Category Archives: Brian Maher

Fools, Traitors and America

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

Yet we begin to suspect the opposite…

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

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

Answer this question:

How many traitors roam within your range of acquaintances?

But how many fools roam within your range of acquaintances?

Being a fool is no crime of course.

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

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

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

Woodrow Wilson, Fool

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

We would never suggest it.

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

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

Almost certainly.

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

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

“Never again!” they would have cried.

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

And the allies “won.”

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

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

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

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

All Roads Lead Back to Wilson

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

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

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

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

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

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

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

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

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

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

A Fool, Not a Traitor

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

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

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

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

It was foolishness.

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

Never Fight a Ground War in Asia

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

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

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

58,000 of its sons came home flat.

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

But a fool?

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

“Ridiculous”

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

Furl the calendar back to April 1961…

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

MacArthur, said Kennedy aide Kenneth O’Donnell:

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

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

A free economy would triumph ultimately over a communist economy.

But the youthful president would forever remain the youthful president.

Kennedy vastly respected MacArthur’s experience.

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

We will never know.

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

Combining Two Fool Ideas

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

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

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

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

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

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

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

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

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

Could there be any doubt?

The Greatest Blunder in the History of United States Foreign Policy

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

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

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

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

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

Fools, Drunks and the United States of America

We only wonder what fool idea will next prevail.

War with China?

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

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

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

He has in the past. Yet will He always?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“A Revolution Not Made But Prevented”

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

For we posted grave heresies about the American Revolution.

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

“Was the American Revolution a mistake?”

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

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

Heresy!

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

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

Here is the answer:

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

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

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

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

Reader reaction was… robust.

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

Readers Let Gary North Have It

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

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

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

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

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

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

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

“Cancel my subscription,” she roared, adding:

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

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

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

Its father was the Currency Act:

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

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

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

We leave you to your own conclusions.

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

Was the American Revolution Actually a Revolution?

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

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

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

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

Each was out to turn society upon its head.

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

Each was out for earthly Utopia.

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

“A Revolution Not Made but Prevented”

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

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

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

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

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

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

It was “a revolution not made but prevented.”

Dead Historians Weigh In

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

From which:

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

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

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

Adds a third deceased historian, a certain Daniel Boorstin:

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

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

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

America’s Current Revolution

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

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

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

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

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

They have already begun with the statues…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“Great Job Numbers”

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“Great job numbers.”

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

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

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

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

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

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

Mr. Trump’s delirium was broadly shared…

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

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

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

A leading question perhaps. The answer nonetheless follows.

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

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

But the gravity of additional news soon tugged them earthward…

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

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

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

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

First among these were airline and cruise line stocks.

The major indexes nonetheless maintained the vertical…

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

But can you trust today’s unemployment numbers?

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

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

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

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

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

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

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

Now roll the calendar forward one month…

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

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

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

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

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

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

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

And unemployment remains the highest since the Great Depression.

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

Says Torsten Slok, Deutsche Bank’s chief economist:

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

30 million jobs!

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

Yet let them eat cake, says the stock market…

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

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

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

We have credited the Federal Reserve with responsibility.

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

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Are We in for a 20-Year Winter?

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The shifting passions of the stock market entertain us, as the shifting passions of a soap opera entertain us.

They entertain us, that is. But they do not fascinate us.

It is the longer view, the overall view that commands our attention… the eagle’s view.

Today the horizon drifts into focus. Yes, we have the future in sight.

How will the stock market fare these next 20 years?

Today we undertake a tour of the horizon.

We first take a canvass of the passing scenery…

One Day, Two Markets

The stock market shook off early staggers to close strong. Yahoo! Finance:

Earlier, stocks traded choppily after Texas said it was pausing its reopening process due to a renewed surge in COVID-19 infections in the state. Investors also monitored incoming economic data, with a new report showing stubbornly high levels of new unemployment claims.

New unemployment claims came in at 1.48 million for the week ending June 20, marking the 14th-straight week that claims held above 1 million. Consensus economists had expected new claims to total 1.32 million.

But late today the Federal Deposit Insurance Commission offered stocks a hand up. It announced it is easing its grip on the banks.

