Requiesce in Pace

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It is Memorial Day… when we pause to honor the nation’s war dead.

Most Americans will not, of course.

It merely represents a chance to lie flat on a beach… to munch frankfurters… to dream the tall dreams of approaching summer.

We will be joining them of course.

We will not be planting tiny American flags atop forgotten graves today.

We will not be bugling taps.

It is unlikely we will thank a veteran for his service — not out of disrespect — but because we scarcely know any.

We nonetheless recall strolling the American military cemetery above Omaha Beach one day… and how it brought us up short.

The rows and rows and rows of bleach-white crosses — and an occasional Star of David — seeming to stretch from horizon to horizon.

We wandered among the dead… and listened for their ghostly counsel.

Beneath the rustling breeze, we could make out a faint murmur.

It seemed to whisper a poem from the First World War:

“In Flanders Fields.”

From which:

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place, and in the sky
The larks, still bravely singing, fly,
Scarce heard amid the guns below.

We are the Dead; short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

IMG 1

Flanders Field

Standing above Omaha Beach, what fetched us was not so much the gravity of those distant events 76 years ago — but the soul-numbing waste of it all.

What great things may have awaited that 21-year-old second lieutenant if a German bullet hadn’t cut him down on June 6, 1944?

What did life have in store for that sergeant of the 2nd Ranger Battalion… who never made it up Pointe du Hoc that morning?

What about this young paratrooper of the 101st Airborne Division, whose bones lie beneath a shady tree?

IMG 2

The American military cemetery above Omaha Beach

What might they have amounted to?

Perhaps much.

Perhaps nothing whatsoever.

But they had lives to live. And every right to live them.

Let us also not forget the pulverized and unidentified dead, known only to their Almighty creator.

What about the futures they never had?

IMG 3

“For of all sad words of tongue or pen,” lamented poet John Greenleaf Whittier, “the saddest are these:

“It might have been.”

What might have been… had they lived?

Alas, we will never know.

And so as we conclude this Memorial Day weekend…

Let us lower our heads in mournful reflection of America’s martial departed… and what might have been.

Requiescant in pace.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Hong Kong Headed for Crisis Again

This post Hong Kong Headed for Crisis Again appeared first on Daily Reckoning.

I’ve been visiting Hong Kong for over 35 years. My first visit was in 1982 and my most recent was in May 2018.

All large cities change over time. New districts are developed. New buildings are erected and some old ones torn down.

Cities on the water, like Hong Kong, can use landfills to build more land and transform colourful (if dangerous) dockside alleys into sleek convention centres and hotel districts. None of that is unexpected, especially in dynamic cities like Hong Kong.

Yet in addition to physical infrastructure (which changes), cities have a kind of soul or zeitgeist, which is less susceptible to change.

St Mark’s Square in Venice, the Louvre in Paris and the Houses of Parliament in London are all defining and, if not eternal, at least help to keep a place rooted over time.

My visits to Hong Kong in the late 1990s and early 2000s were characterised by the same energy and dynamism I had encountered decades earlier.

I had routinely described Hong Kong to friends as the most energetic city in the world after New York.

The ‘One country, two systems’ seemed to work well together.

Yet as China’s growth ‘miracle’ gathered steam from 2002-2007, a legal heavy hand and gloomy administrative culture directed from Beijing descended on Hong Kong. You could feel it in the air.

At first, I noticed the lack of energy. The city was still rich and active, but there was a ‘business as usual’ attitude that was less driven than the energetic venue I had always known. Then I noticed a more depressed attitude among the bankers, investors and event planners I associated with.

They still made money, but the typical upbeat smile had been replaced with a more worried look.

This was accompanied by a rise in street protests against the heavy hand of Beijing on matters such as free speech, government autonomy and the relative importance of Hong Kong in the Chinese master plan.

Clearly, Shanghai had come into its own as the financial centre of China, so Hong Kong’s special role had been greatly diminished. The starkest evidence of change came during my last visit in May 2018…

I was presenting to a group of elite policymakers and property developers at the prestigious Asia Society local headquarters. At one point, one of the local elites took me aside, looked over his shoulder and at a near whisper said, ‘Be careful what you say.’

Global investors are accustomed to treating Hong Kong as a bastion of free markets and fair dealing. Those assumptions were suddenly no longer true, as Beijing began to treat Hong Kong as just another piece on a chessboard of market manipulation and geopolitical ambition.

The Chinese authoritarianism evident in Hong Kong last year only cemented that policy shift. What developments can we expect now that the freewheeling Hong Kong we knew from 1960-2005 has come to an end?

Last year’s unrest in Hong Kong was another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.

This social unrest died down after the proposed bill to extradite Hong Kong citizens to China was pulled off the table. But now Beijing is clamping down hard with its proposed legislation to punish dissent.

Expect the pro-democracy protests to resume again. They may even grow larger. How will China react?

A direct Chinese invasion cannot be ruled out if local authorities cannot squash the unrest.

Of course, that would be the last nail in the coffin of the academic view of China as a good global citizen.

That view was always false, but now even the academics have started to understand what’s really going on. The situation in Hong Kong today is eerily reminiscent of the days leading up to the Tiananmen Square massacre on 4 June 1989.

In both cases, a particular cause for complaint gave rise to demonstrations, which soon grew and led to wider demands for political liberty and justice. Tiananmen started as a demonstration against inflation, which drew college students and housewives.

At its height, over one million protestors were active in Beijing, while demonstrations sympathising with the Tiananmen protestors appeared in over 400 Chinese cities.

Tiananmen Square is immediately adjacent to the Forbidden City and the Chinese leadership compound, so the demonstrators posed a potential threat to the government itself. Finally, hard-line Communist Party leaders ordered tanks and troops to attack the demonstrators.

No one knows the exact number killed, but estimates range from the low thousands to the tens of thousands. The entire incident has been covered up and is never mentioned in official communications or taught in Chinese schools…

As I described earlier, Last year’s Hong Kong demonstrations began on a small scale to protest a proposed law that would allow extradition of Hong Kong people to Beijing for trial on charges that arose in Hong Kong.

That would have deprived Hong Kong people of legal protections in local law, and could have subjected prisoners to torture and summary execution. The demonstrations grew exponentially and involved hundreds of thousands of protestors.

The list of demands also grew to include more democracy and freedom, and adherence to Hong Kong’s rule of law. Now the protests look like they’re starting again, and rightly so. Here’s China’s dilemma…

If Beijing tolerates more protests (and they succeed), they may lead to greater autonomy for Hong Kong at a time when Beijing is trying to strengthen and centralise its control. But if Beijing cracks down on the protestors, it will have another Tiananmen Square massacre on its hands with two important differences.

