Inflation

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Remember all those “green shoots?”

That was the ubiquitous phrase used by White House officials and TV talking heads in 2009 to describe how the U.S. economy was coming back to life after the 2008 global financial crisis.

The problem was we did not get green shoots, we got more like brown weeds.

The economy did recover, yes, but it was the slowest recovery in U.S. history.

After the green shoots theory had been discredited, Treasury Secretary Tim Geithner promised a “recovery summer” in 2010.

That didn’t happen either.

The recovery did continue, but it took years for the stock market to return to its previous highs and even longer for unemployment to come down to levels that could be regarded as close to full employment.

Now, in the aftermath of the 2020 pandemic and market crash, we’re getting the same happy talk.

Green Shoots, or Brown Weeds?

The White House is talking about “pent-up demand” as the economy reopens and consumers flock to stores and restaurants to make up for the lost spending during the March to July pandemic lockdown.

But, the data shows that the “pent-up demand” theory is just as much of a mirage as the green shoots we heard about a decade ago..

Many of the businesses that closed have failed in the meantime. They will never reopen and those lost jobs are never coming back. Even people who kept their jobs are not spending like it’s 2019, they’re saving at record levels.

Meanwhile, the “reopening” of the economy is now in doubt.

In some cities, the reopening was derailed by riots that left shopping districts in ruins. In other cities, the reopening was stopped in its tracks by new outbreaks of the virus that led to new lockdowns and strict application of rules on wearing masks and social distancing.

There was a pick-up in retail sales in May, but it has disappeared as fast as it arrived because of the new outbreaks and the extension of the lockdown.

If you’re trying to understand the economy, pay no attention to the stock market.

Instead, look around your own community to see how many stores are still closed, how many are never reopening, and how much sales are down among the relatively few survivors.

It’s not a pretty picture, and based on the dynamics of the virus it won’t get better anytime soon.

Do you know what’s also not getting better anytime soon?

Debt and deficits.

From $1 Trillion to $5 Trillion

The annual deficit for Fiscal 2020 was originally forecast by the Congressional Budget Office at about $900 billion.

My estimate issued last year was that the 2020 deficit would be a bit over $1 trillion. But we were both wrong…

The pandemic came along the pandemic and new market panic in late winter and spring. The subsequent deficit spending and money printing broke all records.

Unlike the CBO’s estimate and my own forecast, the deficit this year will be at least $5 trillion. That means $5 trillion is the lowest number you can expect.

Meanwhile, the Fed’s money printing will more than double the size of its balance sheet from $3.8 trillion to $8 trillion or higher.

And the U.S. debt-to-GDP ratio is on its way to 130% after starting the crisis at an already high 106%.

With all this money creation, does this mean that inflation is finally on the way?

The Inflation Question

The answer’s more complicated than many think. Let’s look back to the last financial crisis for some guidance…

Between 2008 and 2014, the Fed created trillions of dollars through quantitative easing (which actually seems like small potatoes compared to what we’re seeing now).

Many analysts sounded the alarm about “inflation” as the inevitable consequence of all that excessive money printing by the Fed. It seemed like a perfectly reasonable warning at the time.

But despite all the fears, nothing bad happened.

Inflation actually fell; there was no serious inflation threat. Interest rates fell. There was no “bond bubble” or rout in the bond market.

As a result, politicians and voters in both parties became complacent. It seemed that debt didn’t matter after all.

That’s why there’s so little resistance to all the monetary programs we’re seeing now.

It’s like the boy who cried wolf. Analysts cried wolf about inflation during the last crisis, but the wolf never materialized. Why should we listen to them now?

It’s the Velocity, Stupid

As I’ve argued before, and can’t state strongly enough because it’s that important to understand:

Inflation is not caused by money printing alone. It’s caused by the velocity, or turnover of money.

Velocity is a psychological phenomenon that has nothing to do with the Fed, (in fact, the Fed doesn’t even understand how it works).

The Fed can “print” all the money in the world. But if people don’t actually spend it but save it instead, it won’t create inflation because there’s no velocity.

And now, because of high unemployment and failing businesses, people are not spending money even when the economy reopens. They’re saving instead.

Now, savings in general is positive. And a high savings rate can be good in the long-run. But it kills consumption in the short-run.

It might make individual sense to pay down credit card debt and save money in uncertain times. But it also means little money velocity. It means that not much money is turning over.

And since consumption is 70% of the U.S. economy, the immediate aftermath of the pandemic will be slow growth, disinflation and even deflation (disinflation and deflation aren’t the same).

So we’re looking at disinflation and deflation for now, despite all the money creation we’re seeing now.

But that doesn’t mean inflation is dead. Not at all. The inflation will arrive, just not yet…

When You’ll See Inflation

Inflation will come when people lose confidence in the dollar and suddenly dump dollars for any hard assets they can find.

Money velocity will accelerate but it won’t be into consumer goods. It’ll be into hard assets that hold their value over time, gold in particular.

In other words, the best leading indicator of inflation won’t be found in the grocery store or at the gas pump.

It’ll be found in the dollar price of gold.

Of course higher gold prices means higher consumer prices since higher gold prices mean a weaker dollar. More dollars will be required to buy the same amount of goods.

When gold pushes past $2,000 per ounce toward $3,000 per ounce, that’s your signal that inflation in the price of everything else is not far behind.

Don’t wait until that happens. Buy your (physical) gold now while it’s still affordable.

Regards,

Jim Rickards
for The Daily Reckoning

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Monetary and Fiscal Policy Won’t Help

This post Monetary and Fiscal Policy Won’t Help appeared first on Daily Reckoning.

Monetary and fiscal policy won’t lift us out of the new depression. Let’s first take a look at monetary policy.

Fed money printing is an exhibition of monetarism, an economic theory most closely associated with Milton Friedman, winner of the Nobel Memorial Prize in economics in 1976. Its basic idea is that changes in money supply are the most important cause of changes in GDP.

A monetarist attempting to fine-tune monetary policy says that if real growth is capped at 4%, the ideal policy is one in which money supply grows at 4%, velocity is constant and the price level is constant. This produces maximum real growth and zero inflation. It’s all fairly simple as long as the velocity of money is constant.

It turns out that money velocity is not constant, contrary to Friedman’s thesis. Velocity is like a joker in the deck. It’s the factor the Fed cannot control.

Velocity is psychological: It depends on how an individual feels about her economic prospects. It cannot be controlled by the Fed’s printing press. It measures how much money gets spent from people to businesses.

Think of when you tip a waiter. That waiter might use that tip to pay for an Uber. And that Uber driver might pay for fuel with that money. This velocity of money stimulates the economy.

Well, velocity has been crashing for the past 20 years. From its peak of 2.2 in 1997 (each dollar supported $2.20 of nominal GDP), it fell to 2.0 in 2006 just before the global financial crisis and then crashed to 1.7 in mid-2009 as the crisis hit bottom.

The velocity crash did not stop with the market crash. It continued to fall to 1.43 by late 2017 despite the Fed’s money printing and zero rate policy (2008–15).