CNBC explains the lighter restrictions would:

Allow banks to more easily make large investments into funds such as venture capital funds. Also, banks will not have to set aside cash for derivatives traders between different affiliates of the same firm, potentially freeing up more capital.

We hazard our Nomi Prins has a thing or three to say about this.

And so the Dow Jones surged late to a final 298-point gain. The S&P leapt 33 points and the Nasdaq vaulted to a 107-point advance.

But now we avert our gaze from the hurly-burly of the present… and face the distant horizon…

The Seasons of the Stock Market

The weather has its seasons. And so the stock market has its seasons…

Summer, winter, bull market, bear market.

As we have argued before, climate is what you can expect. But weather is what you actually get.

Sometimes summer extends far into Indian summer before letting go… before nature slips off her green dress… and into her autumn pastels.

And sometimes winter holds its iron grip deep into calendar spring.

The winter of 1929 — for example — was so fierce the ice held 25 years.

Only in 1954 did stocks thaw to their pre-freeze levels.

The investor who lost all in 1929 waited 25 ice age years to make his losses good.

The years 1982–2000 — conversely — were extended summer for the stock market.

Between August 1982–December 1999, compounded real returns on the Dow Jones ran to 15% per annum.

A chill northern gust occasionally blew on in… as in 1987… and 1990. But they quickly blew on out.

Investors believed they had discovered endless summer.

The Return of the Seasons

Investors had another guess when an arctic gale came barreling in, 2001–02.

But summer’s warmth soon returned investors to the beaches… until the harsh winter of 2008–09.

Then 11 balmy years of summer, under the warming influence of the Federal Reserve.

But the weather turned in 2020 as never before…

Summer yielded to winter in record time… and the deep freeze of 2020 held the world in siege.

The unprepared, tee-shirted stock market lost over 30% within weeks.

But record heat from the Federal Reserve soon broke the ice. The stock market has thawed some 30% since March.

And its February heights are in sight.

Summer or Winter Thaw?

Is it summer once again for the stock market?

Or is it heading into a 20-year year winter… similar to the 25-year winter of 1929–54?

We remind you:

By spring 1930, the stock market had made good many of its October ’29 losses.

And fevers raged through 1931. As Jim Rickards notes:

Stocks rose 28.6% from Nov. 17, 1929–April 20, 1930. They rose 13.2% from June 22–Sept. 7, 1930. Stocks rallied again by 17.5% from Jan. 18–Feb. 22, 1931. Finally, stocks rallied 22.2% between May 31–June 28, 1931.

Yet these sweatings proved fleeting, mere winter thaws.

Despite these fiery stretches… the Dow Jones plunged a frigid 89.2% from 1929–32.

And the ice age did not pass until 1954.

And so again we ask: Is it summer once again — or the initial thaw of long, harsh winter?

“Stock Market Valuations Are a Sort of Farmers’ Almanac, a Generally Accurate Farmers’ Almanac”

For clues, we look to stock market valuations. For stock market valuations are a sort of Farmers’ Almanac, a generally accurate Farmers’ Almanac.

These valuations are indicated by price-earnings ratios — P/E ratios.

A low P/E ratio indicates stocks are cheap. A high P/E ratio indicates stocks are dear.

The lower the valuation… the higher returns investors can expect over the next several years.

The opposite likewise holds true.

A P/E ratio of 17 is about par… historically.

That is, P/E ratios below 17 indicate stocks are cheap. Above 17, stocks are expensive.

What is today’s P/E ratio for the S&P as a whole?

Twenty-two — high by history’s standards.

It indicates investors are willing to ladle out $22 for each $1 of earnings.

It also means they will likely meet disappointment…

If there is anything in the term “mean reversion”… investors may soon be in for winter…

“Starting From This Level, Stocks Are Likely to Disappoint Over the Next 20 Years”

Times of expensive stocks are followed by times of cheap stocks.

That is, winter follows summer. Indian summer may delay winter’s onset. But eventually Jack Frost pays his visit.

And he may presently be preparing an extended stay.

Given present P/E ratios… how long might the coming winter last?

Mr. Michael Carr instructs technical analysis at New York Institute of Finance. Says he:

“Starting from this level, stocks are likely to disappoint over the next 20 years.”