Hong Kong is a major city and will not be as easy to control as a confined square in Beijing.

And the rise of social media, mobile devices and live streaming guarantee that Beijing will not be able to hide or cover up any atrocities.

The jury is out on which path the Communists would take. But with China’s increasing belligerence in the region, don’t count out a strong response.

Unfortunately, the resolution may not be the peaceful one hoped for but another bloody massacre.

With the U.S. warning China against strong action in Hong Kong, let’s just hope the situation doesn’t light a powder keg resulting in a shooting war.

In case investors didn’t have enough to worry about with the coronavirus, they may have a whole lot more to deal with before too long.

Regards,

Jim Rickards
for The Daily Reckoning

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Is War Next?

This post Is War Next? appeared first on Daily Reckoning.

Remember the pro-democracy protests in Hong Kong against Chinese authoritarianism?

Well, guess what? They’re about to start again. And U.S.-Chinese relations could get even worse than they are right now.

Are you prepared for a bumpy ride?

Let’s unpack this…

Last year’s protests came in response to a proposed law that would have allowed the extradition of Hong Kong residents to Beijing for trial on charges that arose in Hong Kong.

That would have deprived Hong Kong residents of legal protections in local law and subjected prisoners to torture and summary execution.

The legislation was proposed by Hong Kong’s Chief Executive Carrie Lam, who many consider a puppet of Beijing.

The demonstrations grew exponentially, ultimately involving hundreds of thousands of protesters.

The list of demands also grew to include more democracy and freedom and adherence to Hong Kong’s rule of law.

Due to social media, these protests were seen around the world.

The proposed bill behind the original protests was scrapped last October, which was a victory for the pro-democracy protesters.

The protests didn’t end altogether, but tensions were at least diffused to a great extent and the world moved on.

Well, here comes round two…

China’s Communist parliament is preparing to roll out legislation that would ban “treason, secession, sedition (and) subversion” in Hong Kong.

This is different from the previous legislation because this bill actually originates in Beijing, not Hong Kong. It’s a direct assault on Hong Kong’s democracy. The Chinese parliament would insert the legislation directly into Hong Kong’s constitution.

It’s scheduled for passage next week.

Pro-democracy activists have called for mass protests this weekend in response to what they rightly consider a Chinese invasion of their autonomy.

We could be in for a fresh round of protests, with as many or more people. China’s reaction will be key.

Will they try to put the protests down by force? That could have major consequences.

Yesterday, news emerged that the U.S. Senate is introducing bipartisan legislation to impose sanctions on officials and business entities that enforce the new law.

And President Trump warned yesterday that the U.S. would react “very strongly” to the Chinese legislation.

In response, China’s foreign ministry warned Beijing would “fight back” against any U.S. interference.

At a time when U.S.-Chinese relations are already at a low ebb due to China’s almost criminal handling of the coronavirus pandemic, it looks like things are about to get even worse.

This situation could become very interesting.

But you shouldn’t be surprised. The current trajectory of U.S.-China relations is following a familiar course. It started with the currency war…

When my first book, Currency Wars, was published in 2011, I made the point that currency wars don’t exist all the time, but when they emerge they can last for 15 or 20 years.

The reason is that the currency devaluations just go back and forth between major trading partners and no one is any further ahead in the long run.

Readers said, “OK, we get that, but what comes next?”

The answer is trade wars. Once currency devaluations fail, countries turn to tariffs to slow down imports and help their own exports.

That’s where the U.S. and China are now, with the ongoing trade war (which could get worse).

But that’s also a dead end from an economic perspective. Again, the question is: What comes next?

Well, with history as a guide, we can see that today’s pattern is a repeat of what the world went through in the 1920s and 1930s.

First came currency wars (1921–1936). Then came trade wars (1930–34) and then finally a shooting war (1939–1945).

Are we heading for another shooting war with China? The signs are not good.

Trade war tariffs can be weaponized to pursue geopolitical goals. Trump is using tariffs to punish China for its criminal negligence (or worse) in connection with the spread of the Wuhan virus to the U.S. and the rest of the world.

This also has historical precedent.

Between June and August 1941, President Franklin Roosevelt placed an oil embargo on Japan and froze Japan’s accounts in U.S. banks.

In December 1941, the Japanese retaliated with the sneak attack on Pearl Harbor. Will China now escalate its retaliation to the point of armed conflict?

We’ll find out soon, possibly in the South China Sea or the Taiwan Strait. The latest reemergence of tensions in Hong Kong only adds kerosene to the fire.

Investors should prepare for U.S.-China geopolitical tension to grow worse. Maybe a lot worse. That’s the lesson of history.

Regards,

Jim Rickards
for The Daily Reckoning

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The Jalopy Economy

This post The Jalopy Economy appeared first on Daily Reckoning.

There is absolutely nothing wrong with this economy that a miracle cannot fix… to fine-tune a phrase of Alexander Woollcott.

We believe the economy was going at partial throttle even before the pestilence ran it down.

It gave the appearance of an exotic racing auto — sleek, finely lined, waxed to a blinding sheen…

Unemployment had plunged to 50-year lows. The stock market knocked down one record after the other. The consumer was flush… and eager to drain his wallet.

But beneath this racer’s shining surface lurked a lemon…

The Look Under the Hood

The transmission slipped gears. Cracks ran through the pistons. Rust corrupted the engine block… and oil oozed from every seam.

The record-low unemployment was more statistical gimmickry than actual record-low unemployment.

Account for those hopeless unemployed who had abandoned the search, argues ShadowStats… and the true unemployment rate may have scaled 20%.

Meantime, much employment last decade came within the low-wage service and hospitality industry.

That is the same service and hospitality industry knocked out by the virus… incidentally.

But these are not, in the main, “breadwinner jobs.”

And our consumer, superficially flush, was gulping loads of debt to keep him floating.

GDP growth did not attain 3% one year during this past decade. From 1996–2005 — conversely — GDP exceeded 3% seven years of the ten.

If Not the Virus, It Would Have Been Something Else Eventually

This gaudy but citrusy roadster was bound to go wrong soon or late. The post-financial crisis expansion already ran to record distances.

The virus finally sent the smoke billowing from the hood. But if not the coronavirus… another bugaboo would have sent it veering off the asphalt.

We hazard the deceleration would have been far less sudden, the jolt far less violent, the breakdown less dramatic.

But a mechanical discombobulation of one sort or other was long past due. And here it is.

Of course here is the question on all lips:

When will the economy retake the road?