Even before the new pandemic-related crash, it fell to 1.37 in early 2020. It can be expected to fall even further as the new depression drags on.

As velocity approaches zero, the economy approaches zero. Money printing is impotent. $7 trillion times zero = zero. There is no economy without velocity.

The factors the Fed can control, such as base money, are not growing fast enough to revive the economy and decrease unemployment.

Spending is driven by the psychology of lenders and consumers, essentially a behavioral phenomenon. The Fed has forgotten (if it ever knew) the art of changing expectations about inflation, which is the key to changing consumer behavior and driving growth. It has nothing to do with money supply.

The bottom line is, monetary policy can do very little to stimulate the economy unless the velocity of money increases. And the prospects of that happening aren’t great right now.

But what about fiscal policy? Can that help get the economy out of depression?

Let’s take a look…

Congress is far along in authorizing more deficit spending in 2020 than the last eight years combined. The government will add more to the national debt this year than all presidents combined from George Washington to Bill Clinton.

This spending explosion includes $26 billion for virus testing, $126 billion for administrative costs of programs, $217 billion direct aid to state and local governments, $312 billion for public health, $513 billion in tax breaks for business, $532 billion to bail out major corporations, $784 billion in aid to individuals as unemployment benefits, paid leave, direct cash payments and $810 billion for small businesses under the Paycheck Protection Program.

This comes on top of a baseline budget deficit of $1 trillion.

Moreover, Congress is expected to pass an additional spending bill of at least $1 trillion by late July, mostly consisting of assistance to states and cities. Combining the baseline deficit, approved spending and expected additional spending brings the total deficit for 2020 to $5.3 trillion.

That added debt will increase the U.S. debt-to-GDP ratio to 130%. That’s the highest in U.S. history and puts the U.S. in the same super-debtor’s league as Japan, Greece, Italy and Lebanon.

The idea that deficit spending can stimulate an otherwise stalled economy dates to John Maynard Keynes and his classic work The General Theory of Employment, Interest and Money (1936).

Keynes’ idea was straightforward.

He said that each dollar of government spending could produce more than $1 of growth. When the government spent money (or gave it away), the recipient would spend it on goods or services. Those providers of goods and services would in turn pay their wholesalers and suppliers.

This would increase the velocity of money. Depending on the exact economic conditions, it might be possible to generate $1.30 of nominal GDP for each $1.00 of deficit spending. This was the famous Keynesian multiplier. To some extent the deficit would pay for itself in increased output and increased tax revenues.

Here’s the problem:

There is strong evidence that the Keynesian multiplier does not exist when debt levels are already too high.

In fact, America and the world are inching closer to what economists Carmen Reinhart and Ken Rogoff describe as an indeterminate yet real point where an ever-increasing debt burden triggers creditor revulsion, forcing a debtor nation into austerity, outright default or sky-high interest rates.

Reinhart and Rogoff’s research reveals that a 90% debt-to-GDP ratio or higher is not just more of the same debt stimulus. Rather it’s what physicists call a critical threshold.

The first effect is the Keynesian multiplier falls below 1. A dollar of debt and spending produces less than a dollar of growth. Creditors grow anxious while continuing to buy more debt in a vain hope that policymakers reverse course or growth spontaneously emerges to lower the ratio. This doesn’t happen. Society is addicted to debt and the addiction consumes the addict.

The end point is a rapid collapse of confidence in U.S. debt and the U.S. dollar. This means higher interest rates to attract investor dollars to continue financing the deficits. Of course, higher interest rates mean larger deficits, which makes the debt situation worse. Or the Fed could monetize the debt, yet that’s just another path to lost confidence.

The result is another 20 years of slow growth, austerity, financial repression (where interest rates are held below the rate of inflation to gradually extinguish the real value of debt) and an expanding wealth gap.

The next two decades of U.S. growth would look like the last two decades in Japan. Not a collapse, just a slow, prolonged stagnation. This is the economic reality we are facing.

And neither monetary policy nor fiscal policy will change that.

Regards,

Jim Rickards
for The Daily Reckoning

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Economy Won’t Recover Until 2023

This post Economy Won’t Recover Until 2023 appeared first on Daily Reckoning.

I’ve argued that we’re in a new depression. The depth of the new depression is clear. What is unclear to most observers are the nature and timing of the recovery.

The answer is that high unemployment will persist for years, the U.S. will not regain 2019 output levels until 2022 and growth going forward will be even worse than the weakest-ever growth of the 2009–2020 recovery.

This may not be the end of the world, yet it is far worse than the most downbeat forecasts. Some sixth-grade math is a good place to begin the analysis.

Make 2019 economic output 100 (the actual figure is $21 trillion; “100” is 100% of that number, a convenient way to measure ups and downs).

Assume output drops 40% in the second and third quarters of 2020. (Many estimates project larger drops; 40% is a plausible if conservative estimate.)

A 40% drop for six months equals a 20% drop for the full year assuming the first and fourth quarters are flat on net.

A 20% drop from 100 = 80 (or $4.2 trillion of lost output).

Now let’s see what happens if we estimate back-to-back growth years of 10% in 2021 and 2022…

First, is 10% growth even a reality? Past history says no.

Since 1948, U.S. annual real growth in GDP has never exceeded 10%.

In fact, post-1980 recoveries averaged 3.2% growth. And since 1984, growth has never exceeded 5%. So 10% is a very optimistic forecast to begin with.

If our new base is 80 (compared with 100 in 2019) and we increase output by 10% in 2021, this brings total output to 88.

If we enter 2021 with a new base of 88 and add another 10% to that, we come to 96.8 in total output by the end of 2022.

Here’s the problem.

Using 100 as a yardstick for 2019 output and assuming an unrealistic back-to-back years of 10% real growth in 2021 and 2022, one still does not get back to 2019 output levels.

The hard truth is 96.8 is less than 100.

It would take the highest annual real growth in over 40 years, sustained for two consecutive years, to get close to 2019 output levels.

It’s far more realistic to assume real growth will be less than 10% per year. That puts the economy well into 2023 before reaching output levels last achieved in 2019.

This is the reality of this depression.

It’s not about continuously declining GDP. A depression is an initial collapse so large that even years of high growth won’t dig the economy out of its hole.

Analysts and talking heads debate the recovery’s strength using letters that mimic the shape of a growth curve as shown on a graph.

A V-shaped recovery goes down steeply and back up steeply to get output back where it started in a relatively brief time.

A U-shaped recovery goes down steeply, does not grow materially right away and then makes a sharp recovery.

An L-shaped recovery goes down steeply and is followed by low growth for an indefinite period of time.

Finally, the W-shaped recovery goes down steeply, bounces back quickly and then falters for a second time before finally recovering and getting back to earlier levels of output and growth.

The post-2009 recovery produced only 2.2% growth. It was an L-shaped recovery.

It was a real recovery, yet the output gap between the former trend and the new trend was never closed.

The U.S. economy suffered over $4 trillion of lost wealth based on the difference between the former strong trend and the new weaker trend.

