and will ask for bailouts if this current market does not keep rising. And this wasn't due to the virus, it was due to some bad math and politicians pulling a “Paris” years ago when calculating pension benefits. Either way - NO DURABILITY.
We are trapped. We’ve put off the problem so long by trying to avoid every recession (like plugging the Hoover dam with silly putty) that we can not afford to have a recession. The problems accumulated from all of these prior recessions are enormous and feeling them all at once would crush us for an extended period of correction (some would call a renewal - not the people who suffer though). Therefore, the Fed and Congress simply will do everything they possibly can to stave off the very serious correction that we are due for. The one caused by the over indebtedness in this country.
And I am worried because the general lack of leadership in this country, of telling people we can’t avoid all pain and can not financially engineer success - will cost us. With MMT and endless debt, we passed the point of no return about 2 years back. The US government may at some point suffer their own “Minsky Moment.” When the over-indebtedness just crushes us like it does to a stock market that is fueled by excessive margin borrowing.
One of the major signs of this will be if the Federal Reserve intervenes to ease borrowing, but interest rates rise anyway. Watch out for that.
In parting, I will leave you with this excellent Twitter “thread” from value manager Vitaliy Katsenelson - who is generally a positive guy. he explains what I call the Paris effect. By the way, in case you think he’s one of those “world is ending guys,” his article on Tesla changed my bearish view of the company. So for him to be bearish:
See link to full thread here LINK.