Savings Will Save Us

Worry not, coo the glass-half-fullers. The economy is recuperating in the auto shop.

Once we turn the key, it will come busting to life like a stallion from the barn. We will have a V-shaped recovery. You watch.

They inform us, for example, that the consumer has been storing in cash. Trading Economics reports the savings rate has stretched to a walloping 13.1%.

It had averaged 7.6% in 2019… as a counterexample.

These savings will go flooding into the economy once the doors swing open. This spending will drive the recovery along. It will cut a lovely “V” into the road.

But will it? We have questions. Here is one:

Do these savings actually exist?

Phony Savings

Statistics are often lovely liars. They tell fabulous tales beyond compare.

As Lance Roberts reports — he of Real Investment Advice — the 13.1% savings rate represents a gorgeous fiction.

These savings are densely concentrated within the utmost income brackets. The bottom 80% are so loaded down… they can scarcely save a jot. Their tanks are empty.

And the lower 90% have maintained negative savings rates since the 1990s:

IMG 1

Penetrating the Statistical Fogs

Here Roberts drives a shaft of light through the statistical fogs:

Since the top income earners have more than enough income to maintain their standard of living, the balance falls into savings. This disparity in incomes also generates a “skew” to the savings rate…

“Savings” are confined to the top 10% of income earners, as the bottom 90% struggle to make ends meet by increasing debt levels.

While government numbers suggest average Americans are saving 13% of their income, the majority of “savings” is coming from the differential in incomes between the top 20% and the bottom 80%.

In other words, if you aren’t in the “top 20%” of income earners, you probably aren’t saving a chunk of money.

Over 38 million Americans are presently off the job. And so the fuel tank of savings runs drier yet.

How will their nonexistent savings drive the economy back?

Don’t Look to the Top 20%

The upper 20%, meantime, will not likely raise their spending above existing levels. Roberts:

The issue with the lack of savings for the bottom 80–90% is that economic growth is roughly 70% consumption. Those in the top 10%, which have capacity to spend, have little need to substantially increase their rate of spending.

In conclusion:

Americans are not “saving more money” Unless, of course, you are in the top 20% of income earners.

By the time the current recession and bear market are over, it will take much longer than anticipated for the economy and markets to bounce back. Each recovery has already been slower, and weaker, than the last, and the next recovery will be no different.

With growth rates below 2% on average, wage growth suppressed and a large contingent of boomers withdrawing assets to sustain their living requirements, the ability to generate higher levels of economic growth will be limited.

We cannot therefore expect savings to haul us up.

An Unbalanced Economy

In a balanced economy with piles of savings in back of it, they very well could.

The economy could have held on until the trial passed… and sidelined cash would have come pouring back in.

But the economy is not a balanced economy. And piles of savings are not in back of it. Piles of debt are instead on top of it.

And so limited progress is likely ahead of it.

An economy swaybacked under piles of debt cannot make much headway. The load is simply too heavy.

As we have maintained before, productivity is the spring of authentic long-term prosperity…

Productivity, Productivity, Productivity

For centuries the United States went up on a rising tide of productivity. Leaping productivity gains of the 19th and early 20th centuries lifted it from stump-toothed backwater to global colossus.

These advances continued past midcentury…

Productivity growth averaged 4–6% for the 30 years following the Second World War. But since 1980?

Average productivity has languished between 0–2% — a 40-year running in place.

What about American labor productivity? Has the American worker kept up?

No… he has not.

Labor productivity averaged 3.2% annual growth from World War II through the close of the 20th century. But since 2011?

A mere 0.7%.

Look to the Federal Reserve

We do not believe worker productivity has declined because the American worker took to snoozing on the job.

We point our finger in another direction entirely… to institutions beyond his control.

Analyst Michael Lebowitz robs our thunder when he writes:

The stagnation of productivity growth started in the early 1970s. To be precise it was the result, in part, of the removal of the gold standard and the resulting freedom the Fed was granted to foster more debt… Over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

And now the Federal Reserve is fostering debt growth on a scale beyond all belief…

More of Everything, Except Growth and Productivity

It has once again nailed interest rates to zero. And it has ballooned its balance sheet to $6.96 trillion — far past its previous $4.5 trillion limit.

It is likely stretching to $10 trillion… and beyond.

Meantime, each fresh dollar of debt gives less economic thump than the last.

But it will not turn back now. It is already too far down the roadway.

Where will the productivity originate? We cannot say.

Yet until it comes, we can expect more of the same…

More debt, more warfare against savers, more monetary and economic bedlam, more of all of it  — only more so.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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The Coin-Toss Election

This post The Coin-Toss Election appeared first on Daily Reckoning.

The political climate is fragile and feverish, with the nation amid a crisis that is both fast-changing and unparalleled in living memory.

The biggest change in my election forecast is that Trump’s chances of reelection in November have plunged from 74% (the pre-COVID forecast) to 50% as of today.

This does not mean Trump will lose; he could very well win. But it will be a very close election. Deciding the outcome between Trump and Biden as of now is basically a coin toss. Many factors, some foreseeable and some unforeseen, could tip the balance.

Trump’s strengths are that he is an excellent campaigner, has enormous amounts of mo‌ney for the campaign and seems to have unlimited stores of energy. He also has the power of incumbency, which usually propels a sitting president to a second term.

Trump’s weaknesses are the depth of the New Depression and his handling of the COVID-19 pandemic. Amost no one blames Trump for the outbreak, but many found his response belated and overly optimistic in the initial stages. He did some things right (the China travel ban), but many responses were bungled (defective testing kits, shortages of masks and protective clothing, shortages of ventilators).

In stages, these mistakes were overcome. Masks and protective clothing were mass-produced. Ventilators were surged to those locations that most needed them. New hospital beds were made available through Navy hospital ships and temporary hospitals built by the Army Corps of Engineers. Testing kits gradually became available, although there is still a severe shortage.

Instead of taking credit in a measured way for these positive developments, Trump wasted time in petty disputes with corrupt journalists. Those fights might be OK in the normal political arena, but there’s nothing normal about a pandemic. Trump didn’t seem to know the difference and alienated even his supporters in the process with his pontificating and sideshow antics.

These Trump deficiencies (despite many positive accomplishments) began to show up in the polls.

Large employment losses in states that Trump must carry, especially Pennsylvania, will not help Trump’s chances in November. On the other hand, if Trump can reopen the economy and recover some of these losses, he may benefit from a positive trend even if net losses remain.

What about Joe Biden?

Biden may have pulled even with Trump in the election horse race, but he’s not a sure thing by any means. Before Biden can even turn to the campaign against Trump, he must still try to obtain unity in his own party.