Twenty years?

When the P/E ratio is near all-time highs, as it is now, the S&P 500 delivers annual returns averaging about 5% over the next 20 years. When the P/E ratio is near all-time lows, returns are about three times higher, averaging 15.4% a year over the next 20 years.

$163,665.37 vs. $26,532.98

Assume you have $10,000 to adventure in the stock market.

If you invest it at a time of low P/E ratios, Mr. Carr’s calculations reveal $10,000 would ultimately become a handsome $163,665.37.

A $10,000 investment at a time of average P/E would come out at $67,275.00.

But a $10,000 at a time of high P/E ratios… as today?

You would have a mere $26,532.98 on your hands — a minus 61% deviation from average.

“Imagine finding yourself 61% below target at retirement,” warns Mr. Carr.

Imagine it — if you can take the jolt.

The line at the bottom is this: Your long-term prospects are poor when you invest at a time of elevated P/E ratios.

Lance Roberts of Real Investment Advice draws this identical conclusion…

Better off Stuffing Your Cash in Your Mattress for 22 Years

At today’s valuation extremes, Roberts asks…

Would you be better off placing $10,000 into the stock market each year — or wedging it into your mattress?

Roberts has given the numbers a good, hard soaking. At 20x valuations, he finds…

Your stock market money would finally outperform your bed-bound cash… in 22 years.

Twenty-two years!

“Historically, it has taken roughly 22 years to resolve a period of overvaluation,” adds Mr Roberts.

We remind you that today’s S&P trades at 22x valuations — higher than 20.

Are you prepared for a 22-year winter?

Hedging Our Bets

Summer, winter… we do not know which will prevail ultimately.

We are presently outfitted for summer.

And perhaps the Federal Reserve can extend the season, hold the sun up in the sky a bit longer.

It has extended summer before.

But the Horae — the Greek goddesses of the seasons — are fickle and capricious beings.

They resent man’s encroachments upon their natural prerogatives.

And so we have our winter apparel ready…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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These Statues Must Come Down

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Today we enter into the revolutionary spirit of the times… topple idols… and haul down statues.

We will be declared subversive. We will be denounced as vandalous. The establishment will yell blue murder and demand our immediate arrest.

Yet justice is with us.

For we bring low the authors of destruction, of human inequality, of wickedness itself.

Which icons, which statues come crashing down today?

You will have your answer shortly. First to the site of a famously iconic statue — the statue of a fearsome bull…

Pandemic Fears Grip Wall Street

Faces were taut on Wall Street today… and nerves in tatters.

An uprising of the coronavirus is the evident cause. It presently lays siege to the Sunshine State. Explains CNBC:

The major averages hit their lows of the day after Florida said its confirmed cases jumped by 5,508 on Tuesday, a record, and now total 109,014. The state also said its positivity rate rose to 15.91% from 10.82%.

To Florida we must add fresh insurrections in California, Arizona, Texas and others.

“We’re going to eclipse the totals in April, so we’ll eclipse 37,000 diagnosed infections a day.”

That is the warning of former Food and Drug Administration Commissioner Dr. Scott Gottlieb.

And so the stock market took a severe fright today…

The Dow Jones plunged 710 points by closing whistle.

The S&P shed 81 points today; the Nasdaq 222.

And so the V-shaped recovery goes on ice.

But the stock market is not our central concern today. For a mad passion seizes us… and we are hot for mischief.

Central Bank Theory

Before we shatter icons, before we pull down statues… let us identify the source of our heat…

Central banks run on this primary theory:

Higher interest rates encourage saving and discourage consumer spending.

Low rates, meantime, coax bashful dollars out of wallets… and into consumer goods.

Why save money — after all — if it merely rots down in your wallet?

And consumer spending is the engine of inflation. There must be inflation, we are told.

Without inflation we risk deflation. And deflation is the great bugaboo of economics.

Under deflation, consumers cling to their cash in anticipation of lower prices tomorrow.

Before long the entire economy is trapped in the vortex of deflation… and the wolf of depression soon snarls at the door.