That lost wealth was a serious problem for the U.S. before the New Great Depression.

Now the prospect is for even lower growth than the weak post-2009 recovery.

The new recovery, far from the 10% growth discussed in the example above, may only produce 1.8% growth, even worse than the 2.2% growth before the pandemic.

It’s another L-shaped recovery, the second in a row. Now the bottom of the L is even closer to a flat line and the output gap compared with the long-term trend is even greater.

There will be no V-shaped recovery. There are no green shoots despite what you hear on TV.

We’re in a new Great Depression and will remain so for years.

Regards,

Jim Rickards
for The Daily Reckoning

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Fools, Traitors and America

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A nation can survive its fools, it is said — but not its traitors.

Yet we begin to suspect the opposite…

That is, a nation can survive its traitors — but not its fools.

That is because a nation’s fools infinitely outnumber a nation’s traitors.

Answer this question:

How many traitors roam within your range of acquaintances?

But how many fools roam within your range of acquaintances?

Being a fool is no crime of course.

We would be rotting behind the bars if it were. Much of the population would be with us.

But their legal status makes fools no less dangerous. And the damage they work often ranges beyond calculation.

A fool with a bad idea in his head is like a baby with a loaded gun in his hand…

Woodrow Wilson, Fool

Was Woodrow Wilson a traitor for meddling in a European civil war?

We would never suggest it.

He may have meant the best in the world. He wished to make the world safe for democracy — and by extension safe for America.

But was he a fool for hurling the nation into a European civil war?

Almost certainly.

The warring parties had nearly bled themselves white by 1917. Neither side could shatter the other.

They would have likely exhausted themselves, come to terms… and walked home, honors even.

“Never again!” they would have cried.

But Mr. Wilson dispatched the doughboys over there in 1917. It shifted the battletide against the kaiser.

And the allies “won.”

Yet the Versailles Treaty that closed the war to end all wars… spawned the peace to end all peace.

Mr. Wilson’s fool crusade did not make the world safe for democracy.

It rather made the world unsafe for democracy by making the world safe for fascism… and communism.

And WWI was “The Great War” until an even greater war broke loose 20 years later.

All Roads Lead Back to Wilson

Here our former colleague David Stockman hauls Wilson into the dock… and indicts him for every crime on the 20th century’s calendar:

Had Woodrow Wilson not misled America on a messianic crusade, the Great War would have ended in mutual exhaustion in 1917 and both sides would have gone home battered and bankrupt but no danger to the rest of mankind.

Indeed, absent Wilson’s crusade there would have been no allied victory, no punitive peace and no war reparations; nor would there have been a Leninist coup in Petrograd or Stalin’s barbaric regime.

Likewise, there would have been no Hitler, no Nazis, no Holocaust, no global war against Germany and Japan and no incineration of 200,000 civilians at Hiroshima and Nagasaki.

Nor would there have followed a Cold War with the Soviets or CIA-sponsored coups and assassinations in Iran, Guatemala, Indonesia, Brazil and Chile to name a few. Surely there would have been no CIA plot to assassinate Castro, or Russian missiles in Cuba or a crisis that took the world to the brink of annihilation.

There would have been no domino theory and no Vietnam slaughter, either.

Nor would we have had to come to the aid of the mujahedeen and train the future al-Qaida in Afghanistan. Likewise, there would have been no Khomeini-led Islamic revolution and no U.S. aid to enable Saddam’s gas attacks on Iranian boy soldiers in the 1980s.

Nor would there have been an American invasion of Arabia in 1991 to stop our former ally Saddam Hussein from looting the equally contemptible emir of Kuwait’s ill-gotten oil plunder — or, alas, the horrific 9/11 blowback a decade later.

Nor would we have been stuck with a $1 trillion Warfare State budget today.

Does David simplify events? Do we simplify events? Perhaps so.

A Fool, Not a Traitor

We do not propose an entirely quiet 20th century absent Mr. Wilson’s botchwork.

The world was — as it always is — to its neck with fools. And these fools would have certainly gotten themselves up to mischief.

Yet we believe the hottest hells of the 20th century would have been averted had Mr. Wilson sat wisely upon his hands in April 1917.

But it was not treason that sent Mr. Wilson stumbling into Europe’s war… and the world subsequently into the 20th century’s hells.

It was foolishness.

Of course Wilson was not the only fool to ever sit down at 1600 Pennsylvania Ave.…

Never Fight a Ground War in Asia

Never fight a ground war in Asia, warned Douglas MacArthur. This was the counsel of a fellow who had fought two.

But fool Lyndon Baines Johnson soon had the United States fighting a ground war in Asia.

Eventually it came straggling home, bandaged, beaten, broken.

58,000 of its sons came home flat.

Was Johnson a traitor? It has never been suggested, to our knowledge.

But a fool?

This time the “domino theory” was the fool idea that fetched an American president…

“Ridiculous”

But old Gen. MacArthur — no pacifist — toppled the domino theory. “Ridiculous,” he labelled it.

Furl the calendar back to April 1961…

MacArthur had met freshly minted president John Kennedy at New York’s Waldorf Astoria.

MacArthur, said Kennedy aide Kenneth O’Donnell:

Implored the president to avoid a U.S. military buildup in Vietnam, or any other part of the Asian mainland, because he felt that the domino theory was ridiculous in a nuclear age.

MacArthur instead advised the youthful president to battle communism with America’s greatest weapon — its economy.

A free economy would triumph ultimately over a communist economy.

But the youthful president would forever remain the youthful president.

Kennedy vastly respected MacArthur’s experience.

Would he have taken aboard the advice… brought home the advisers he had dispatched to Vietnam… and quit the country without further escalation?

We will never know.

The fool idea won the day… and America lost its way.

Combining Two Fool Ideas

A half century later another fool idea was loose in the White House, lodged between the ears of President George Walker Bush.

And the United States once again shooed aside MacArthur’s advice against Asian ground wars.

Only this ground war was not in southeast Asia — but southwest Asia.

The United States combined a variation of Wilson’s fool idea… with the fool idea of a reverse domino theory.

It would not make the world safe for democracy — but the Middle East safe for democracy.

It would begin by making Iraq a democracy, an America on the Euphrates.

Saddam Hussein would go out and Thomas Jefferson would come in.

Iraq would then become the initial democratic domino that proceeded to topple — one after the other — the region’s autocratic tyrannies.

But what happens when you combine one fool idea with another fool idea?

Could there be any doubt?

The Greatest Blunder in the History of United States Foreign Policy

Some have labelled Mr. Bush’s adventure the greatest blunder in the history of United States foreign policy.

Over 4,500 Americans perished attempting to transform Iraq into Kansas. Many thousands more were injured.

And this Asian ground war’s ultimate financial costs may near $2 trillion.

Like Messieurs Wilson and Johnson, Mr. Bush was no traitor — except perhaps a traitor to the good senses.

Yet he was a fool to believe he could transform the Middle East… if not a dunce.

Fools, Drunks and the United States of America

We only wonder what fool idea will next prevail.

War with China?