Bernie Sanders withdrew from the race, which essentially guaranteed the nomination for Biden. But will the “Bernie Bros” actually turn out on Election Day? Key components of the Democratic base might not be motivated to vote.

The left wants a Biden administration ban on anyone who has worked on or near Wall Street, the fossil fuel industry, the health insurance sector and the lobbying world, to name a few.

In short, the price that Bernie Sanders’ supporters are demanding from Biden may well make Biden unelectable in key swing states like Florida, Pennsylvania, Michigan and Wisconsin.

If Biden does not embrace the socialist agenda, his lost support from the Sanders movement may make him unelectable for other reasons. Biden is between a rock and a hard place, and the Bernie Bros intend to keep him there in order to pursue their goals.

One way for Biden to appease the Bernie Sanders movement without going all-in on the progressive agenda is to choose a progressive running mate. In the eyes of progressives, the right running mate will be able to “keep an eye” on Biden and pursue the Bernie agenda inside the White House even if the specifics are not shouted from the rooftops.

Here’s a summary of the struggle going on inside the Biden camp regarding a VP choice as reported by Tal Axelrod for The Hill on April 19, in an article titled “Progressives Look for Concession From Biden With Running Mate”:

“Joe Biden absolutely has to pick a progressive champion as his VP pick. He has to unify the party, and that’s the key,” Charles Chamberlain, head of Democracy for America, told The Hill. “What we saw during the primary is… that we have two major factions of this party, the corporate wing, more establishment Democrats, and there is [the] progressive, ascendant left. And he absolutely has to choose from that progressive left to unify the party.”

Biden could pick from a number of progressive women to serve as his VP. Among the most prominent contenders who have been floated are [Elizabeth] Warren and Stacey Abrams, the former Georgia gubernatorial candidate and state House minority leader.

Both have openly expressed interest in the role, with Abrams saying she would be an “excellent” running mate for Biden and Warren confirming that she would accept an offer to be his No. 2.

Amy Klobuchar, the Minnesota senator, has also been mentioned as a leading candidate.

There are others, but these three have gotten the most attention.

But there’s no free lunch for Biden. The choice of Stacey Abrams for vice president would undoubtedly rally progressive and minority voters to turn out for Biden. That’s critical. But it helps Biden in places he is highly likely to win anyway such as California and New York.

Abrams’ ultra-leftist views and strident persona would drive away many moderates in critical swing states such as Michigan and Pennsylvania and possibly tip those states to Trump.

What we have today is a too-close-to-call election and six long months to go before Election Day.

Trump is aided by a solid base and a well-organized campaign strategy. Biden is aided by an electoral vote head start in big states like California and New York and a friendly media that will not criticize his many shortcomings.

The Democrats may hold a “digital” convention and keep Biden under wraps as much as possible until the October debates (where his cognitive decline may be difficult to disguise).

Republicans want to get the economy open for business and show some growth in the aftermath of a second-quarter collapse.

But there is one potential development that could move the odds in Trump’s favor…

Remember the “Russia collusion” accusations against Trump? The accusation was that he colluded with Russians to interfere in the 2016 presidential election. Trump campaign aides and early appointees such as Gen. Michael Flynn, Carter Page, George Papadopoulos and others were all said to be in on the conspiracy to “steal the election.”

There was only one problem with these claims. None of them were true. Multiple congressional investigations all reached the conclusion that there was no merit to the claims. The two-year, $30 million Mueller investigation found no evidence of Russian collusion by Trump or his team.

Multiple internal reviews and inspector general reports not only found no collusion, but also revealed extensive wrongdoing by the FBI and the U.S. intelligence community when it came to false representations, doctored reports, illegal surveillance of American citizens and other egregious abuse of constitutional rights.

Well, a day of reckoning may be coming soon. U.S. attorney John Durham has been conducting a multiyear investigation of his own at the request of the U.S. attorney general, William Barr. This investigation targets the wrongdoers in the Obama administration Justice Department, intelligence community and diplomatic corps.

High-profile subjects of inquiry include former FBI head James Comey, former National Security Adviser Susan Rice, former U.N. Ambassador Samantha Power and many other former high-ranking officials.

Guess what? Joe Biden has been listed as someone who requested and was privy to these reports, which raises serious questions.

The Durham investigation is criminal, so a wave of indictments and prosecutions may be coming soon. The exact timing is uncertain, but mid-July seems a likely date for announcement of the results of the investigation and any indictments.

Attorney General William Barr said Monday that he doesn’t expect criminal charges to be filed against Biden (or Obama). But Biden’s involvement in the Russiagate scandal could have implications for the election. We’ll see.

Investors have their hands full today dealing with the Wuhan virus, the new depression and an unsteady stock market. Now you can add legal fireworks to the list of things that may disrupt markets.

Regards,

Jim Rickards
for The Daily Reckoning

The post The Coin-Toss Election appeared first on Daily Reckoning.

Trump vs. Biden: Who Will Win?

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The novel coronavirus has dominated the headlines for the past two months, as it should. There’s no bigger story in the world. And besides its human toll, I believe we’ll be dealing with its economic fallout for years.

But let’s not forget, this is an election year. Today I want to tie together the pandemic, the economy and the election.

What we are witnessing is a cascade of complex systems.

A pandemic is one complex dynamic system. The economy is another. A political season is still another.

Each complex system is highly unpredictable and capable of throwing out shocks (called “emergent properties” by physicists).

These three dynamic systems could exist on their own without affecting each other. But that’s not the case today.

A contagious virus, an unstable economy and a highly contested election are crashing into each other. Any one of these systems is difficult to model and predict. Collectively, it’s almost impossible.

All three systems go around in a circle affecting each other and being affected by each other. The pandemic has crashed the economy, and the economic collapse will affect the election. They all interact.

There’s no early end to this complex dynamic in sight.

There’s much that we don’t know about the pandemic and the political outcome. We know more about the economy because the specter of mass layoffs and business failure is already plain to see.

Even at that, we don’t know how long the economic distress will last and how long a recovery will take.

At this point, it’s fairly clear that the presidential election will feature Donald Trump versus Joe Biden.

There is some chance that Biden will stumble because of his cognitive disabilities, but it’s more likely the media will cover for him and he’ll be on the ballot on Election Day.

The principal factor in my election model this year was the probability of a recession before Election Day. No president seeking reelection to a second term has lost in the 20th or 21st centuries unless a recession occurred late in his first term.

Jimmy Carter and George H.W. Bush both lost their reelection bids, and both suffered recessions shortly before the election. Absent a recession late in a first term, the incumbent wins.