Central banks therefore pursue low interest rates — and a moderate dose of inflation — with a zeal verging upon mania.

But do their theories hold together?

The Magic 4%

Bank of America recently hauled central bank policy in for interrogation…

It released a report bearing this title: “Stagnation, Stagflation or Elevation.” Here is the question it pursued:

Do low interest rates truly spark consumption — and inflation?

The answer is yes, concedes the report — but only to a point. Below that point rates do not encourage spending. They encourage hoarding instead.

Low interest rates, meantime, do not yield inflation. They rather yield deflation.

What is that point of separation between spending and hoarding, between inflation and deflation?

Four percent.

Interest rates beneath 4% do not bring out more consumption. They store in more savings.

And rates beneath 4% do not yield inflation — but deflation.

The Vicious Cycle

Reports Bank of America:

As low growth and inflation make low-risk-asset income scarce (e.g., from government bonds), households are forced to reduce consumption and increase savings in order to meet retirement goals.

Forced saving further depresses demand in a vicious cycle.

And the lower rates slip beneath 4%, the more people save — and the less they spend.

We might remind you that rates presently stand scarcely above zero.

The iconoclasts of Zero Hedge in summary:

[Bank of America] shows that while lower rates indeed stimulate spending and lead to lower savings, this effect peaks at around 4% and then goes negative. In fact, the lower yields — and rates — drop below 4% — not to mention to 0% or below — the lower the propensity to spend and the higher the savings rate!…

And so the Federal Reserve is the snake devouring its tail, the man who shoots a hole in his foot, the goalkeep who rifles the ball into his own net.

That is, the Federal Reserve is its own saboteur.

It digs and digs in the belief it is digging its way up. Yet in reality it is digging its way down:

It demonstrates without a shadow of doubt that hyper-easy monetary policy is not inflationary but is deflationary. Which is catastrophic for central banks, who publicly state that the only reason they are pursuing ultra easy monetary policy, which includes QE and negative rates, is not to goose the market higher (even though by now we all know that’s the real reason) but to stimulate inflation.

And the cycle it has begun is truly vicious:

This means that the lower (and more negative) central banks push rates, the lower (not higher) the spending, the higher (not lower) the savings rate, the lower the inflation, the higher the disinflation (or outright deflation), which in turn forces central banks to cut rates even more, to add QE, yield curve control, buy junk bonds, buy ETFs or pursue any of a host of other monetary policies that are even more devastating to consumer psychology, forcing even more savings, resulting in even more disinflation, causing even more intervention by central banks in what is without doubt the most diabolical feedback loop of modern monetary policy and economics.

Said otherwise, monetary easing is deflationary. Let that sink in.

We have let it sink in. And it penetrated clear through to the marrows.

Scarlet Sins

And so today we are out to yank down the statues of those who have perpetuated “the most diabolical feedback loop of modern monetary policy and economics.”

Wall Street erected the statues.

The artificially low interest rates the Federal Reserve has chased — after all — inflated the stock market to dimensions grotesque and obscene.

But their economic sins are scarlet… and of the mortal category.

And so we come now to the bronze statue of Alan Greenspan, stately, regal, august…

Down Comes “The Maestro”

“The Maestro” is chiseled into its pedestal.

At once we seize our canister of spray paint… and graffiti “Traitor” over the inscription.

That is because Mr. Greenspan once exalted the gold standard and the golden handcuffs it placed upon central bankers.

Yet when he directed the central bank of the United States, he slipped the cuffs…

He tinkered interest rates downward against his own earlier advice.

He engineered two manias — the technology mania and the housing mania — earning him the applause of Wall Street and title of Maestro.

Both of his creations came tearfully to grief.

And so we string a chain around Mr. Greenspan’s cold metal wrist, hitch the other end to our bumper… and flatten the accelerator.

Down he comes with a mighty and rapturous thud.

Thus Mr. Alan Greenspan’s is the first statue to topple. Central bankers everywhere moan in sorrow, decrying our wanton vandalism.

“Helicopter Ben” Is Next

Next we come to “Helicopter” Ben Bernanke. This fellow’s pedestal bears the dedication: “The Courage to Act.”

We reach once again for our spray can. We improve the inscription with “Coward.”

