A Warning From the Great Depression

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3.28 million.

That is the total number of unemployment claims Americans filed last week — nearly five times the prior record of 695,000, from October 1982.

“We’ve known this number was coming for a week and a half,” laments Tom Gimbel, who captains a Chicago employment agency, adding:

It doesn’t surprise me at all. When you see a city like Las Vegas get shut down, I don’t know what other options there were than seeing a number like this.

A fellow must take his comforts where he can find them these days. And precious few are on offer.

But if it is consolation you seek, here you have it: Some economists had forecast as many as 7 million claims.

Here is additional cheer, however transient: The stock market had itself another day at the races today.

Stimulus, at Last!

The Dow Jones recaptured another 1,351 points. The S&P gained 154, the Nasdaq 413.

Today’s stock market surge follows last evening’s Senate passage of a $2 trillion relief package. It is the largest ever in United States history. The vote was unanimous.

The bill includes, per CNBC:

One-time direct payments to individuals, stronger unemployment insurance, loans and grants to businesses and more health care resources for hospitals, states and municipalities. It includes requirements that insurance providers cover preventive services for COVID-19.

Qualified individuals will receive cash payments of $1,200. Couples will receive $2,400… with an additional $500 for each child.

A Lobbyist’s Dream

883 pages in length, we can only imagine the skullduggery and chicanery within, the sweet venoms the lobbyists put in.

But who has time to read all 883 pages while American life dangles by a strand? And who can say no?

The legislation next goes to the House of Representatives for the rubber stamp — which it will assuredly receive tomorrow morning when the vote is scheduled.

Then it jumps to the White House for the presidential signature. Mr. Trump has pledged to sign it “immediately.”

Treasury Secretary Mnuchin said today the checks will mail within three weeks.

But as we have questioned previously… what will they accomplish?

Say’s Law

The issue at hand is not one of demand. It is one of supply. And a shuttered-in economy produces little.

Filling an idle man’s pocket with fabricated money does not increase supply. It merely increases the bid for existing supplies.

Let us not forget Say’s law — that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

One man produces bread. Another produces shoes.

The cobbler who requires bread for his dinner appears before the baker. And the baker who must clad his feet appears before the baker.

They may transact in money… but money merely throws an illusory veil across their transactions.

Ultimately the baker purchases his shoes with the bread he has baked. And the cobbler purchases his bread with the shoes he has cobbled.

Concludes Monsieur Say:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found that one kind of commodity has been exchanged for another.

The Government Attempts to Outlaw Say’s Law

Assume now a free economy in which supply and demand are allowed their unfettered reign. Assume an economy — that is — that does not presently exist.

You can expect supply and demand to come to terms, to come into rough equilibrium.

If there is less demand, prices will fall to meet it.

But when the government prints money with no production to match it… it attempts to outlaw Say’s law.

Consider the thought experiment of another 18th-century thinker David Hume…

Imagine a benevolent fairy slips money into all the nation’s pockets overnight. And so the money supply doubles at a stroke.

Is this nation doubly rich?

Alas, it is not. The money supply has been doubled, yes. But no additional goods have entered existence.

The new money will simply chase existing goods. We can therefore expect prices to approximately double.

The Real Source of Wealth

Explains the late economist Murray Rothbard:

What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its newfound wealth, prices will, very roughly, double — or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods.

There you have the wisdom of classical economics. But then came the Great Depression, and out it went…

Out from under every rock slithered the cranks, chiselers, dreamers, something-for-nothing and wine-from-water men…

All promising salvation, all offering their quack medicines.

And they all found their way to Washington…

Destroying Food While People Starved

The farmers were in a bad way, they argued. These sad sacks could not fetch enough money for their produce or their livestock. And so they needed a hand up.

A program was therefore required to raise prices. The brain trust then in operation hatched a beautiful scheme. What was it?

To set fire to the crops and murder the livestock.

To be clear, they did not butcher the animals to bring to market — but precisely the opposite — to keep them off the market.

Ponder for one moment the reality of it:

While millions starved, entire crops were set ablaze. And millions of animals went into the ground… rather than growling bellies… all to raise the price of farm products.

What of the impoverished nonfarmers required to pay more for their basic sustenance? How would higher food prices benefit them? Or the overall economy? Might the money people saved on food allow them additional purchases from other industries?

The men with the grand pensees did not say… or did not care for the answers.

The same lunacy was brought to bear on other industries…

A Reign of Terror

Production above mandated levels was not permitted. Nor were prices permitted to fall beneath predetermined levels.

If a man flouted the rules… woe to him.

One man, a New Jersey tailor, was convicted and clapped into prison. What was this hellcat’s “crime”?

He pressed a suit for 35 cents. Law required the job be done for 40 cents.

Meantime, New York’s garment industry endured a mighty terror, explains 1930s journalist John Flynn:

The code-enforcement police roamed through the garment district like storm-troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing a pair of pants at night.

(We acknowledge economist Thomas DiLorenzo for the source material.)

Examples abound. Here is the central lesson:

At a time when lower prices and greater production were most needed… lower prices and greater production were violently suppressed.

This was the economic wisdom of the day. And now in this, our own time of economic crisis…

A fresh roster of cranks, chiselers, dreamers, something-for-nothing and wine-from-water men will afflict us anew.

1930s Redux

They would treat us to another New Deal — green in color — to haul us up.

Modern Monetary Theory is our salvation, they will croon.

Medicare for All will be the promised cure for the next pandemic.

All war with the ancient and iron laws of economics that time has proven valid.

Yet as in the 1930s… a fearful and desperate America may yet embrace them.

Regards

Brian Maher
Managing editor, The Daily Reckoning

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Rickards: It’ll Get Worse it Before It Gets Better

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We’re well into the coronavirus pandemic at this point. As of this writing, there are 360,765 reported infections and 15,491 deaths worldwide.

Over the next few days, you may be certain that those numbers will be significantly higher.

That’s how pandemics work. The cases and fatalities don’t grow in a linear fashion; they grow exponentially.

It’s widely acknowledged that this pandemic will get much worse before it gets better. There’s no doubt about that.

It didn’t take long for the coronavirus crisis to turn into an economic and financial crisis.

The Worst Collapse Since the Great Depression

The U.S. is falling into the worst economic collapse since the Great Depression in 1929. This will be worse than the dot-com collapse of 2000–01 and worse than the Great Recession and global financial crisis of 2008–09.

Don’t be surprised to see second-quarter GDP drop by 10% or more and for the unemployment rate to race past 10% on its way to 15% or higher.