Until March, the odds of a recession before Election Day were less than 30% (many analysts set those odds even lower). This meant that Trump’s odds of winning were the reciprocal of 30%, which put the odds of winning at 70% (or higher).

And Trump’s odds would have likely improved by 2% per month. This means that if nothing changed, Trump would be an 86% favorite to win on Election Day.

Yet things did change.

Because of coronavirus, the odds of a recession switched to 100%. In theory, that would put the odds of Trump’s reelection at 0%. But Trump certainly has a better chance of reelection than zero. Basically, you have to set aside the rule book in this case.

This isn’t just a garden variety recession. It was deliberately imposed and accepted as a legitimate trade-off to prevent a massive public health crisis that could have overwhelmed the health care system.

I’m not going to get into a debate about whether it was necessary or not, but the point is it was a choice. It wasn’t because the economy suddenly collapsed on its own (although the economy was weaker than most people think it was).

So past comparisons don’t really hold up. This is a completely unprecedented situation.

But if you’re trying to forecast the election, how do you do it?

The best place to start the modeling process is to make the odds 50/50 (which really is just an educated starting place in the absence of better information).

That means Biden’s odds of winning are also 50% (for now).

In other words, the election has gone from being close to a sure thing for Trump to a coin toss.

Stock markets certainly have not had time seriously to contemplate President Biden and his pledges of higher taxes, open borders, the Green New Deal, late-term abortions and gun confiscations.

But that’s coming soon and is another huge headwind for markets.

So you can see how coronavirus, the economy and the election are all densely connected. Few would have imagined seven months ago where we’d be today. But here we are.

We still have nearly six months until the election. The best approach is to reserve judgment on what will happen six months from now.

But I’ll be watching developments closely and giving my readers the best available forecasts using my predictive analytic models and decades of experience.

Regards,

Jim Rickards
for The Daily Reckoning

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George Gilder: Enemy of Society?

This post George Gilder: Enemy of Society? appeared first on Daily Reckoning.

Friday’s reckoning drew an especially heavy mail.

We vented Mr. George Gilder’s unorthodox opinions about the virus. He claimed its actual threat has been fantastically exaggerated, that the terror has little excuse in the facts.

But George’s arguings failed to fetch the game. In fact readers seized their own shotguns… and peppered George’s backside with buckshot.

Reader Vince W. — for example — instructs us to:

Please tell Mr. Gilder that his stance against the wearing of face masks makes him an enemy of society, and he can go (fornicate) himself. If he brings his sorry a** anywhere near me without a mask, I will consider it assault and respond accordingly.

Alice S. insists George vastly soft pedals the threat. Far more Americans are vulnerable, she says:

We’re not Sweden. More than 40% of our population is obese (No. 1 comorbidity factor associated with death from COVID other than age). More than 40% are hypertensive (No. 2 comorbidity factor). I won’t even go into the millions of diabetics, asthmatics, immunocompromised, etc., who have additional comorbidity factors.

The point is that as a country, our entire country is either elderly and/or ill. Easily more than half our population falls into the “vulnerable” category.

Calls to let the lucky minority who aren’t vulnerable won’t help the economy. It will be liberating for them, and we need to do it, but it is too small a fraction of the population to make a difference to the economic devastation that has already occurred.

And it’s worth noting that the elderly (people over 60 seriously? Elderly?) and the “vulnerable” also comprise a high percentage of highly productive working people, business owners and entrepreneurs. Shunting them into second-class citizenhood status certainly won’t help the economy.

Sam L. raps us smartly across the knuckles for airing George’s packet of lies:

I am very disappointed that you gave Mr. Gilder the opportunity to spread such awful, misleading information.

Meantime, Jane F. is so steamed up she is attempting to cancel her subscription — again:

I canceled my subscription to this newsletter in part because of reasoning like the above. Will cancel it again and hope it works this time.

Alas, we can extend Jane no guarantee. We structure our operations on the model of Dionaea muscipula — the Venus flytrap.

It is far easier to come in than to get out, that is.

But we wish her a successful escape. We will nonetheless miss her if she slips our snare.

But is this criticism of George entirely just?

How Do We Know What to Believe?

George flouts the received wisdom, it is true. But is the received wisdom true?

Authorities initially informed us that masks were fraudulent defenders, that the virus can break the blockade.

They then executed a rightabout-face… and claimed masks in fact formed effective barriers to entry.

But are they correct?

Even now expert opinion divides. Some claim mask-wearing is actually harmful to the mask-wearer. For example:

Dr. Russell Blaylock — a retired neurosurgeon — insists masks concentrate the virus within the nasal passages.

From there it could beat a path clear through to the brain… and proceed against the neurology.

We cannot say if this fellow is correct or if he is incorrect.

But if even mask-wearing cannot gather expert consensus… how do we know what to believe? Or whom to believe?

One expert wars with another. We are all trapped in their crossfire, heads glued to earth, uncertain of its accuracy.

Each day appears to bring a fresh repudiation of a prior claim, of a prior study. That initial claim was a living and breathing truth until the new evidence murdered it.

And so it goes.

In conclusion… that which is known today may be disknown tomorrow.

Perhaps George is far off the facts, as our readers allege. But perhaps he is not.

We simply do not know of course. But does anyone? And who is to say the authorities responded properly to the threat?

Sweden May Have Gotten It Right

We have raised a provisional cheer for the Swedish approach in previous issues. Sweden did not padlock its economy.

The schools, the restaurants, most places of public resort remained open. Mass assemblies were banned, it is true. Yet only the aged and vulnerable were put in quarantine.

That is, the appropriate groups were put in quarantine. Much of the world, meantime, also threw the youthful and vigorous into quarantine.

The Swedish fatality rate exceeded the United States fatality rate — but not overmuch.

Now the virus has torn through the healthful population. Most suffered no symptoms or bearable symptoms.

They developed antibodies… and contrary to fears, most likely a sustained immunity.

Explains Sweden’s ranking epidemiologist, a certain Anders Tegnell:

It is quite certain that immunity does exist… For all the cases we have had in Sweden, there has not been one single person who had this disease twice. And we have a very strict identification system. So there is no way we would miss a person who had it twice. I haven’t heard any reports from any countries where there has been a certified case who has actually had this twice. There’s been rumors about it. But in the end, they have been disclaimed.

And so Sweden is likely on its way to the population immunity. That is, on its way to the “herd” immunity that will lift the siege.

The World May Have Gotten It Wrong

Meantime, the United States elected to hide indoors. Thus the virus did not sweep through the healthy herd.

And so the United States is far from the population immunity that Sweden may be nearing.