In the economic realm, perhaps Modern Monetary Theory? Or the Green New Deal?

We know only that the fools are busy. Principal among them are the fools of the Federal Reserve.

“God has a special providence for fools, [drunks] and the United States of America,” said Germany’s Iron Chancellor, Otto von Bismarck.

He has in the past. Yet will He always?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Depression and the Great American Exodus

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Is the worst of the economic collapse over?

Not really. The economy is off the bottom, but that’s only to be expected after the historic collapse of March–May and the stock market crash in March and April.

The question now is not whether we’re growing again. We are. The questions are how fast is that growth, and how long will it be before we return to 2019 levels of output?

And this question applies not just to the U.S. but to the entire global economy, especially the large producers such as China, Japan and the EU.

Here, the news is not good at all.

Recent data suggests that we may not reach 2019 output levels until 2023 at the earliest, and that something close to full employment may not return until 2025.

A simple example will make the point.

Just Not Enough Growth

Assume 2019 GDP has a normalized level of 100. Now assume a 10% drop (that’s about how much the U.S. economy will decline for the full-year 2020 according to many estimates).

That moves the benchmark to 90 in 2020.

Now assume 5% growth in 2021 (that would also be the highest growth rate in decades).

That will move the benchmark back up to 94.5. Next assume growth in 2022 is 4% (that would also be near record annual growth for the past three decades).

That would move the benchmark up to 98.3. Here’s the problem…

An output level of 98.3 is still less than 100. In other words, back-to-back growth of 5% in 2021 and 4% in 2022 is not enough to recover the 2019 level after a 10% decline in 2020.

But the situation is even worse than I just described.

Worse Than a Technical Recession

China PMI figures have recently been 50.9 (manufacturing) and 54.4 (services).

The Wall Street happy talk brigade is cheering these numbers because they “beat” expectations and they show growth (any number over 50 indicates growth in a PMI index series).

But growth is completely expected. The problem is that growth is so weak.

A strong bounce back from a collapse should produce PMI readings of 60 or 70 if a robust recovery were underway. It’s not.

Here’s the reality: What the U.S. economy is going through right now is far worse than a technical recession.

A recession is defined as two or more consecutive quarters of declining growth along with higher unemployment.

A recession beginning in February has already been declared by the National Bureau of Economic Research (NBER), which is the private arbiter of when recessions begin and end.

If we judge strictly by growth figures, the recession may already be over (although we won’t know for months to come, until quarterly growth figures are available and the NBER has time to evaluate them and make a call).

Most recessions don’t last that long, usually only about six–nine months. But that misses the fact that we’re really in a new depression.

The New Depression

“Wait a minute,” you say. “Growth may be weak, but it’s still growth. How can you say we’re in a depression?”

Well, as I’ve explained before, the starting place for understanding depression is to get the definition right.

Economists don’t like the word “depression” because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist. This view is one of the many failings of modern economics.

Many think of a depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment, as I just explained.

Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline.

But that’s not the definition of depression.

Defining Depression

The best definition ever offered came from John Maynard Keynes in his 1936 classic The General Theory of Employment, Interest and Money.

Keynes said a depression is “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.”

Keynes did not refer to declining GDP; he talked about “subnormal” activity.

In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt.

That is exactly what the U.S. is experiencing today.

The key is a depression is not measured by declining growth but is measured by a combination of actual declines and a below-trend recovery. This happened during the Great Depression.

Depressions Leave Lasting Impressions

There was declining growth and a technical recession from 1929–1932. Then a recovery (from a low level) from 1933–36. Then a second technical recession in 1937–38 and then another recovery from 1939–1940.

The entire period 1929–1940 is known as the Great Depression in part because the stock market and commercial real estate never recovered their 1929 levels even by 1940 (they finally recovered in 1954).

Depressions are also categorized by large behavioral changes including higher savings rates, smaller family size and internal migration. These effects are intergenerational.

Many behavioral changes from the 1930s were still prevalent in the 1950s and early 1960s and lasted until the baby boomers came of age in the late 1960s.

This kind of profound change with lasting impact is happening again.

The Great American Exodus

Due to a combination of COVID-19 spreading in densely populated areas, business failures, urban riots and failing mayors and police departments, Americans are migrating from the big cities to suburban and country areas by the millions.

American families are leaving dysfunctional cities such as New York City, Seattle and San Francisco and heading for Montana, Colorado, Maine and upstate New York in the Catskill Mountains among other safe havens.

Big cities have always offered a trade-off between higher taxes and urban stress in exchange for entertainment, great restaurants, museums and intellectual buzz.

Today the venues and buzz are gone, the crime rates are soaring and all that is left is the stress and taxes. So people are getting out.

Changes like this are not temporary. Once people move out, they don’t return ever. Their children may return someday but that could be 15 or 20 years away.

And those who leave tend to have the most capital and the most talent. This leaves the cities as empty shells populated by oligarchs with personal bodyguards and the poor, who have to deal with the street-level violence.

This shift can be helpful for individuals who move, but it’s devastating for the economics of major cities. And that’s devastating for the U.S. economy as a whole.

It’s one more reason we will be in depression for years even if the technical recession is over soon.

Investors Will Learn the Hard Way

The best case is that it will take years to get back to 2019 levels of output. The worst case is that output will drop even lower as the recovery fails.

We’re not really in a recession right now. We’re in a depression and will remain there for years.

No one under the age of 90 has ever experienced a depression until now. Most investors have no working knowledge of what a depression is or how it affects asset values.

But they’re going to find out, and probably the hard way.

Regards,

Jim Rickards
for The Daily Reckoning

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“A Revolution Not Made But Prevented”

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The Daily Reckoning trampled sacred ground this Independence Day… and profaned the national religion of America.

For we posted grave heresies about the American Revolution.

This is the question we raised, leadingly, provocatively, heretically:

“Was the American Revolution a mistake?”

We may as well have declared Benedict Arnold a hero… George Washington a traitor… the revolutionaries a crew of cutthroats… and the Fourth of July a blackguard’s holiday.

Yet the article’s author — Mr. Gary North — roared a thunderous “yes” to our question.

Heresy!

“I did not celebrate the Fourth of July today,” he thundered… with fire in his heart, blood in his eye, venom in his words.

Why did Mr. North refuse to celebrate this July Fourth… or any other July Fourth?

Here is the answer:

Because he believes the American colonists were the freest peoples on Earth.

And at 1% — perhaps 2.5% in the southern Colonies — King George’s tax bite was so light it failed to break the skin.

That is, the Revolution was a grand swindle and the Declaration of Independence a packet of lies.

Please click here if you missed Mr. North’s blasphemies.

Reader reaction was… robust.

These Minutemen seized their muskets, loaded their cannons and came leaping to the defense of a cause they consider just.

Readers Let Gary North Have It

The author is “flat-out wrong,” insists reader D.R. What is more, the author is a statue-toppler:

You’re flat out wrong. There was a 16-year trajectory of abuse. To claim otherwise is no different than taking down statues. Revisionist history all the way down.