The questions for economists are whether the lost output will be permanent or temporary and whether U.S. growth will return to trend or settle on a new path that is below the pre-virus trend.

Some lost expenditure may just be a timing difference. If I plan to buy a new car this month and decide not to buy it until August, that’s just a timing difference; the sale is not permanently lost.

But if I don’t go out for dinner tonight and then do go out a month from now, I’m not going to order two dinners. The skipped dinner is a permanent loss.

Unfortunately, 70% of the U.S. economy is based on consumption and the majority of that consists of services rather than goods. This suggests that much of the coronavirus impact will consist of permanent losses, not timing differences.

More important is the question of whether growth returns to trend by next year or follows a new lower trend. (Bear in mind that “trend” for the past 11 years has been 2.2% growth compared with average growth in all recoveries since 1980 of 3.2%; any decline in trend growth would be from an already low base.)

This is unknown, but the result will be as much psychological as policy driven.

The Fed’s Bazooka Is Empty

In situations like this, the standard policy response is for the Fed to cut rates, which it has certainly done.

The Fed has also launched massive amounts of quantitative easing.

In addition, they have guaranteed or offered credit facilities to banks, primary dealers, money market funds, the municipal bond market and commercial paper issuers so far.

Now the central bank has taken the unprecedented step of committing to buy as many U.S. government bonds and mortgage-backed securities as needed to keep the market functioning.

The problem is that the Fed’s programs won’t work as a form of stimulus. We’re seeing a supply shock as the economy grinds to a standstill. What’s everyone going to buy with all the money?

Still, they may have done things exactly backward.

Mohamed El-Erian, chief economic adviser at Allianz, says that the Fed should have focused on payment system problems and liquidity first but should not have cut rates.

Interest rates were already quite low. Once the Fed goes to zero as they did, they are incapable of cutting rates further (leaving aside negative rates, which also don’t provide stimulus).

El-Erian argues the Fed should have saved their rate cuts in case they are needed more acutely in the weeks ahead. Too late now. The interest rate bullets were fired. Now the Fed’s bazooka is empty at the worst possible time.

No Stimulus Bill

Meanwhile, Congress is working to pass a “stimulus” bill to fight the economic effects of the coronavirus pandemic.

Negotiations stalled this morning as Democrats want to insert provisions that would give tax credits to the solar and wind industry, give more power to unions and introduce new emissions standards for the airline industry.

“Democrats won’t let us fund hospitals or save small businesses unless they get to dust off the Green New Deal,” said Senate Majority Leader Mitch McConnell.

Once again, I need to emphasize the point: The economic impact of coronavirus could be devastating.

If consumers get used to not spending and decide that increased savings and debt reduction are the best ways to prepare for another virus or natural disaster, then velocity will fall and growth will be weak no matter how much money the Fed prints or the Congress spends.

The bottom line is that these spending bills provide spending but they do not provide stimulus. That’s up to consumers. And right now consumers are hunkered down.

It may be that the last of the big spenders just left town.

Gold Roars $75

Markets were down again today, what a surprise. The Dow lost another 600 points, finishing the day at 18,591.

Meanwhile, gold was up about $75 today. Physical supply is drying up and dealers are running out.

That’s why I’ve been warning my readers for years to get their gold before the crisis hits. Once it does (and it has), you won’t be able to get any.

What about silver?

You Should Get a “Monster Box”

Silver’s dynamics are a little bit different than gold because there are some industrial applications, but there’s no question that it’s a monetary metal.

And I always recommend that people have a “monster box.” A monster box is 500 American Silver Eagles, fine pure silver that comes directly from the Mint. It comes in a green case and is sealed.

The 500 coins at retailer commission will run you about $12,000 right now, but everybody should have one.

You ought to have a monster box of silver because if the power grid goes down, which could happen for a lot of reasons, the ATMs won’t work and neither will credit cards.

But if you walk into a store with five or six silver coins, you’ll be able to get groceries for your family.

Believe me, that’ll be legal tender when the time comes, so I definitely recommend silver.

Regards,

Jim Rickards
for The Daily Reckoning

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It’s Over

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The financial elites are pushing a narrative that asset prices, sales and profits will all return to January 2020 levels as soon as the Covid-19 pandemic fades.

Get real, baby.

Nothing is going back to January 2020 levels. Rather than the “V-shaped recovery” expected by Goldman Sachs et al., the crash in asset prices will eventually gather momentum.

Why? It’s simple: for 20 years we’ve over-invested in speculative bubbles and squandered borrowed money on consumption and under-invested in productivity-increasing assets.

To understand why the market value of assets will relentlessly reprice lower, a process sure to be interrupted with manic rallies and false dawns of hope that a return to speculative good times is just around the corner, let’s start with the basics:

The only sustainable way to increase broad-based wealth is to boost productivity across the entire economy.

That means producing more goods and services with less capital, less labor and fewer inputs such as energy.

Rather than boost productivity, we’ve lowered productivity via mal-investment and by propping up unproductive sectors with immense sums of borrowed money.

The poster child for this dynamic is higher education: rather than being pushed to innovate as costs skyrocketed, the higher education cartel passed its inefficiencies and bloated cost structure onto students, who have paid for the bloat with $1. 6 trillion in student loans few can afford.

As for Corporate America squandering $4.5 trillion on stock buybacks, the effective gains on productivity from this stupendous sum is not just zero. It’s negative, as the resulting speculative bubble suckered in institutions and individuals who’d been stripped of safe returns by the Federal Reserve’s low-interest-rates-forever policy.

What could that $4.5 trillion have purchased in terms of increasing the productivity of the entire economy?

Considerably more than the zero productivity generated by stock buybacks. The net result of uneven gains in productivity and the asymmetric distribution of whatever gains have been made is stagnant wages for the bottom 90% and rising costs for everyone.

Those of us who are self-employed or owners of small businesses know that healthcare insurance costs have been ratcheting higher by 10% or more annually for years.

Whatever gains in health that have been purchased with the additional trillions of dollars poured into the healthcare cartels have been offset with declining life spans, soaring addictions to opioids and numerous broad-based declines in overall health.

The widespread addiction to smartphones and social media have deranged and distracted millions, crushing productivity while greatly increasing loneliness, insecurity and a host of social ills.

Two dynamics define the economy in the 21st century:

1. We have substituted debt-driven speculation for productive investment

2. We have substituted debt for earnings

This is why the repricing of speculative-bubble assets can’t be stopped: debt-driven speculation is not a sustainable substitute for investing in increasing productivity, and debt-fueled consumption masquerading as “investment” is not a sustainable substitute for limiting consumption to what we earn and save.