But is this herd immunity a heartless immunity that exacts an intolerable death rate?

Not according to another Swede — Dr. Johan Giesecke.

This fellow has been Sweden’s state epidemiologist. He has also been chief scientist with the European Centre for Disease Prevention and Control. From whom:

Most people will become infected by this and most people won’t even notice. We have data now from Sweden that 98–99% of the cases have had a very mild infection or didn’t even realize they were infected. So we have the spread of this mild disease around the globe and most of it is happening where we don’t see it because it happens among people who don’t get very sick and spread it to someone else who doesn’t get very sick… What we’re looking at (with the official number of cases and deaths) is a thin layer at the top of people who do develop the disease and an even thinner layer of people who go into intensive care and an even thinner layer of people who die. But the real outbreak is happening where we don’t see it.

We freely concede that Sweden is not the United States… as reader Alice reminded us.

Yet we find ourselves tied up to the notion that the Swedish approach was the generally appropriate approach.

And that a mass arrest of the healthy and virile was the inappropriate approach.

We are aware that places us outside the main stream. We swim instead in a parallel stream…

Outside of Consensus

This is a publication that likes to graze against the grain, to alter metaphors. And so we often veer sharply from “consensus.”

We prefer to patrol the boundaries of allowable opinion… and launch unauthorized raids across the forbidden frontier.

Thus we skirmish with ideas the mainstream would declare scandalous or outrageous.

We are not The New York Times. We are not The Washington Post. We are not The Wall Street Journal.

Nor do we aspire to be. And you would not read us if we were.

The Story Not Being Told

We are under bonds to you, our reader. Under bonds, that is, to tell you “the story that is not being told.”

It is true, we often report a false story.

We chase phantom leads. We go down ends that are dead. We lose our quarry’s scent.

At other times we take ourselves into water — water that is deep — and occasionally hot.

But sometimes we get it just about right.

And those rare instances make it worth all the while…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post George Gilder: Enemy of Society? appeared first on Daily Reckoning.

Globalization, Financialization Are Dead

This post Globalization, Financialization Are Dead appeared first on Daily Reckoning.

A popular claim is that the 1918–19 flu pandemic killed millions but no biggie, the Roaring ’20s started the following year. It’s onward and upward, baby, once we toss the masks.

Wrong. Completely, totally, dead wrong.

The drivers of the past 75 years of growth — globalization and financialization — are dead, and so is everything that depended on them for “growth.”

Here’s what’s poorly understood: Globalization and financialization die when they stop expanding.

Just as a shark dies if it stops swimming forward, globalization and financialization die once they stop expanding, because their viability depends on expansion.

Globalization and financialization have been losing momentum for years.

Globalization Has Strip-Mined Economies

Under the guise of “opening markets,” globalization has strip-mined every economy that can’t print a reserve currency and hollowed out economies globally as only globally competitive sectors survive globalization.

The net result is that once vibrant, diversified economies have been reduced to fragile monocultures completely dependent on global flows of capital and spending for their survival.

Tourism is a prime example: Every region that has seen its local economy crushed by global corporations, leaving global tourism as its sole surviving sector, has been devastated by the drop in tourism, which was always contingent on disposable income and credit expanding forever.

But credit can’t expand forever, as it eventually runs out of income to service additional debt.

Financialization is not just the expansion of credit and leverage to marginal borrowers; it’s also legalized looting, as the true risks of soaring debt and leverage are hidden in obscure financial instruments and bogus claims of “safety” and “hedging.”

Excesses of debt and leverage funneled into risky speculations inevitably end in default.

Asset and Consumption Bubbles

Financialization manifests as asset bubbles and hyperconsumption as people who never had credit spend up to the credit limits and beyond.

Both asset and consumption bubbles pop, pushing the financial sector that feasted off the unsustainable expansion of credit into insolvency.

In other words, neoliberal globalization and financialization — essentially one dynamic — are inherently destabilizing, as all the incentives are perverse.

Just as asset and consumption bubbles are inevitable, so too is the bursting of those bubbles and the devastation of everything that had become dependent on the expansion of those bubbles.

And that has real consequences.

Food security, to take a basic example, is impossible once globalization has destroyed local agricultural production, and financialization has rewarded factory-farming since Big Ag can borrow capital at scales that only make sense in a world of globalized monoculture agriculture.

1919 Is Not 2020

Everyone touting 1919 as the model for 2020 is deeply ignorant of history and the destructive ontologies of globalization and financialization. There is virtually no overlap between the world of 1919 and the world of 2020 in terms of financial structures and excesses.

That globalization and financialization are dead is revealed by what Federal Reserve bailouts and fiscal free-for-alls cannot do:

1. They cannot create creditworthy borrowers out of thin air like the Fed creates dollars out of thin air.

2. They cannot force lenders facing mass defaults to loan more money to uncreditworthy borrowers

3. They cannot force creditworthy borrowers to borrow money.

4. They cannot reflate asset and consumption bubbles that have popped.

5. They cannot restore confidence in long, fragile supply chains.

6. They cannot magically turn unprofitable enterprises into profitable enterprises.

7. They cannot create income streams — revenues, profits, wages, etc. — with bailouts that continue the perverse incentives of moral hazard or “free money” designed to give debt-serfs enough cash to continue making their loan payments.

8. They cannot forgive debt payments without destroying the wealth held as debt: Mortgages, student loans, auto loans, credit card debt, corporate junk bonds, etc., are assets that lose their value once borrowers default.

9. The Fed can buy impaired debt, but that doesn’t change their abject powerlessness (points 1–7 above).

Financialization was never sustainable, and neither was the destructive globalization it enabled.

Any system that depended on the ever-expanding exploitation of new resources, debtors and markets could never be anything but fragile. The ferociousness of its rapacity masked its inherent weakness, a weakness that is now exposed as fatal.

But let’s stick to the U.S. alone for now. The pandemic is having a dramatic long-term effect on Main Street local tax revenues.

First- and Second-Order Effects

To understand how, we need to consider first- and second-order effects.

The immediate consequences of lockdowns and changes in consumer behavior are first-order effects: closures of Main Street, job losses, massive Federal Reserve bailouts of the top 0.1%, loan programs for small businesses, stimulus checks to households that earned less than $200,000 last year and so on.

The second-order effects cannot be bailed out or controlled by central authorities. Second-order effects are the result of consequences having their own consequences.

The first-order effects of the pandemic on Main Street are painfully obvious: Small businesses that have barely kept their heads above water as costs have soared have laid off employees as they’ve closed their doors.