Come the crash…

Mr. Bernanke could have allowed the profound imbalances within the financial system to correct — as they would have under honest capitalism.

The pain would have proved acute. But the pain would most likely have proven brief.

A newer, healthier economy… erected on surer footings… would have risen upon the wreckage of the old.

Yet Mr. Bernanke lacked the courage to let the free market take its natural course.

He instead pummeled rates to zero, devised quantitative easing… and inflated the greatest stock bubble market in history.

For his crimes against economics, his statue too comes crashing down today.

Even Janet Yellen?

Now, what is this? A rare statue of a female — Ms. Janet Yellen, next in line after Bernanke.

She is honored for being “The First Female Chairperson in the History of the Federal Reserve.”

This we cannot dispute. Yet she perpetuated Mr. Bernanke’s economic vandalism.

She did not believe another financial crisis would befall us “in our lifetimes,” she declared in retirement.

And so today we razz her prophecy, in red spray-paint upon her pedestal:

“We Must All Be Dead.”

Yet we are highly gallant. We are therefore loath to rip down the statue of a woman. Yet we yield to an egalitarian impulse…

We cannot discriminate on the basis of gender. Down Janet Yellen comes in the customary manner. And with the customary clank.

Powell’s Day Will Come

Mr. Jerome Powell is still on duty. His statue has therefore yet to be dedicated. That day will come of course.

He will be depicted upon a galloping horse, in the manner of Napoleon.

He will be credited with saving the United States economy at its darkest moment since the Great Depression.

And so we will be there with our spray paint, our chain… and our pickup truck…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“There Is a Big Shift Happening”

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“There is a big shift happening.”

Here you have the judgment of old Daily Reckoning hand Wolf Richter.

The “big shift” to which Mr. Richter refers is this:

A big shift in Federal Reserve policy.

But a big shift away from what policy… and toward which policy?

To which we must add our own question:

Is the “big shift” a genuine wheeling around — or merely a brief detour, a fleeting and transient veering?

These are the questions we peer into today.

We first peer in on the central beneficiary of existing Federal Reserve policy — Wall Street.

The Dow Jones gained another 150 points today. The S&P gained another 20 of its own; the Nasdaq, 110.

As is often the case, technology stocks such as Apple, Microsoft, Netflix and Amazon hauled much of the market’s cargo.

But to revisit our central question:

Is the Federal Reserve silently plotting a “big shift” in course?

The Hon. Jerome Hayden Powell appeared before Congress last week…

This he told Congress:

“We” — the Federal Reserve — must “keep our foot on the gas.”

Their foot has been on the gas since March…and heavily on the gas since March.

They collapsed rates clear to zero. They nearly doubled the balance sheet within three months.

Their violent and spasmed pummeling of the gas pedal — in fact — knows no precedent.

The delirious octane flood set Wall Street’s engine racing… and the tachometer to astonishing indications.

In no time whatsoever the stock market was chasing down its February highs. It chases yet.

But the gas pedal came off the floor last week…

The Federal Reserve’s gargantuan balance sheet actually contracted $74 billion on the week.

It was the first weekly winnowing since the crisis commenced — the coronavirus crisis, that is (a fellow must be specific nowadays).

It was also the largest weekly balance sheet shrinkage in 11 years… since May 2009.

In fairness, a deliberate easing off the gas pedal did not cause it. The peculiarities and practicalities of balance book operations did cause it…

$88 billion of “repos” went rolling off the books last week. As $92 billion in foreign central bank “liquidity swaps” likewise went rolling off the books (details below).

Their combined rolling off overmatched — by $74 billion — the Treasuries and mortgage-backed securities that came rolling on.

Hence… the largest weekly balance sheet off-rolling in 11 years.

The stock market has lost some zoom of late. Is it because the hi-test was running low?

Here is a second question, chained to the leg of the first:

Is the Federal Reserve abandoning Wall Street… for Main Street?

Wolf Richter — the aforesaid Wolf Richter — believes:

“There is a big shift happening right now that Wall Street doesn’t seem to understand.”

What precisely constitutes this shift?

The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities and businesses, rather than into the financial markets.