Rick I. would pack Mr. North off to the mother country:

I get the impression North has never read the list of grievances in the Declaration of Independence. Does he think that it was only the taxation they objected to or does he really want to rationalize all those other issues?

If he thinks we should have been so happy and contented being British citizens, maybe he’d prefer to go live in jolly old England now.

I’d be the first to say, “Good riddance.”

Martha M. — or is it Martha W.? — was so boiled up she declared her independence from our tyrannical crown.

“Cancel my subscription,” she roared, adding:

Sorry you hate the United States and what it stands for. Sure don’t want advice from you.

Reader D.G., meantime, believes North misses fire altogether.

The Stamp Act did not father the American Revolution, argues this reader. Nor did the Intolerable Acts.

Its father was the Currency Act:

Parliament learned in 1763 from Ben Franklin that the American Colonies were creating their own interest-free money without being dependent on debt-forever money from the Bank of England, Parliament declared the Colonial Scrip to be illegal. In 1764 they passed the Currency Act that put more teeth into their earlier declaration. The immediate result was a ghastly depression in the Colonies from the inability to do business. Ben Franklin is quoted as saying that’s what really turned enough of the Colonial population against England and what motivated the Revolution…

Now why government-school history books today attribute the Revolution to that minor tea tax suspension instead of the fight over debt-free money versus debt-forever money from the Bank of England is another question. Could it be that the debt-forever counterfeiting money we are stuck with today from the Federal Reserve is just a resurrection of the ancient Bank of England scam — and not something the sheeple need to know about?

Our reader raises delicate questions for which we have no answer — no official answer at least.

We leave you to your own conclusions.

Yet to return to our central question: Was the American Revolution a mistake?

Was the American Revolution Actually a Revolution?

We must consider if the American Revolution was in fact a revolution…

It was a rebellion, that is sure. But a revolution?

A revolution is a thorough overhaul, a mass reordering, a 180-degree swinging around.

Please see the French Revolution. Please see the Russian Revolution. Please see China’s Cultural Revolution.

Each was out to turn society upon its head.

Each was out to rip down the old buildings… and erect new buildings in their place.

Each was out for earthly Utopia.

Yet the American colonists cherished the old buildings. They would leave them intact.

“A Revolution Not Made but Prevented”

They were merely out to preserve their ancient rights of Englishmen, the “chartered rights of Englishmen.”

And unlike the revolutions above referenced… they disbelieved in Utopia.

They believed — correctly or incorrectly — that old King George was menacing their ancient English rights, their chartered English rights.

And so they seceded from royal authority in defense of the old ways.

Thus the shot heard ’round the world was fired in defense. It was an act of preservation — not revolution.

Like England’s 1688 Glorious Revolution… this has been said of the American Revolution:

It was “a revolution not made but prevented.”

Dead Historians Weigh In

Late historian Trevor Colbourn authored The Lamp of Experience: Whig History and the Intellectual Origins of the American Revolution.

From which:

In insisting upon rights which their history showed were deeply embedded in antiquity, American Revolutionaries argued that their stand was essentially conservative; it was the corrupted mother country which was pursuing a radical course of action, pressing innovations and encroachments upon her long-suffering Colonies. Independence was in large measure the product of the historical concepts of the men who made it…

Affirms Clinton Rossiter, another historian presently lounging upon a heavenly cloud:

Practical political thinking in 18th-century America was dominated by two assumptions: that the British Constitution was the best and happiest of all possible forms of government, and that the colonists, descendants of free-born Englishmen, enjoyed the blessings of this constitution to the fullest extent consistent with a wilderness environment.

Adds a third deceased historian, a certain Daniel Boorstin:

The most obvious peculiarity of our American Revolution is that, in the modern European sense of the word, it was hardly a revolution at all. The Daughters of the American Revolution, who have been understandably sensitive to this subject, have always insisted in their literature that the American Revolution was no revolution but merely a Colonial rebellion. The more I have looked into the subject, the more convinced I have become of the wisdom of their naiveté…

The American Revolution was in a very special way conceived as both a vindication of the British past and an affirmation of an American future. The British past was contained in ancient and living institutions rather than in doctrines; and the American future was never to be contained in a theory.

Thus concludes our disquisition on the American Revolution — or rather, the American War of Independence.

America’s Current Revolution

The United States is presently ensnared in the rages of an authentic revolution — a cultural revolution.

Today’s revolutionaries follow the French, Russian and Chinese examples. They reject — violently — the American model.

The American colonists were out to preserve their ancient and chartered English rights. They fought to keep the old buildings upright.

Today’s revolutionaries are out not to preserve the old ways… but to murder the old ways.

They fight not to keep the old buildings upright… but to haul the old buildings down.

They have already begun with the statues…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Was the American Revolution a Mistake?

This post Was the American Revolution a Mistake? appeared first on Daily Reckoning.

I did not celebrate the Fourth of July today.

This goes back to a term paper I wrote in graduate school. It was on Colonial taxation in the British North American Colonies in 1775. Not counting local taxation, I discovered that the total burden of British imperial taxation was about 1% of national income. It may have been as high as 2.5% in the southern Colonies.

In 2008, Alvin Rabushka’s book of almost 1,000 pages appeared: Taxation in Colonial America (Princeton University Press). A review published in the Business History Review summarizes the book’s findings.

Rabushka’s most original and impressive contribution is his measurement of tax rates and tax burdens. However, his estimate of comparative transatlantic tax burdens may be a bit of moving target. At one point, he concludes that in the period from 1764–1775 “the nearly 2 million white Colonists in America paid on the order of about 1% of the annual taxes levied on the roughly 8.5 million residents of Britain, or 1/25th in per capita terms, not taking into account the higher average income and consumption in the Colonies” (p. 729). Later he writes that on the eve of the Revolution, “British tax burdens were 10 or more times heavier than those in the Colonies” (p. 867). Other scholars may want to refine his estimates, based on other archival sources, different treatment of technical issues such as the adjustment of inter-Colonial and transatlantic comparisons for exchange rates or new estimates of comparative income and wealth. Nonetheless, no one is likely to challenge his most important finding: the huge tax gap between the American periphery and the core of the British Empire.

Was the Declaration of Independence Built Upon a Lie?

The Colonists had a sweet deal in 1775. Great Britain was the second-freest nation on Earth. Switzerland was probably the most free nation, but I would be hard-pressed to identify any other nation in 1775 that was ahead of Great Britain. And in Great Britain’s Empire, the Colonists were by far the freest.

I will say it, loud and clear: The freest society on Earth in 1775 was British North America, with the obvious exception of the slave system. Anyone who was not a slave had incomparable freedom.

Jefferson wrote these words in the Declaration of Independence:

The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States.

I can think of no more misleading political assessment uttered by any leader in the history of the United States. No words having such great impact historically in this nation were less true. No political bogeymen invoked by any political sect as “the liar of the century” ever said anything as verifiably false as these words.

The Continental Congress declared independence on July 2, 1776. Some members signed the Declaration on July 4. The public in general believed the leaders at the Continental Congress. They did not understand what they were about to give up. They could not see what price in blood and treasure and debt they would soon pay. And they did not foresee the tax burden in the new nation after 1783.