All bubbles pop, period. Once Corporate America’s credit lines are pulled and its revenues and profits plummet, the financial manipulation of stock buybacks will end. That spells the end of the 12-year bull market in stocks.

As the tide of speculative mania ebbs and confidence wanes, the world’s housing bubbles will all pop, and the $1.4 million bungalows will drift back down to their Bubble #1 highs around $400,000, and perhaps even drop from there.

As for collectibles and other play-things of the super-wealthy: the bids will soon vanish and yachts will be set adrift to avoid paying the dock fees.

Regards,

Charles Hugh Smith
for The Daily Reckoning

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It Could Last 18 Months — “or Longer”

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547.5 days. 78.2 weeks. 18 months. “Or longer.”

That is how long the coronavirus scourge may endure. This we learn by way of The New York Times.

It has done us all a capital service by executing a rare feat of journalism.

For its spies have captured a government document “not for public distribution or release.”

From which:

A pandemic will last 18 months or longer and could include multiple waves of illness… Increasing COVID-19 suspected or confirmed cases in the U .S. will result in increased hospitalizations among at-risk individuals, straining the health care system… Supply chain and transportation impacts due to ongoing COVID-19 outbreak will likely result in significant shortages for government, private sector and individual U.S. consumers.

Potentially critical shortages may occur of medical supplies and staffing, due to illnesses among public health and medical workers, and potentially also due to exhaustion. SLTT governments (state, local, tribal and territorial), as well as health systems will be stressed and potentially less reliable. Health systems may run low on resources inhibiting the ability to make timely transitions between postures and maintenance of efficacy.

We are precious sick of the coronavirus after four days of home jailing.

How can any man withstand 18 months — “or longer”?

And how can the economy hold?

Consider one week of deadness upon the automobile industry. Reports auto man Eric Peters:

If people stop buying new cars for one week because dealers are forced to close shop – which has already happened in at least one state or because instantly unemployed people are no longer shopping for new cars it will cost the car industry $7.3 billion in earnings — and cost 94,400 Americans their jobs. It would also cost the government some $2 billion in taxes.

That’s one week. How about three months?

Indeed… how about 18 months?

We stagger and reel at the prospect.

Meantime, the National Restaurant Association — this organization has actual existence — projects its industry will shed “5–7 million jobs.”

We expect hotels and the tourist trade to withstand parallel holocausts.

In the immediate run…

JPMorgan’s primary U.S. economist, Michael Feroli by name, has hacksawed his second-quarter GDP forecast to a ghastly 14% drop.

The third and fourth quarters may yield a recovery. But that is far from certain if the virus remains amok.

And how about six entire quarters?

“If life doesn’t get back to normal for ‘18 months,’” argues catastrophist Michael Snyder, “we are going to witness a societal meltdown of epic proportions.”

More from whom:

If the entire world shut down for 30 days, this pandemic would quickly be brought under control. If only the U.S. shuts down, it is inevitable that the virus would keep coming back into the country as the pandemic continues raging elsewhere on the globe.

Of course we aren’t going to get the entire globe to agree to shut down simultaneously for 30 days.

So this outbreak will continue to spread and the case numbers will continue to grow.

It is a dismal mathematics.

Naturally the monetary and fiscal authorities are mobilizing on multiple fronts.

The Federal Reserve has executed the largest single market intervention in its hellish history. And the Department of Treasury is clearing for action.

The nation will plunge deeper and deeper into debt’s inky depths.

But how can it come up when chained down with so much debt?

The past 10 years offer high proof that debt does not translate to growth — not after a point, at least.

We may be articled off to prison for merely putting out this question. And the gallows after prison — and hell after the gallows…

But what if they allowed the economy and the stock market to go their own way?

Yes, the way would be down.

The going would be dreadful for a stretch. We will not pretend otherwise. Yet it would clear out much of the rot that presently infests us.

A new economy, strong and youthful and resilient, could come up from the rubble. And healthy shoots of growth could eventually grow into the towering oaks of tomorrow.

That is, what if the authorities did not do something… but merely stood there?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“Close the Whole Thing Up”

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“If this doesn’t work,” wonders Seema Shah, Principal Global Investors central strategist…

“What will?”

“This” is of course the Federal Reserve’s desperate harum-scarum yesterday afternoon.

Mr. Powell and crew knocked down rates one entire percentage point. The federal funds rate now squats between 0% and 0.25% — zero essentially.

And so as a dog returneth to its vomit… the Federal Reserve returneth to zero.

The scoundrels of Zero Hedge label it part of the “the biggest emergency ‘shock and awe’ bazooka in Fed history.”

But we are not shocked. Nor are we awed.

Our only surprise is the scheduling — our hazard was a return to zero later this week.

Yet the business was so urgent, all hanging in balance… it could not even wait for this week’s formal FOMC confabulation (now canceled).

Not Just Rate Cuts

We were further informed yesterday that quantitative easing (QE) is commencing anew.

The Federal Reserve will purchase “at least” $500 billion of United States Treasuries — and $200 billion of mortgage-backed securities — $700 billion in all.

We are betting high on “at least.” This merely represents the opening installment.

The Federal Reserve is also extending fresh ratlines — our apologies, swap lines — to foreign central banks.

That is intended to maintain dollar liquidity against the global coronavirus delirium presently obtaining.

Greg McBride, Bankrate chief financial analyst, in summary:

The Fed is dusting off the financial crisis playbook, returning to bond buying, coordinating with other global central banks to provide access to U.S. dollar liquidity, cutting interest rates to zero and opening the Fed’s discount window to ensure the flow of credit through banks to consumers and businesses.

“It’s really great for our country,” gushed the president.

But is it? Did yesterday’s “shock and awe” bazooka blast score a hit?

It did, yes. A direct hit — to the wrong side.

Shocked and Awed…

Stock futures went careening last evening, so shocked, so awed were they. They promptly went “limit down.”

The future arrived this morning at 9:30 Eastern. And markets remained shocked and awed…

The Dow Jones plunged nearly 10% from the opening whistle. The S&P and Nasdaq followed in lockstep.

Once again the breakers tripped… and trading was suspended 15 minutes.

“The central banks threw the kitchen sink at it yesterday evening, yet here we are (with deep falls in stock markets),” yelled Societe Generale strategist Kit Juckes.

“This is what panic looks like,” hollered Patrick Healey, president of Caliber Financial Partners.

Yet we are not surprised. Markets can see the beads of perspiration forming about Mr. Powell’s forehead. Markets are flighty birds easily frightened.