These programs include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion) and the Municipal Liquidity Facility ($16 billion).

How do these programs differ from quantitative easing?

This is not QE but more like paying businesses and municipalities, and ultimately workers/consumers, to consume. This money is circulating in the economy rather than inflating asset prices… These types of programs are propping up consumption — not asset prices. That’s a new thing.

Is Wall Street prepared for this “big shift” of which you write, Mr. Richter?

I don’t think the hyperinflated markets, which have soared only because the Fed poured $3 trillion into them, are ready for this shift. Again, that’s an important change and a big shift. But it’s not getting any attention.

We do not believe the Federal Reserve will walk away from Wall Street.

Yet we have long maintained that authorities would reroute “stimulus” from Wall Street… toward Main Street.

It would go under the banner of “QE for the People” or some such.

The pandemic has merely deepened our conviction.

Millions and millions are idle, unemployed. Many will likely remain idle and unemployed, their jobs permanently erased.

Heaps of businesses nationwide, meantime, may never swing open their doors… or register another sale.

Each extinct business represents one dream permanently dashed.

Are the frustrated and dream-dashed prepared to watch Wall Street prosper beyond avarice — while they wallow?

Legions of unemployed seethed for much of the past decade watching Wall Street prosper in this fashion.

We do not believe they are prepared to seethe another 10 years.

Eventually the pitchforks come out, the barricades are manned, the citadels are stormed.

And elected officials do not wish to be aerated, hanged or guillotined.

They will therefore have a go at QE for the People.

Of course, it too will end in folly. Yet that is a tale for a different day…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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REVEALED: The Fed’s Next Trick

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Today we lower our ear to the rail… and report the approach of a rumbling locomotive.

Free and honest markets are roped to the tracks, squirming, writhing, sobbing.

This iron horse is barreling toward them. Mr. Jerome Powell is at the controls…

And murder is on his mind.

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

And will it pull off the caper?

Answers anon.

We first look in on the seemingly condemned — squirming, writhing, sobbing on the tracks…

A Quiet Day on Wall Street

The day counted plus and minus.

The Dow Jones lost 39 points. The S&P scratched out a 1.85-point gain today. The Nasdaq, meantime, took the ribbon with a 32-point advance.

A dull affair altogether. Yet tomorrow may bring high adventure of course.

And so we now return to today’s central question:

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

Let us first flip back the calendar to the war year of 1942… where our tale begins.

How the Fed Fought WWII

Wars are costly enterprises. And taxes alone would not purchase the arsenals of democracy.

Uncle Samuel therefore held his cap before the bond market… and went upon the borrow.

But the authorities were hot to keep borrowing costs within reasonable limits.

The Federal Reserve and the Treasury Department therefore signed onto an agreement:

The Federal Reserve would place a cap on the government’s borrowing costs.

This it accomplished by purchasing any government bond with yields above a predetermined level.

These purchases shrunk the yield (purchasing Treasuries hammers down the yield; selling Treasuries ratchets yields higher).

If the 3-month Treasury bill yielded above 0.50% — for example — the Federal Reserve purchased 3-month Treasury bills until yields fell to 0.50% or below.

If longer-dated Treasury yields exceeded 2.5%… the Federal Reserve purchase longer-dated Treasuries until yields dropped to 2.5% or lower.

Thus borrowing costs were clamped to tolerable levels.

The Fed Cedes Monetary Policy to the Treasury

The proper term for the business is “yield curve control” (more on which below).

The Federal Reserve — in essence — ceded monetary policy to the United States Department of Treasury.

The Federal Reserve likewise surrendered control of its balance sheet, notes Jim Rickards:

The cap also meant that the Fed surrendered control of its balance sheet because it would have to buy potentially unlimited amounts of Treasury debt to implement the rate cap. (Such asset purchases had inflationary potential, but in World War II, inflation was managed separately through wartime price controls.)

The monetary base doubled between 1942–45… incidentally.

The Federal Reserve continued to abdicate its responsibility for monetary policy until 1950.

Now come home…

The Fed’s Fighting a New War

It is the year of pandemic. To battle its economic catastrophes, the Federal Reserve has reset its target interest rate to zero.

Thus interest rate policy is… limited.