In his book, Rabushka gets to the point:

Historians have written that taxes in the new American nation rose and remained considerably higher, perhaps three times as much, than they were under British rule. More money was required for national defense than previously needed to defend the frontier from Indians and the French, and the new nation faced other expenses.

So as a result of the American Revolution, the tax burden tripled.

The debt burden soared as soon as the Revolution began. Monetary inflation wiped out the currency system. Price controls in 1777 produced the debacle of Valley Forge. Percy Greaves, a disciple of Austrian economist Ludwig von Mises and for 17 years an attendee at his seminar, wrote this in 1972:

Our Continental Congress first authorized the printing of Continental notes in 1775. The Congress was warned against printing more and more of them. In a 1776 pamphlet, Pelatiah Webster, America’s first economist, told his fellow men that Continental currency might soon become worthless unless something was done to curb the further printing and issuance of this paper money.

The people and the Congress refused to listen to his wise advice. With more and more paper money in circulation, consumers kept bidding up prices. Pork rose from 4 cents to 8 cents a pound. Beef soared from about 4 cents to 100 a pound. As one historian tells us, “By November 1777, commodity prices were 480% above the prewar average.”

The situation became so bad in Pennsylvania that the people and legislature of this state decided to try “a period of price control, limited to domestic commodities essential for the use of the Army.” It was thought that this would reduce the cost of feeding and supplying our Continental Army. It was expected to reduce the burden of war.

The prices of uncontrolled imported goods then went sky-high, and it was almost impossible to buy any of the domestic commodities needed for the Army. The controls were quite arbitrary. Many farmers refused to sell their goods at the prescribed prices. Few would take the paper Continentals. Some, with large families to feed and clothe, sold their farm products stealthily to the British in return for gold. For it was only with gold that they could buy the necessities of life which they could not produce for themselves.

On Dec. 5, 1777, the Army’s quartermaster-general, refusing to pay more than the government-set prices, issued a statement from his Reading, Pennsylvania, headquarters saying, “If the farmers do not like the prices allowed them for this produce, let them choose men of more learning and understanding the next election.”

This was the winter of Valley Forge, the very nadir of American history. On Dec. 23, 1777, George Washington wrote to the president of the Congress “that, notwithstanding it is a standing order, and often repeated, that the troops shall always have two days’ provisions by them, that they might be ready at any sudden call; yet an opportunity has scarcely ever offered, of taking an advantage of the enemy that has not been either totally obstructed, or greatly impeded, on this account… We have no less than 2,898 men now in camp unfit for duty, because they are barefoot and otherwise naked… I am now convinced beyond a doubt, that, unless some great and capital change suddenly takes place, this Army must inevitably be reduced to one or other of these three things: starve, dissolve or disperse in order to obtain subsistence in the best manner they can.”

“There Was No British Tyranny, and Surely Not in North America”

Only after the price control laws were repealed in 1778 could the Army buy food again. But the hyperinflation of the Continentals and state-issued currencies replaced the pre-Revolution system of silver currency: Spanish pieces of eight.

The proponents of independence invoked British tyranny in North America. But there was no British tyranny in North America.

In 1872, Frederick Engels wrote an article, “On Authority.” He criticized anarchists, whom he called anti-authoritarians. His description of the authoritarian character of all armed revolutions should remind us of the costs of revolution.

A revolution is certainly the most authoritarian thing there is; it is the act whereby one part of the population imposes its will upon the other part by means of rifles, bayonets and cannon — authoritarian means, if such there be at all; and if the victorious party does not want to have fought in vain, it must maintain this rule by means of the terror which its arms inspire in the reactionists.

After the American Revolution, 46,000 British Loyalists fled to Canada and other places controlled by the crown. They were not willing to swear allegiance to the new Colonial governments. They retained their loyalty to the nation that had delivered to them the greatest liberty on Earth. They had not committed treason.

The revolutionaries are not remembered as treasonous. The victors write the history books.

The Boston Tea Party: A Protest Against Lower Tea Prices

What would libertarians — even conservatives — give today in order to return to an era in which the central government extracted 1% of the nation’s wealth? Where there was no income tax?

Would they describe such a society as tyrannical?

That the largest signature on the Declaration of Independence was signed by the richest smuggler in North America was no coincidence. He was hopping mad. Parliament in 1773 had cut the tax on tea imported by the British East India Co., so the cost of British tea went lower than the smugglers’ cost on non-British tea.

This had cost Hancock a pretty penny. The Tea Party had stopped the unloading of the tea by throwing privately owned tea off a privately owned ship — a ship in competition with Hancock’s ships. The Boston Tea Party was, in fact, a well-organized protest against lower prices stemming from lower taxes.

So once again, I’m not celebrating the Fourth of July today.

Regards,

Gary North
for The Daily Reckoning

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Investing in a World Gone “Covidious”

This post Investing in a World Gone “Covidious” appeared first on Daily Reckoning.

How do you invest in a world gone covidiously cuckoo?

In Agora founder Bill Bonner’s take: wandering through life facelessly suspended “between six feet apart and six feet under?”

In a country that locks down its healthy and productive citizens, while refusing even to bother, let alone lock up, crazed mobs of masked arsonists and burglars in the streets?

How do you soldier on without despair in the throes of the doomsday Adventist cult of COVID-19, with its high priest Anthony Fauci on Tuesday trumpeting a “Second Coming” of the virus, as a scourge for sinners in the hands of an angry doctor?

He probably means you and me, folks.

Indignant at Southern and Western states that have apparently unleashed vicious “surges” of viral YouTube porn after opening up their economies, the reverend doctor stormed: “Just look at some of the film clips that you’ve seen! Of people congregating! Often without masks!”

Don’t deny it, you yourself may have taken a dirty peek or two at the shocking scenes of happy faces.

Some of the celebrants are adopting strange new and kinky positions: “Of being in crowds… and jumping over, avoiding, and not paying attention to the guidelines that we very carefully put out.”

Predicting hundreds of thousands of infections a day unless the misbehavior stops, the Doctor seemed shaken by the guideline-scoffers: “We’re going to continue to be in a lot of trouble. And there’s going to be a lot of hurt.”

Don’t say he didn’t warn you!

Much Lower Fatality Rates Than New York

Meanwhile, with the all-cause death rate in this decade still the lowest of the century, death rates plummet around the world, while the spikes and surges affect only test-rates and media spins.

In the index of COVID death rates per thousand people, the Southern and Western rebels remain an order of magnitude behind the lock downers in New York.

Texas’s per capita COVID death rate is just 6% of the death rate of New York; Arizona’s is 16%. William Briggs and David Stockman are both on top of the data.

Intelligent investors will ignore the pandemonium and seek the signal in the noise.

They are always ready to invest in the midst of what economist Joseph Schumpeter called “gales of creative destruction.”

And in the future, they will take solace from understanding the message of time-prices, which gained impressive new momentum and authority with recent research from the anti-doomsday voices of economists Marian Tupy and Gale Pooley.