And what telegraphs fear more than a “shock-and-awe bazooka”?

The shock and awe deepened throughout the day…

Another “Worst Day Since Black Monday”

We grow weary of repeating it. But the Dow Jones once again suffered its mightiest whaling since Black Monday, 1987.

The index gushed another 2,997 points today to close at 20,188 — giving back another 12.93%.

The S&P lost 325 points, or 11.98%. The Nasdaq, 970 points and 12.32%

And so additional trillions of stock market wealth vanish into the electricity, lost.

Losses accelerated towards day’s end. Why?

Late this afternoon the president said the “worst of the outbreak” could stretch into August.

Fear gauge VIX went skyshooting to 83 today — within shouting distance of its record 90 from October 2008.

And so we return to our opening question:

“If this doesn’t work… what will?”

Alas, the question is easier asked than answered…

“Just Close the Whole Thing up”

One CNBC host even suggests shuttering Wall Street. Shrieks Mr. Scott Wapner:

How are folks supposed to focus on trading stocks when they’re dealing with nervous kids out of school, spouses working from home and scrambling to keep up, all while managing their own anxieties? Just close the whole thing up and start again later. It’s the right thing to do.

It may be the right thing to do or the wrong thing to do. Regardless, it has been done before.

The stock market was suspended 10 days during the panic of 1873 — and four entire months at the outset of the First World War.

Examples abound. Most recently in October 2012 when a hurricane, Sandy by name, closed the market two days.

But now the Federal Reserve confronts a different variety of hurricane…

“Very Serious Trouble”

“The Fed is now in very serious trouble,” gulps Graham Summers of Phoenix Capital — whom we recently introduced to you, our reader.

“Put another way,” he continues…

The Fed has gone truly NUCLEAR with monetary policy… and the market is STILL imploding…

The Fed can do NOTHING to stop this. No amount of rate cuts or stimulus from the Fed will make people want to go out and spend money if the country is on lockdown/facing a health crisis triggered by a pandemic.

The country is indeed verging upon a lockdown of sorts…

National Lockdown

The Centers for Disease Control and Prevention has recommended that all sizable gatherings and events be “postponed” for the following eight weeks.

New York, New Jersey and Connecticut — home to a fair number of Americans — have taken aboard its counsel.

All gatherings of 50 persons or greater thus are banned.

We remind you that restaurants frequently entertain crowds exceeding 50. As do other dens of vice including drinking establishments, casinos, theaters, concert halls, ballparks, gymnasiums and houses of worship — to name some.

Houses of ill repute, we assume, must ration admission ruthlessly… else court the wrath of the law.

New Jersey residents are now confined to barracks between 8 p.m. and 5 a.m. All travel is “strongly discouraged,” save in emergency.

Other States Follow

Meantime, Illinois bars and restaurants will close to the public beginning tonight. Their doors will not reopen until March 30.

Delivery and takeout services are available, however, as they are in New York, New Jersey and Connecticut.

Washington state has followed their example. As has the great state of Michigan. As has our own state of Maryland.

Massachusetts has exceeded even CDC’s draconian limit of 50. Gatherings of 25 or more are presently forbidden in this, the cradle of American liberty.

Meantime, over 30 million students in at least 31 states are exiled from the classroom. The Ohio governor has suggested his state’s may not come back until autumn.

Even the Supreme Court of the United States will no longer hear arguments — until early April at the earliest.

Do not forget, six of nine justices are aged 65 or above. And the coronavirus harbors a savage antagonism toward the elderly.

Thus a grateful nation is insured against a potential holocaust of justices.

A Ban on All Air Travel?

And now… rumors are on foot that a complete ban on domestic air travel is under active consideration.

We have assigned our men to investigate.

Regardless, the airlines are suffering damnably. Delta Air Lines claims conditions are worse than even the Sept. 11 afterblow.

“The speed of the demand fall-off is unlike anything we’ve seen,” laments Chief Executive Officer Ed Bastian.

The airline has gutted operations some 40%. And 300 planes are tied down to the tarmacs.

Meantime, all American cruise liners will remain tied up to the piers for 60 days.

A bailout of the air and cruise lines is on the way — depend on it.

So too, perhaps, is a bailout of the American citizen…

$1,000 Check Every Month

Sen. Mitt Romney (R-Utah) proposes to hand every American adult $1,000 per month so long as the coronavirus rages.

Reads a press release under his name:

Every American adult should immediately receive $1,000 to help ensure families and workers can meet their short-term obligations and increase spending in the economy.

Of course, the money must originate somewhere… as the government has none of its own.

In many cases it would amount to lifting money out of a fellow’s back pocket and lowering it into his front pocket.

But crises bring forth ideas that would never get a hearing otherwise. Many are of course lunatic.

Americans would acclimate rapidly to the monthly stipend. Who would take it away from them once the all clear signal goes out?

This is an election year, do not forget, when votes go up for sale. A monthly check can purchase many.

“The Worst Is yet Ahead for Us”

But just when might the coronavirus lose its stranglehold on American life?

“The worst is yet ahead for us,” warns Dr. Anthony Fauci of the National Institutes of Health.

We hope the fellow is mistaken.

We further hope the worst is behind for markets.

But we fear the worst is ahead for the economy.

And so again we ask:

“If this doesn’t work… what will?”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Will Coronavirus Usher in the “Reign of Saturn?”

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“There are decades where nothing happens; and there are weeks where decades happen” — said a man named Lenin.

This week has the color of a week where decades happen.

The stock market has withstood its lightningest plunge in history…

The aerial ways to Europe are closed…

Hand sanitizer is more precious than oil…

Disney World has locked its gates…

Universities, high schools, grammar schools and grade schools have locked their doors…

Broadway is dark…

Professional sports leagues have put the balls away…

“March Madness” has been canceled.

Instead, an alien madness stalks the land — the coronavirus madness.

North to south, east to west… even to ships asea… the fever builds.

And today the president declared a national “state of emergency.”

Forty-seven states and the District of Columbia have now reported coronavirus infections. Each day brings fresh cases.

How many Americans might it ultimately hook? The possible answer shortly.

Ironic, it is, that America’s biggest monster is visible only through a microscope.

Yet we fear the unseen greater than the seen…

The enemy bomber turns up on radar. The plunging barometer alerts you to the storm. The onrushing train does not approach in silence.

These are observable menaces. Since observable, defensible.

But the black bugaboos of night, the phantom-haunted shadows, the stealthy spirits of the air…

These unseen terrors fetch us most.

And an invisible fee-fi-fo-fum — like a lethal virus — is potentially everywhere at once.