The second-order effects are still spooling out: How many businesses will close for good because the owners don’t want to risk losing everything by chancing reopening?

How many will give it the old college try and close a few weeks later as they conclude they can’t survive on 60% of their previous revenues?

How many enjoy a brief spurt of business as everyone rushes back, but then reality kicks in and business starts sliding after the initial burst wears off?

How many will be unable to hire back everyone who was laid off?

Falling off a Cliff

As for local tax revenues based on local sales taxes, income taxes, business license fees and property taxes: The first three will fall off a cliff, and if cities and counties respond to the drop in tax revenues by jacking up property taxes, this will only hasten the collapse of businesses that were already hanging on by a thread before the pandemic.

The federal government can bail out local governments this year, but what about next year, and every year after that?

The hit to local tax revenues is permanent, as the economy became dependent on debt and financialization pushed costs up.

Amazon and online sellers don’t pay local taxes except in the locales where their fulfillment centers are located.

Yes, online sellers pay state and local sales taxes, but these sales are for goods; most of the small businesses that have supported local tax revenues are services: bars, cafes, restaurants, etc.

As these close for good, the likelihood of new businesses taking on the same high costs (rent, fees, labor, overhead, etc.) is near zero, and anyone foolish enough to try will be bankrupted in short order.

Now that working at home has been institutionalized, the private sector no longer needs millions of square feet of office space. As revenues drop and profits vanish, businesses will be seeking to cut costs, and vacating unused office space is the obvious first step.

What’s the value of empty commercial space?

Trying to Get Blood From a Stone

If demand is near zero, the value is also near zero. Local governments will be desperate to raise tax revenues, and they will naturally look at bubble-era valuations on all real estate as a cash cow. But they will find that raising property taxes on money-losing properties will only accelerate the rate of property-owner insolvencies.

At some point valuations will adjust down to reality and property taxes collected will adjust down accordingly. If municipalities think they can make up the losses by jacking up the taxes paid by the survivors, they will quickly find the ranks of the survivors thinned.

This doesn’t exhaust the second-order effects: Once Main Street is half-empty, the attraction of the remaining businesses declines; there’s not enough to attract customers, and the virtuous circle of sales rising for everyone because the district is lively and attractive reverses: The survivors struggle and give up, further hollowing out the district.

The core problem is the U.S. economy has been fully financialized, so costs are unaffordable.

The commercial property owner overpaid for the buildings with cheap borrowed money, and now the owner must collect nosebleed-high rents or he can’t make the mortgage and property tax payments.

Local governments spend every dime of tax revenues, as their costs are insanely high as well. They cannot survive a 10% decline in tax revenues, much less a 40% drop.

The Lesson of Yellowstone

The metaphor I’ve used to explain this in the past is the Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up.

But the central banks no longer allow any creative destruction of unpayable debt and misallocated capital; every brush fire is instantly suppressed with more stimulus, more liquidity and lower interest rates.

As a result, the deadwood sapping the real economy of productivity and innovation is allowed to pile higher.

IMG 1

The only possible output of this suppression is an economy piled high with explosive risk.

Eventually nature supplies a lightning strike, and the resulting conflagration consumes the entire economy.

Regards,

Charles Hugh Smith
for The Daily Reckoning

The post Globalization, Financialization Are Dead appeared first on Daily Reckoning.

We’re Sacrificing the Economy for Nothing

This post We’re Sacrificing the Economy for Nothing appeared first on Daily Reckoning.

Dr. Anthony Fauci recently warned the Senate of the possibility of “suffering and death” if the U.S. ended its lockdowns too soon.

For all his acclaimed brilliance, Fauci confessed that the reason for shutting down and locking in the economy and society was not the proven effects of COVID-19 but the possible “worst-case” impact.

As a doctor, above all, he does not want the patient to die. Any extreme measure is justifiable. But prescriptions tenable for individual patients are outrageously inappropriate for entire societies.

Human beings have evolved for millions of years with viruses and bacteria. If they could wipe us out, there would not be 8 billion of us around.

If enterprise were governed by worst-case possibilities, the Wright brothers’ plane could have never taken off, let alone an industrial or biotech revolution.

In that same vein, the so-called Green New Deal would close down the U.S. energy economy in the name of a theoretical peril of climate.

Author Jared Diamond regards overpopulation as the ultimate threat and would halt population growth and thus imperil economic expansion and support for the aged.

And Dr. Fauci would close the economy down for COVID-19 and any other possible plague.

But addressing all possibly extreme threats at once would cripple the economy that is the source of the wealth necessary to remedy any actual threat that occurs.

Dictating a repeated dictatorial response to speculative perils, the cautionary principle is a death sentence for the capitalism and freedom that have made it possible for the planet to support a global population of 8 billion people.

Today, lockdowns threaten starvation for an estimated 260 million people in the Third World who can least afford them.

Closures are ravaging the economy of India and wreaking mass starvation there, for example. The United Nations World Food Program estimates that by the end of the year 260 million people will face starvation.

Michael Levitt, professor of structural biology at Stanford Medical School and winner of the 2013 Nobel Prize in chemistry, says, “There is no doubt in my mind that when we come to look back on this, the damage done by lockdown will exceed any saving of lives by a huge factor.”

I’m not arguing that COVID-19 is not dangerous to the old and those with underlying conditions like heart disease, hypertension, asthma, diabetes and other conditions. Yes, it can be fatal to these people, unfortunately. And even if they live, those with severe cases may have lasting damage.

But we can protect the vulnerable while the overwhelming majority who aren’t vulnerable can get back to their lives.

So please, don’t say I’m insensitive to the people who have suffered and died. I’m not. And let’s just say my own age places me at risk, so I’m not being cavalier about it. But we have to look at the situation in its entirety.

The egregious blunder of the current lockdown illustrates the crippling flaws of bureaucratic management of economics and society.

As I wrote in Wealth and Poverty some 40 years ago, “Modern civilization is hopelessly contingent and problematical, subject to destruction any day by possible climatic reversals, astrophysical mishaps, genetic plagues, nuclear explosions, geological convulsions and atmospheric transformations — all conceivable catastrophes originating beyond the ken of plausible remedy or control.”

If we try to battle all these threats at once, we will end up wasting all our wealth on windmills, strewing them across the environment or tilting with them like Don Quixote. We will resort to ever more stifling controls that will suppress the unexpected benefits of creativity that have always been the source of our prosperity and success.

We will invest in problems rather than in opportunities and end up without either wealth or freedom. The human race has prevailed against the plagues and scarcities of its past, not through regulation or lockdown but through creativity and faith.