Time-Price Theory Meets COVID-19

Time-prices are the only true prices. They gauge the number of hours and minutes you have to work in order to buy goods and services.

An index of economic progress, they combine in one number both the rise of incomes and the drop in prices resulting from the advance of innovation.

In the past, Pooley and Tupy have confined their measurements and observations to the relatively halcyon years between 1980 and 2018.

During this period, while world population increased 73%, the prices of 50 key commodities of life, measured in the work hours to buy them, dropped 71% and their abundance grew 518%.

Nowhere was evidence of “peak commodities” or unsustainable resources. As population grew, commodities grew yet more abundant per capita. Human populations do not burden the planet; they proliferate its bounties.

Although an exciting breakthrough in economic statistics, this evidence of surging economic growth and progress fails to offer guidance to investors for a time of economic and social catastrophe such as today.

As Steven Pinker of MIT has documented in several books, the era between 1980 and 2018 has been a time of unprecedented peace, productivity, and increasing longevity.

But now Tupy and Pooley have uncovered a new series of commodity prices going back to 1960 (World Bank).

For the U.S., they also compiled time-prices going back to 1919 (U.S. Bureau of Labor Statistics), 1900 (Canadian economist Davis S. Jacks) and even 1850 (also Jacks).

Since the U.S. was what we now would call a Third World country in 1850, its 19th century ascent is suggestive of the global trend.

This new data covers the U.S. Civil War, the First World War, the Spanish Flu, the Great Depression and World War II. The Spanish Flu in 1918 had a death rate roughly ten times COVID-19 today.

What Pooley and Tupy found was that innovation proceeded with little disturbance through all these disasters. In my Information Theory of Economics, with wealth measured as knowledge, growth as learning, and money as time, wars and plagues could buffet but not balk the process of growth and innovation.

The current and recent COVID-19 lockdowns represent the most egregious public policy blunder of all time, ravaging economies around the world, causing a UN estimated (and probably exaggerated) 260 million starvation deaths in the Third World, with no detectable improvement in healthcare outcomes.

The carnage perpetrated by a clueless political class and its sanctimonious experts is possibly unprecedented in world history. But as long as the human heroics of invention, learning, and creativity are allowed to continue, the prospects for the world economy remain better than ever.

Better and Better

Our time-price chroniclers show that innovation has been accelerating ever since 1850. In the early period in the U.S., time-prices improved on average around two percent a year as workers had to spend ever less time to gain the crucial commodities of life.

Through wars and plagues, time-prices continued to improve, dropping some 3.4% per year compounded through the most recent period.

Innovation is a process of learning, accomplished through falsifiable business and technological experimentation — business projects that can fail and thus yield knowledge regardless of outcome.

The key metric is the learning curve — the tendency of costs to drop between 20-30% with every doubling of unit sales — the most widely documented data in business history.

Tupy and Pooley’s most recent data opens up wide global horizons for investors that dwarf the political botches and blunders of 2020.

What investors have to do is find the most innovative and creative entrepreneurs and support them.

Don’t let the lockdown control freaks control you.

Regards,

George Gilder
for The Daily Reckoning

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Investors Feel Bulletproof Again

This post Investors Feel Bulletproof Again appeared first on Daily Reckoning.

Investors are ignoring the worst economic and earnings data since 2008. They’ve piled into risky assets in the hope that conditions will soon be back to normal.

But as much as we all hope for restoration to pre-coronavirus economic conditions, there are many reasons why the environment for stocks won’t be back to normal for much of 2020.

The first reason is that corporate balance sheets were weak going into the coronavirus crash. Large corporations have taken full advantage of the Fed’s emergency actions in March to issue a tidal wave of new corporate bonds in April and May. This raised liquidity and staved off bankruptcy for many companies.

Most companies won’t be using the money they raised from corporate bond sales to expand facilities or hiring. Rather, they’re hunkering down for a long downturn by raising liquidity on favorable terms.

Corporate cash balances may be higher, but so are corporate debt balances. Companies that take such corporate financing actions tend to remain defensive for years afterward as they shift to balance-sheet-repair mode.

A second reason why conditions for risky assets won’t be back to normal for much of 2020 is that a cycle of corporate defaults has begun. Household names like J.C. Penney and Hertz have already defaulted. But more defaults are on the way.

With so many insolvent companies in the oil, retail, restaurant, hospitality, airline and (eventually) high-rise office building sectors, the corporate default rate will remain very high in the months ahead.

This environment warrants lower-than-normal valuations in the stock market. But instead, bull market sentiment is as euphoric as ever, and valuations have ramped up to near all-time highs just as the earnings stream that supports the market has collapsed.

Investors feel bulletproof yet again, extremely confident that the bear market is over because “the Fed has their back.”

But what entity is really supporting investors? What has their back?

  • It’s not the Fed directly, because the Fed isn’t buying stocks. The Fed is already walking a political tightrope by buying a small amount of corporate bonds. It’s a show of force to try to rekindle risk appetites. The Fed would rather see private-sector investors buy risky assets than take the political risk of buying risky assets themselves
  • It’s not corporate buybacks, which will be hundreds of billions of dollars lighter in 2020 than in 2019
  • It’s not foreign investors, who are already stuffed with U.S. stocks after having accumulated them for years on end
  • And it’s not institutional investors, most of whom have strict mandates to rebalance out of stocks and into bonds when stocks outperform.

Here is what ultimately “has the back” of bullish investors: the supply of new money that comes from other bullish investors.

Lately, much media attention has been lavished on a new generation of day traders who use modern versions of the 1990s internet “chat boards” to share trade ideas.

The quality of these ideas is extremely low, as shown by the recent frenzy for bankrupt stocks like Hertz that are clearly worth nothing and distressed stocks like American Airlines that could easily be worth nothing by late 2020.

Nonetheless, a temporarily popular idea (no matter how poorly researched) can have outsized effects on market pricing.

Why is that?

I suspect it’s a combination of shallow depth in the order books for many stocks and the high-frequency trading (HFT) shops that are the first to pick up on a retail trader frenzy.

When online brokerages shifted to a commission-free business model, following pioneer Robinhood, the pace of mini-spikes and crashes in individual stocks seemed to multiply. That’s because HFTs pay the no-commission brokerages for “order flow.”

Payment for order flow not only results in HFT front-running of retail investor orders; it also delivers market intelligence to HFT shops and other algorithm-based traders.

This generation of retail day traders might be exerting a much more powerful influence on stock prices than is widely assumed. The buying power of retail traders has been multiplied by the way the trading system has evolved.

Said differently: The market prices of many stocks are being set by the least-informed, least-experienced investors because their buying power is being magnified by HFT buying.

Combine this phenomenon with the passive-investing trend (indexing and ETFs) and we have a market that’s being mostly driven by ill-informed investors.

Take the case of German payment technologies company Wirecard…

A long list of short sellers have argued convincingly for years that Wirecard is an accounting fraud. Yet it took a specific set of catalysts (including Wirecard’s auditor finally doing its job) to reveal the fraud that lay beneath the surface.