Every person you encounter is a potential executioner, every surface you touch may harbor a plague.

The air itself may carry you to your grave.

Communists lurked beneath every bed once upon a time in America. The “Red Scare,” it was called.

Today we verge upon the “Invisible Scare.” But is it unjustified?

We know nothing of epidemiology… and would prefer to know even less.

But we have had our best men look into it. And they report that medical professionals — of highly sober aspect — give ominous warnings.

A certain Dr. Brian Monahan is the attending physician of Congress. This fellow has informed the Senate that 70–150 million Americans — one-third of the population — may potentially come down with the coronavirus.

If fatality rates run as low as 1%… the pathogen could claim 1.5 million American souls.

Yet our agents report scenarios suggesting the virus may invade up to 214 million Americans.

The variables are many. Much depends upon preparation.

The final death roster may run anywhere from 5,000… to 5 million… depending.

But assume for the moment the virus slips its leash…

Workplaces shutter, the truckers stay home, supply chains snap and the shelves go bare in the supermarkets.

Perhaps one month of shattered commerce could result in a general discombobulation.

What might happen?

Writer Brandon Smith sketches the scene in dark colors:

When the public can’t find an open grocery store, then you will see panic. When there are checkpoints in and out of major metropolitan areas stopping people from leaving if they have any symptoms of illness, then you will see panic. When COVID-19 continues to circulate through the population for a year or more and does not disappear during the summer months as some people theorize, get ready for anger and panic.

When your local banks announce a financial “holiday” for an unspecified amount of time because of a credit crisis and lack of liquidity, and all the ATMs are shut down, then you will see panic. When crime rates explode because of lack of supplies and people start fighting over access to the meager food lines… THAT will be panic.

And don’t think for a second that this is not possible in this country, because it absolutely is. All it takes is for the global supply chain to break down for one month and there will be chaos like nothing the average person has seen in their lives.

Alarmist? Perhaps it is.

And we do not believe the virus will rout us in the manner suggested. Yet…

How many truly anticipated 1987’s Black Monday? Or 1929’s Black Tuesday?

How many anticipated Donald Trump’s presidency of the United States?

Indeed… how many anticipated the coronavirus… or that the United States would fall under a state of emergency today?

“You think that a wall as solid as the Earth separates civilization from barbarism,” writes author John Buchan...

“I tell you the division is a thread, a sheet of glass. A touch here, a push there, and you bring back the reign of Saturn.”

Who is prepared for the reign of Saturn?

Below, Jim Rickards takes you to the year 2026. He reflects upon the great Panic of 2024… and a world drastically changed. Could it happen? You be the judge. Read on.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Will Coronavirus Usher in the “Reign of Saturn?” appeared first on Daily Reckoning.

R.I.P.: Requiem for a Bull

This post R.I.P.: Requiem for a Bull appeared first on Daily Reckoning.

For the longest bull market in history… it is a time to die.

For the Dow Jones, aged 11 years and two days, the soul quit the body yesterday afternoon.

Immediate cause of death: coronavirus disease (COVID-19).

Underlying cause of death: irrational exuberance.

The sickness was brief, acutely brief — a mere 19 days.

Only in November 1931… in the teeth of the Great Depression… did the index plunge from record heights to bear market depths in so short a space. Such was the violence of the death spasm.

Both S&P and Nasdaq joined it in the morgue this afternoon.

And so the flags over Wall Street flap at half mast today… and the black crepe is up.

Yet as we have argued previously:

The stock market is an ingenious device constructed to inflict the greatest suffering upon the most people… within the least amount of time.

In Memoriam…

The eulogies have already come issuiwwng…

Linda Zhang is chief executive officer of Purview Investments. Says she, a pearl of sorrow coursing down her cheek:

This bull market will go down in history as the one that nobody believed would last this long… What destroyed us in 2008 was overleverage. What brought us to where we are in 2020 is too much hope, sky-high valuations.

Doug Ramsey is chief investment officer of Leuthold Group. This fellow labels the late lamented decade the “steroid era” of the stock market — and identifies the supplier:

It was the most hated bull market — people said that early on. I think in the middle of the decade people [got] on board. Certainly in the last year they became believers. I’d also call the whole decade the steroids era because of all the help out of the Federal Reserve. I think it certainly did get a lot of help from the Federal Reserve. This was the steroids era of the stock market — the Fed propped it up.

Will the Federal Reserve attempt to blow life into the deceased? And how long can you expect the bear’s market to run?

Possible answers below.

But the exuberant, marauding bears desecrated the corpse this morning — before the Dow’s body was cold…

Another 15-minute Trading Halt

Within minutes of the opening whistle… the poor Dow Jones plunged another 1,700 points into eternity.

The S&P plummeted 7%, overloading the circuits and tripping the breakers — for the second instance this week.

For another 15 minutes the markets suspended breath.

Why this morning’s fresh stampede out?

The President Fails to Inspire Confidence

Apparently the president’s fireside chat last evening inspired little confidence. It failed to indicate a government response equal to the crying need.

Fifteen minutes after this morning’s halt, markets reopened for business. They should have remained closed…

The rout promptly resumed.

The market — meantime — places 83.4% odds the Federal Reserve will hatchet rates to between 0% and 0.25% next week.

That is, to financial crisis levels.

But dare we ask… is the worst over?

“You Likely Have not Seen Anything Yet”

“You likely have not seen anything yet,” wails Eric Parnell of Global Macro Research:

A potentially great fall lies ahead. Unfortunately for investors, conditions for the stock market have the potential to get worse, much worse, in the intermediate term. And all of the king’s policy horses and all of the king’s policy men may not be able to put this market back together again when it’s all said and done…

In short, you likely have not seen anything yet when it comes to today’s stock market.

After years of policy stimulus, stocks are trading at record-high valuations and bond yields are at historic lows. It is only a matter of time before reality returns to global capital markets.

But the coronavirus may merely be the tip of the berg that has gashed this Titanic down deep…

Think Lehman Bros.!

Phoenix Capital’s Graham Summers, introduced here this week, argues the bulk of the berg is invisible:

Now, let’s talk about the REAL crisis that is hitting the financial system…

[Global] debt-to-GDP is north of 200%. Leverage is higher today than it was in 2007. And the world is absolutely saturated in debt on a sovereign, state, municipal, corporate and personal level.

However, everything was running smoothly as long as nothing began to blow up in the debt markets [or] credit markets.

And despite a few hiccups here and there, the debt markets have been relatively quiet for the last few years…

Not anymore.