State planning killed close to a billion people in the 20th century. Led by the banning of DDT, the resurgence of malaria, the suppression of nuclear power and the retardation of global growth, environmentalist excesses have already killed more people than environmental pollution ever did.

Now the expert response to the coronavirus is on track to exceed even environmentalism in its vast damage of our civilization.

In the name of fighting COVID-19, we are destroying the monetary underpinnings of capitalist markets with untold trillions of dollars of wanton spending and crony bailouts.

We are closing down much of the economy for months on end. We are jeopardizing food supplies and other medical services.

We are giving up world leadership in technology to communists in China. We are condoning a devastating blow to the economies of third-world countries that unlike the U.S. cannot merely print dollars and expect people to take them.

It’s time to end the madness.

Below, I show you 25 findings on the coronavirus from the independent nonprofit Swiss Policy Research. It’s further evidence that the lockdown is far more destructive than the virus. Read on.

Regards,

George Gilder
for The Daily Reckoning

The post We’re Sacrificing the Economy for Nothing appeared first on Daily Reckoning.

Is Monetary Policy Too Tight?

This post Is Monetary Policy Too Tight? appeared first on Daily Reckoning.

No negative interest rates — “for now.”

This we have on authority of the Federal Reserve chairman himself. For Mr. Powell announced yesterday that:

I know there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good tool kit, and that’s the one that we will be using.

Like a fireman hosing a junior fire before it fans an inferno… Powell was out to stream freezing water upon all talk of them.

From one direction the president was pushing him…

On Tuesday Mr. Trump implored the Federal Reserve to “accept the GIFT” of negative interest rates.

From another direction the market was pulling him…

The futures markets had begun to project negative rates — by mid-2021.

What if Mr. Powell failed to swear off negative rates yesterday?

“Forward Guidance”

Silence often talks louder than talking itself. And markets may have heard a shout in his silence. It would have informed them that negative rates are truly in prospect.

The stock market would have begun to factor them. And it would have endured a severe letting-down if Powell failed to carry through. Do not forget:

“Forward guidance” is one of the implements in the fellow’s “tool kit.”

Its purpose is to telegraph rate policy — to wire a sort of advance weather report — so markets can chart a proper course.

An unexpected gust could knock them off their heading.

What, Monetary Policy Is Too Tight???!!!

Yet the stock market is not the economy. And the economy is in for dirty weather.

Only additional easing will see it across the other side… or so we are told.

We are further told monetary policy is too tight for the challenge ahead — if you can believe it.

Deutsche Bank’s credit strategist Stuart Sparks, for example, tells us:

For all the measures taken by the Fed and fiscal authorities to counter the COVID-19 shock, policy remains too tight.

Yet rates are presently set to zero. How can monetary policy remain too tight?

To locate the answer we must get… “real.” That is, we must look beyond nominal interest rates… to real interest rates.

It’s the Real Rate That Counts

Explains Jim Rickards:

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate…

If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

Just so. What then is today’s real rate?

A Shocking Conclusion

The 10-year Treasury note currently yields a skeletal 0.614%. Meantime, the latest core inflation runs to 1.4%.

If we subtract the core inflation rate (1.4%) from the nominal rate (0.664%)… we find the real rate equals -0.786%.

Thus the real rate is negative — but only slightly.

Let us compare today’s real rate with the real rate from 1981…

Nominal rates at the time were killingly high — 13%. But real rates? Once again, Jim Rickards:

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Thus today’s real rate — though negative — nonetheless runs higher than 1981’s -2% real rate.

This, despite the fact that 1981’s nominal rate (13%) vastly overtowered today’s vanishing 0.664%.

It may flabbergast you, it may astound you. It may dynamite the bedrock upon which you stand.

But the facts are the facts.

And so comes the question: Are today’s rates negative enough?

Not according to Harvard economist Kenneth Rogoff…

The Economy Needs -3% Rates

You may recognize the name from these pages. That is because we have often brought him into ridicule.

He is perhaps the loudest drummer for negative interest rates — and the abolition of cash. And Mr. Rogoff believes today’s slightly negative real rate is inadequate to purposes.

The following is from a Reuters article, summarizing Rogoff’s position:

While core inflation excluding volatile energy prices was a healthier 1.4%, that fall in inflation could mean “real” interest rates are not deeply negative enough to swiftly revive the virus-hit economy as the Fed hopes.

To what depth should real rates sink?

Minus 3% — “or lower.” The blessings would spread wide, far and deep:

Negative rates of -3% or lower could lift firms, states and cities from default, boost demand and jobs and be a boon to many hobbled emerging economies too.

Assume for the moment this fellow is correct. Only deeply negative rates could work the trick. Yet Mr. Powell has declared against negative rates.

Can he nonetheless engineer negative real rates to push up the economy? How?

Look to the Balance Sheet

The aforesaid Stuart Sparks — of Deutsche Bank — lights the path:

“Further easing must be provided by the size and composition of the Fed’s balance sheet.”

That is, by additional quantitative easing.

As the gentlemen of Zero Hedge remind us, the Federal Reserve has made the previous estimation:

Each $100 billion of quantitative easing roughly equals three basis points of rate cuts (a normal rate cut is 25 basis points).

Let us assume the Federal Reserve takes aboard Mr. Rogoff’s counsel… and guns for a real -3% rate.

Recall, today’s real rate is -0.786% by our calculations. The Federal Reserve would need to sink the real rate at least two percentage points. Only then would it scrape -3%.

Two percentage points equal 200 basis points.

If $100 billion of quantitative easing approximates three basis points of rate cuts… the Federal Reserve would therefore require the equivalent of 66 rate cuts.

Thus it must empty a satanic $6.66 trillion onto the balance sheet.

That balance sheet presently swells to $6.72 trillion. $6.66 trillion would double the thing to $13.38 trillion — three times its 2015 high.

And so the Federal Reserve could plunge real rates to -3% while nesting nominal rates at zero.

Will it come to pass?

Powell’s Conundrum

We hazard no prediction. And we do not believe monetary policy can bring the economy back up.

We merely sketch a blueprint.

Is Mr. Powell prepared to balloon the balance sheet to a delirious $13.38 trillion?

Balance sheet expansion has a limit. An unknown limit — but a limit.

Drive past it and the dollar could crumble, all confidence lost.

And so we find Mr. Powell hung upon the hooks of a mighty dilemma…

In his mind he could:

A) Risk a dollar collapse by inflating the balance sheet to $13 trillion, or…

B) Risk a deeper economic collapse by failing to inflate the balance sheet to $13 trillion.

Our wager is on A…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Is Monetary Policy Too Tight? appeared first on Daily Reckoning.