The whole time, retail investors, institutional investors, index investors and even German government regulators chose to either not understand the stock they owned or defend it against valid criticisms from short sellers.

At the stock’s all-time high in September 2018, German-listed Wirecard had a market cap of €23 billion. It’s likely to be worth zero in the near future.

I mention this case not to imply that Wirecard-style accounting frauds are everywhere but to highlight this point: When a critical mass of investors are all thinking the same way, a company perceived to be worth billions one day can be perceived as nearly worthless the next.

At its peak, Wirecard could do no wrong in the eyes of its shareholders and defenders. Confidence surely grew when shareholders saw that German financial regulators “had their back” against the claims of supposedly evil short sellers.

The tragic case of Wirecard applies to today’s day trader-driven market for many individual stocks because so many popular stocks have been pumped up by echo-chamber sentiment. A near-universal belief that the Fed “has my back” is part of the echo chamber.

But again, the only real entity that has their back (for now) is the supply of new money that comes from other bullish investors. Yet that supply, which includes buying pressure from HFTs, can turn on a dime once momentum shifts.

This is a message I’ve relayed before, but it bears repeating: Stock market bulls tend to think similarly. They move in sync. So when the mood shifts abruptly and bulls turn cautious, prices can fall sharply.

In his book Aftermath, Jim Rickards explains the concept of “hypersynchronicity.” It’s a state of the market in which most of the players have similar strategies and expectations in the months leading up to crashes.

Groupthink and herd behavior are pervasive near a market’s peak. An unstable number of investors has herded into an asset class. These investors are hoping to sell to other investors who may have a similar philosophy but have an even greater risk appetite.

The stock market environment of mid-February 2020 appeared to be very hypersynchronous. And today’s stock market environment appears very hypersynchronous.

An efficient, stable market for stocks requires a set of actors with diverse philosophies and viewpoints. If most market participants have piled into similar strategies and trades, you can end up with a market that is setting new all-time highs yet becoming increasingly fragile.

“Markets now confront a lethal brew of passivity, product proliferation, automation and hypersynchronous behavioral responses,” Jim writes in Aftermath. “This accumulation of risk factors is entirely new and outside the experience of any trader or quant.”

Traders and quants have no historical analogue that can plug neatly into their automated trading models. Most quants recognize this dearth of historical analogues, so they make up for it by constantly tweaking the inputs to their models to match what worked in recent history.

With so many quants flocking to trends that are “working,” the end result is groupthink on a mass scale. Groupthink reaches a critical state once investors have dangerously similar strategies and expectations.

If some surprising new factor — a second wave of coronavirus cases or a monetary system earthquake like a Chinese currency devaluation — causes expectations to suddenly change in a hypersynchronous market, then we should not be surprised to see a crash.

The seemingly relentless bid under most stocks can suddenly relent. Although it feels wasteful at times to implement bearish trades, I’m confident they will be valuable in hedging your portfolio against losses if a hypersynchronous market morphs from a bubble into a crash.

And that looks increasingly likely.

Regards,

Dan Amoss
for The Daily Reckoning

The post Investors Feel Bulletproof Again appeared first on Daily Reckoning.

“Great Job Numbers”

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“Great job numbers.”

Here the president refers to June’s unemployment report, out this morning.

The United States economy took on 4.8 million nonfarm jobs last month — a record number.

We are further informed that the unemployment rate has fallen to 11.1%.

As is custom, a Dow Jones survey of economists botched it badly.

These blind soothsayers soothsaid 2.9 million jobs… and 12.4% unemployment.

“Today’s announcement proves that our economy is roaring back,” the president continued. “It’s coming back extremely strong.”

Mr. Trump’s delirium was broadly shared…

“The 4.8 million rise in nonfarm payrolls in June provides further confirmation that the initial economic rebound has been far faster than we and most others anticipated,” gushed Michael Pearce, senior U.S. economist for Capital Economics.

“A second consecutive large upside surprise to hiring relative to consensus confirms our view that the reopening rebound would be much more robust than most expected a couple months ago,” chortled Citi economist Andrew Hollenhorst.

But is today’s report as lovely as these gentlemen claim?

A leading question perhaps. The answer nonetheless follows.

But first… how did the stock market take this morning’s news?

The Dow Jones was immediately up and away 232 points. The other major indexes were also up, also away.

But the gravity of additional news soon tugged them earthward…

Florida authorities announced 10,000 fresh coronavirus infections this morning — a “healthy” number to be certain.

This after the United States reported over 50,000 new infections yesterday. That is a record amount… incidentally.

And so the economic lights that have been winking on in many locations… may once again wink off.

Thus today, stocks that would prosper from a rapid economic recovery absorbed the heartiest slatings.

First among these were airline and cruise line stocks.

The major indexes nonetheless maintained the vertical…

The Dow Jones posted a 92-point gain on the day. The S&P added 14 points of its own; and the Nasdaq, 53.

But can you trust today’s unemployment numbers?

Like June’s, May’s unemployment report was likewise a “blowout.”

Yet the Bureau of Labor Statistics (BLS) itself advised you to look beyond the headline number… and glance the small print.

That is because BLS confessed to a “misclassification error.”

Many workers had been previously listed as unemployed on temporary layoff.

Yet in the May survey these same workers were listed as “employed but absent from work.”

That is, they were listed as employed — though their circumstances may not have changed one jot since March or April.

Sort them into the unemployment column… and BLS conceded actual unemployment may have run three full percentage points higher than the official 13.3%.

Now roll the calendar forward one month…

Buried under many inches of print today — near the very foot of a CNBC article — we learn the following:

The headline unemployment rate was understated slightly due to counting errors at the Bureau of Labor Statistics. Workers who still have jobs but have not been working are being counted as employed and even though they are supposed to be considered unemployed under BLS rules.

And so June’s report features the identical “miscalculation error” as May’s report.

Yet we are assured that June BLS number-counting improved drastically:

However, the BLS said that discrepancy “declined considerably” in June, making the actual unemployment rate only about 1 percentage point higher than the reported level.

Thus June unemployment would read 12.1% — not 11.1%.

In either event… the United States economy has killed nearly 14.7 million jobs since February.

And unemployment remains the highest since the Great Depression.

Nearly half of working age American adults — some 47% — are presently idle, their hands the devil’s workshop.

Says Torsten Slok, Deutsche Bank’s chief economist:

To get the employment-to-population ratio back to where it was at its peak in 2000 we need to create 30 million jobs.

30 million jobs!

Meantime, the Department of Labor reported today that another 1.4 million Americans filed onto unemployment lines last week.

Yet let them eat cake, says the stock market…

Its assault upon its February peaks continues yet, the craggy heights within sight.

The Nasdaq has vaulted 30% this past year — despite the fiercest economic downdraft since the Great Depression.

Never before has the stock market risen so loftily above the economy that supposedly supports it.

We have credited the Federal Reserve with responsibility.

But does the Federal Reserve alone account for the stock market delirium?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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