Someone or something is blowing up in a horrific way “behind the scenes.”

The Fed was FORCED to start providing over $100 BILLION in free money overnight back in September 2019. And even that massive amount is proving inadequate…

[Two nights ago], the Fed was forced to pump another $216 BILLION into the system.

You don’t get those kinds of demands for liquidity unless something is truly, horrifically wrong.

Think: LEHMAN BROS.

But we suppose that is why the Federal Reserve answered the klaxons this afternoon, dripping icy sweat…and rounded into action…

QE4 Is Here

Shortly after 1 p.m., it announced it is hosing in a staggering $1.5 trillion of liquidity today and tomorrow.

Between September and December it expanded its balance sheet at a rate unseen even during the financial crisis.

But the flow was but a trickle compared to the torrent on tap:

IMG 1

What is more, the Federal Reserve will conduct purchases across a “range of maturities.”

A full range of maturities includes longer-dated Treasuries. Thus it can no longer deny it has resumed quantitative easing…

Its purchases since September centered exclusively upon shorter-term Treasuries. Since QE targeted long-term Treasuries, it could throw out a smokescreen of deniability.

But no longer. Thus today we declare the onset of “QE4.”

The Rescue Doesn’t Hold

The drowning stock market seized upon the life ring thrown its way. And it rapidly made good half its losses on the day.

But it began to lose its purchase on the ring, on life… and resumed its slide into depths.

The Dow Jones finally settled at 21,200 by closing whistle — a 10% loss on the day — its worst since Black Monday, 1987.

Perhaps history will label this date “Gray Thursday.”

The S&P hemorrhaged an additional 9.51% on the day; the Nasdaq 9.43%.

The Leaders up Are Leading the Way Down

Are ruptures within the credit markets why stocks continue plunging, Mr. Summers?

This is why the markets are failing to rally. It is why every major central bank is out talking about launching new aggressive monetary policies. And it is why the Fed is privately freaking out.

Below is a chart showing [a proxy for] the credit markets (black line) relative to the stock market (red line).

As you can see, the credit market led stocks to the upside during the bull market. And it is now leading stocks to the downside. Credit is already telling us that stocks should be trading at 2,600 or even lower.

IMG 1

This is a real crisis. And from what I can see, the Fed can’t stop it anytime soon.

The Fed’s One Option

But if the prospect of rate cuts and additional QE cannot hold the line… does the Federal Reserve wield any options at all?

So what could stop this?

A globally mandated intervention in which the Fed and other central banks start buying corporate debt.

However, in the U.S., the Fed CANNOT buy corporate debt…

It would need authorization from Congress to do so. And from what I can tell, no one is even suggesting this.

I don’t mean to be a fear-monger, but this is a very dangerous situation.

We would have to agree. It appears a very dangerous situation.

But how long can you expect the bear’s market to endure? The answer in one moment.

But first… will the Federal Reserve actually attempt to reanimate the corpse?

Perhaps not.

The Fed Wants to End the Market’s Dependency

As our own Charles Hugh Smith claimed in a recent reckoning, it has grown fearful of the monstrous bubble it inflated.

But it did not wish to shoulder blame for draining the air out.

Thus the coronavirus has done it a great service by seizing the sharpened pin.

And it may not wish to risk blowing another bubble. Do we speculate?

No. Here former Dallas Federal Reserve President Richard Fisher speaks for himself:

The Fed has created this dependency…

The question is do you want to feed that hunger? Keep applying that opioid of cheap and abundant money? The market is dependent on Fed largesse… and we made it that way…

But we have to consider… that we must wean the market off its dependency on a Fed put.

The question is worth considering. But how long can you expect this bear to run amok?

Here is the answer, says history:

Roughly seven months for the S&P… and perhaps nine months for the Dow Jones.

Of course it could end sooner. But it could also end later.

More tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Complex Systems Collide, Markets Crash

This post Complex Systems Collide, Markets Crash appeared first on Daily Reckoning.

At some point, systems flip from being complicated, which is a challenge to manage, to being complex. Complexity is more than a challenge because it opens the door to all kinds of unexpected crashes and events.

Their behavior cannot be reduced to their component parts. It’s as if they take on a life of their own.

Complexity theory has four main pillars. The first is the diversity of actors. You’ve got to account for all of the actors in the marketplace. When you consider the size of global markets, that number is obviously vast.

The second pillar is interconnectedness. Today’s world is massively interconnected through the internet, through social media and other forms of communications technology.

The third pillar of complexity theory is interaction. Markets interact on a massive scale. Trillions of dollars of financial transactions occur every single day.

The fourth pillar, and this is the hardest for people to understand, is adaptive behavior. Adaptive behavior just means that your behavior affects my behavior and my behavior affects yours. That in turn affects someone else’s behavior, and so on.

If you look out the window and see people bundled up in heavy jackets, for example, you’re probably not going to go out in a T-shirt. Applied to capital markets, adaptive behavior is sometimes called herding.

Assume you have a room with 100 people. If two people suddenly sprinted out of the room, most of the others probably wouldn’t make much of it. But if half the people in the room suddenly ran outside, the other half will probably do the same thing.

They might not know why the first 50 people left, but the second half will just assume something major has happened. That could be a fire or a bomb threat or something along these lines.

The key is to determine the tipping point that compels people to act. Two people fleeing isn’t enough. 50 certainly is. But, maybe 20 people leaving could trigger the panic. Or maybe the number is 30, or 40. You just can’t be sure. But the point is, 20 people out of 100 could trigger a chain reaction.

And that’s how easily a total collapse of the capital markets can be triggered.

Understanding the four main pillars of complexity gives you a window into the inner workings of markets in a way the Fed’s antiquated equilibrium models can’t. They let you see the world with better eyes.

People assume that if you had perfect knowledge of the economy, which nobody does, that you could conceivably plan an economy. You’d have all the information you needed to determine what should be produced and in what number.

But complexity theory says that even if you had that perfect knowledge, you still couldn’t predict financial and economic events. They can come seemingly out of nowhere.

For example, it was bright and sunny one day out in the eastern Atlantic in 2005. Then it suddenly got cloudy. The winds began to pick up. Then a hurricane formed. That hurricane went on to wipe out New Orleans a short time later.

I’m talking about Hurricane Katrina. You never could have predicted New Orleans would be struck on that bright sunny day. You could look back and track it afterwards. It would seem rational in hindsight. But on that sunny day in the eastern Atlantic, there was simply no way of predicting that New Orleans was going to be devastated.

Any number of variables could have diverted the storm at some point along the way. And they cannot be known in advance, no matter how much information you have initially.

Another example is the Fukushima nuclear incident in Japan a few years back. You had a number of complex systems coming together at once to produce a disaster.

An underwater earthquake triggered a tsunami that just happened to wash up on a nuclear power plant. Each one of these are highly complex systems — plate tectonics, hydrodynamics and the nuclear plant itself.

There was no way traditional models could have predicted when or where the tectonic plates were going to slip. Therefore, they couldn’t tell you where the tsunami was heading.

And the same applies to financial panics. They seem to come out of nowhere. Traditional forecasting models have no way of detecting them. But complexity theory allows for them.

I make the point that a snowflake can cause an avalanche. But of course not every snowflake does. Most snowflakes fall harmlessly, except that they make the ultimate avalanche worse because they’re building up the snowpack. And when one of them hits the wrong way, it could spin out of control.

The way to think about it is that the triggering snowflake might not look much different from the harmless snowflake that preceded it. It’s just that it hit the system at the wrong time, at the wrong place.

Only the exact time and the specific snowflake that starts the avalanche remain to be seen. This kind of systemic analysis is the primary tool I use to keep investors ahead of the catastrophe curve.

The system is getting more and more unstable, and it might not take that much to trigger the avalanche.

To switch metaphors, it’s like the straw that breaks the camel’s back. You can’t tell in advance which straw will trigger the collapse. It only becomes obvious afterwards. But that doesn’t mean you can’t have a good idea when the threat can no longer be ignored.

Let’s say I’ve got a 35-pound block of enriched uranium sitting in front of me that’s shaped like a big cube. That’s a complex system. There’s a lot going on behind the scenes. At the subatomic level, neutrons are firing off. But it’s not dangerous. You’d actually have to eat it to get sick.

But, now, I take the same 35 pounds, I shape part of it into a sphere, I take the rest of it and shape it into a bat. I put it in the tube, and I fire it together with high explosives, I kill 300,000 people. I just engineered an atomic bomb. It’s the same uranium, but under different conditions.

The point is, the same basic conditions arrayed in a different way, what physicists call self-organized criticality, can go critical, blow up, and destroy the world or destroy the financial system.

That dynamic, which is the way the world works, is not understood by central bankers. They don’t understand complexity theory. They do not see the critical state dynamics going on behind the scenes because they’re using obsolete equilibrium models.

In complexity theory and complex dynamics, you can go into the critical state. What look like unconnected distant events are actually indications and warnings of something much more dangerous to come.

So what happens when complex dynamic systems crash into each other? We’re seeing that right now.

We’re seeing two complex systems colliding into each other, the complex system of markets combined with the complex system of epidemiology.

The coronavirus spread is a complex dynamic system. It encompass virology, meteorology, migratory patterns, mass psychology, etc. Markets are highly complex, dynamic systems.

Financial professionals will use the word “contagion” to describe a financial panic. But that’s not just a metaphor. The same complexity that applies to disease epidemics also apply to financial markets. They follow the same principles.

And they’ve come together to create a panic that traditional modeling could not foresee.

The time scale of global financial contagion is not necessarily limited to days or weeks. These panics can play out over months and years. So could the effects of the coronavirus.

Just don’t expect the Fed to warn you.

Regards,

Jim Rickards
for The Daily Reckoning

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Why the Fed Can’t Get It Right

This post Why the Fed Can’t Get It Right appeared first on Daily Reckoning.

The World Health Organization declared the coronavirus a pandemic today. The virus has now spread to over 100 countries and infected well over 100,000 people.

After Monday’s 2,000-point collapse of the Dow and yesterday’s 1,100-point gain, stocks broke down again today. The Dow puked another 1,465 points on further fears.

What we’re seeing now is the very definition of volatility. The market’s in a highly unstable state right now.

These violent swings show the inadequacy of the standard models that the Fed and other mainstream analysts use.

The Fed assumes so many things about markets that are simply false, like that markets are always efficient, for example. They’re not.

Under volatile conditions like these they gap up and down — they don’t move in rational, predictable increments like the “efficient-market hypothesis” supposes.

The problem is that the Fed’s models are empirically false. Studies have proven how faulty their models are.

The Fed has the worst forecasting record in the world. It’s basically been wrong every year since 2009.

Equilibrium models like the Fed uses basically say the world runs like a clock and occasionally it gets knocked out of equilibrium. And all you have to do is tweak policy or manipulate some variable to push it back into equilibrium.

It’s like resetting a clock. That’s a shorthand way of describing what an equilibrium model is. They treat markets like they’re some kind of machine. It’s a 19th-century, mechanistic approach.

But traditional approaches that rely on static models bear little relationship to reality. Twenty-first-century markets aren’t machines and they don’t work in this clockwork fashion.

On the other hand, complexity theory explains financial panics much better than the Fed’s old-fashioned models. Complexity theory accounts for market shocks that seem to come out of nowhere, like the one we’re seeing now.

It also lends you greater insight into where markets are going next, unlike traditional models.

And I promise you, because I know firsthand, the Fed doesn’t use complexity theory. I’ve discussed it with them and they know nothing about it.

But it’s not just the Fed. I’ve talked to monetary economists. I’ve talked to staff people. They just stare at me blankly. They can’t even process what I’m saying.

Complexity theory has had great success explaining phenomena in fields such as climatology, seismology and many other dynamic systems.

And I’ve taken the insights of complexity theory and applied them to financial markets, which are perfect models of complex systems.

I’m happy to say I’m one of a few pioneers who have applied the insights of complexity theory to financial markets.

That’s how I analyze risk in financial markets, and it’s very powerful. Applying complexity theory to markets sets my analysis apart from the mainstream. The evidence for its effectiveness is very, very strong.

What led me to start studying complexity theory? And what exactly is it?

Back in 1997, I was a lawyer for Long Term Capital Management (LTCM). We had two Nobel Prize winners on our staff. We had a team of Ph.D.s from MIT, Harvard, Yale, Stanford, etc. We had some of the best brains in finance working for us, in other words.

I trusted all those Ph.D.s and Nobel Prize winners because they had made us a lot of money. I had no reason to doubt them.

Then the Asian financial crisis came along. By the time the crisis was over, I lost 92% of my own money.

I was only their lawyer, so I wasn’t making these deals. And I didn’t understand the deeper complexities of the financial system at the time. I’ve since learned the truth.

The truth is that their models had nothing to do with the real world. If their models were right, the crisis never would have happened.

I began studying the dynamics of capital markets on my own. I took some university courses, but I did most of the research on my own.

I studied physics, network theory, complexity theory, applied mathematics, behavioral psychology and so on. I took all that learning and applied it to the markets, which the Fed does not do.

So I’ve studied complexity theory intensively for over two decades now. And I’m more convinced than ever of its effectiveness in understanding markets.

Regards,

Jim Rickards
for The Daily Reckoning

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Whiplash!

This post Whiplash! appeared first on Daily Reckoning.

Markets rediscovered their fighting elan today. Impassioned pledges of government support stiffened their nerves… and steeled their spines.

But will they soon be taking to their heels again? We cannot say.

We are nonetheless unsurprised that the S&P counterattacked to a 136-point gain today.

Take in the history from 1952:

The S&P has withstood trouncings of at least 5% or more on 10 previous Mondays. This Monday’s was its 11th (7.60%).

In each previous instance the S&P advanced the following day — all 10 of the 10.

Nor were these gains measured in centimeters, inches or feet.

Sayeth the Bespoke Investment Group crackerjacks who ran the numbers:

Remarkably, following all 10 of the Monday 5%-plus drops since 1952, the S&P has gained the next trading day. And not just gained but gained more than 2.2%.

The S&P gained 4.94% today.

The Dow Jones and Nasdaq advanced on parallel fronts today, unsurprisingly.

The former hurled 1,161 points ahead, making good nearly half of yesterday’s losses. The latter, the Nasdaq, gained 393 points.

Hence our whiplashed neck from following the action these two days.

Whiplashing Sentiment

Meantime, investor sentiment has whiplashed from “extreme greed” to “extreme fear” within two months’ space.

On a scale of 1–100, CNN’s “Fear & Greed Index” presently gives a reading of 4 — extreme fear.

In late January it scaled 90 — extreme greed.

And so swirl the variable, gusting winds of sentiment…

All is peace while the warm, favoring trade winds push investors along.

But suddenly, out of a bright sky, a wintry gale comes barreling in from the north.

Most are caught in short sleeves, dreadfully unprepared for the frosting.

Mark Twain’s observation thus springs to mind:

“There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

A Coming Ice Age

But 10-year Treasury yields recovered today…

Yields ran up to 0.748% today after yesterday’s inconceivable 0.318%. They nonetheless remain beneath 1%.

And yesterday the entire yield curve — all the way out to 30 years — plunged beneath 1% for the first occasion in history.

The bond market still appears to warn of a severe economic winter ahead. A severe winter? It suggests a coming ice age.

But we are pleased to announce that the 30-year yield poked its head up above 1% today — to a blossoming 1.284%.

But why did the stock market come storming from the trenches this morning?

“Very Dramatic” Support

Late yesterday the commander in chief stood tall before the troops, rallied them to the colors… and pledged “very dramatic” support.

That very dramatic support will evidently take the form of a payroll tax cut. It will further include “very substantial relief” for businesses knocked back by the coronavirus.

Thus the prospects of reinforcements put heart into the market.

But by sheerest coincidence… a “fiscal response” may also let Mr. Trump retain his throne this fall.

The president’s reelection odds have sunk to 50.5%, say the betting markets — a coin’s toss. They had previously stood near 60%.

The Verge of a Credit Crisis

The gallant response comes none too soon, says Stephen Innes, chief market strategist at AxiTrader. And not merely because of the stock market:

We are on the verge of a credit crisis. A fiscal response could be justified not because S&Ps are down, or oil is down, but because we are potentially on the cusp of a credit crisis driven by cash flow shortages and bankruptcies across a meaningful list of industries.

The roster of imperiled industries certainly includes the energy industry…

Oil withstood a 25% lashing yesterday. It clawed out a $3.46 gain today… but the damage runs deep.

The energy market creaks and sways under a load of risky debt. Many of the large banks are tied up to it.

Most United States shale oil producers only find production profitable with oil at perhaps $50 per barrel.

Today oil trades at only $34 and change. Hence production is immensely unprofitable.

Should defaults and bankruptcies begin issuing from the energy sector, they could potentially spread through the larger credit markets… like prairie fire through a parched land.

A prediction? No. We merely suggest a possibility.

Passed the Point of Diminished Returns

With interest rates so low as is, monetary policy has passed beyond that point of diminished returns.

More rate cuts are coming, yes. The market expects them. If the Federal Reserve fails to come through, the market could go to pieces again.

In that sense, the market holds a loaded pistol to Mr. Powell’s temple. He must go along.

But assume a fiscal response is on the way, despite the fact that the administration has provided few specific details — and that it would require Democratic blessings.

Will even a fiscal response be adequate to requirements?

Too Much Existing Debt to Provide Stimulus

Do not elevate your hopes, says Jim Rickards, taking the overall view:

After Monday’s massive market sell-off, many are calling on the Fed to rush in with additional rate cuts and possibly resort to other monetary tricks, even negative interest rates. They’re also calling for the federal government to unleash new stimulus in the form of fiscal policy to offset the adverse economic impacts of the coronavirus.

But here’s the problem: Central banks are largely irrelevant now (except as lenders of last resort). That’s because rate cuts no longer affect the economy.

We had zero rates from 2009–2015 and we only had 2.2% average annual growth versus the long-term 3.5% trend. And negative rates don’t work as central bankers think. Despite what many academics believe, people don’t spend more but actually save more. And fiscal policy doesn’t stimulate when the debt-to-GDP ratio is greater than 90%. Ours is about 105%.

What if the Fed Let the Financial Crisis Complete?

We wonder yet what would have transpired one decade ago — had the monetary and fiscal authorities stood paws off — and let the crisis run its course.

It would have been rough going for a stretch, certainly.

But it would have cleared out the dead and rotting wood… and killed off the termites munching their way through the foundations.

The economy could have rebuilt upon new, sturdier foundations of oak, of walnut, of the harder woods.

Total debt, public and private, would be a slight fraction of today’s $75 trillion.

Today’s debt-to-GDP ratio would be drastically less than 105%. And the economy would be far more resilient to “shocks.”

But rather than letting time and gravity complete their necessary work… the authorities rushed in with the supports.

The Cost of Every Pleasure

They prevented a collapse. But it left the deadwood in place — and the termites doing a brisk trade.

That is why annual growth pegs along at some 2%, unlike the 3.5% previously obtaining.

The economy groans under too much unproductive debt to push along. And debt is only rising.

Yes, it is true…

The decade-long, debt-fueled bull market in stocks has been a thing for the ages, an immense and exhilarating thrill.

But the nation way learn yet:

“The cost of every pleasure” — as the great Buddha probably never said — “is the pain that succeeds it.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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