Might our adventuresome central bank wade into the dense swamp of negative rates?

It may — in these pages we have maintained it will. Yet to date it has heaved the wet blanket upon all speculation of them.

And negative interest rates have not met advertising where attempted — in Japan and parts of Europe primarily.

How then can the Federal Reserve coax the reluctant economic machinery to life… and stuff down borrowing costs?

Yield curve control — the same yield curve control that financed the Second World War.

The Fed Would Take Direct Control of Interest Rates

In reminder, the yield curve plots bond yields across the spectrum — from short-term bonds to long-term bonds.

Yet this you must understand:

The Federal Reserve only fixes the federal funds rate. That is the “overnight” rate banks charge one another to borrow.

That is, the Federal Reserve’s actual control over interest rates is limited.

It influences longer-term rates, nudges them, leans on them, blows against them.

But it does not control them… to its everlasting disappointment.

And longer-term rates unlock the grails of borrowing and consumption.

How can the Federal Reserve seize direct control of longer-term rates?

Yield curve control.

Targeting Longer-Term Yields

Assume a particular Treasury yield exceeds the Federal Reserve’s preferences.

It can then purchase and purchase that particular Treasury until yields sink to its liking.

Explains one Sage Belz — and another David Wessel — they of the Brookings Institution:

In normal times, the Fed steers the economy by raising or lowering very short-term interest rates, such as the rate that banks earn on their overnight deposits. Under yield curve control (YCC), the Fed would target some longer-term rate and pledge to buy enough long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy if bringing short-term rates to zero isn’t enough.

And that is lovely because:

Lower interest rates on Treasury securities would feed through to lower interest rates on mortgages, car loans and corporate debt, as well as higher stock prices and a cheaper dollar. All these changes help encourage spending and investment by businesses and households. Recent research suggests that pinning medium-term rates to a low level once the federal funds rate hits zero would help the economy recover faster after a recession.

Meantime, the federal government is piling up debt at rates truly fantastic…

Bottling Borrowing Costs

The federal deficit in the current year may well exceed $4 trillion. And trillion-dollar deficits stretch to the farthest horizon.

The authorities are therefore keen to bottle interest rates… lest borrowing costs rise and become a millstone about the neck.

Yield curve control permits the Federal Reserve to throttle borrowing costs.

“Wait one minute,” you say. “Are you not describing quantitative easing? The Fed purchased Treasuries and other assets to drive down yields. What’s so different about this yield curve control?”

Precisely correct you are. But quantitative easing did not grant the Federal Reserve direct control over rates.

Yield curve control — as the title faintly suggests — does.

It’s All About the Yield

The Federal Reserve would purchase the requisite number of bonds to hammer yields to its desired level.

If 100 bonds fails to work the trick, then 1,000 bonds it will be. If 1,000 bonds proves inadequate to purposes, then 10,000 it will be… all the way up to a million or more.

Michael Lebowitz and Jack Scott of Real Investment Advice:

Assume the Fed set a 0.75% target yield on the 10-year U.S. Treasury note. They can then employ QE in any amount needed to buy 10-year notes when the rate exceeds that level. If successful, the rate would never exceed 0.75% as traders would learn not to fight the Fed.

Thus “Don’t fight the Fed” would assume an even greater ferocity.

Is this yield curve control in the offing?

“Whatever It Takes”

The Federal Reserve Bank of New York president — Mr. John Williams — says he and his fellows are “thinking very hard” about it.

We have no doubt they are… to the extent that they are capable of thinking very hard.

Our spies in Washington inform us the Federal Reserve will hatch its yield curve control operation later this year — for what it is worth.

Jim Rickards likewise believes yield curve control is coming:

The Fed and Treasury will reach a new secret accord, just as they did in 1942. Under this new accord, the U.S. government could run larger deficits to finance stimulus-type spending…

The Fed can use open market operations in the form of bond buying to achieve the rate caps. This means the Fed would not only give up control of interest rates, but it would give up control of its balance sheet. A rate cap requires a “whatever it takes” approach to Treasury note purchases.

“Whatever it takes.” We suspect “it” will take much. Then some more.

And so we will have more manipulation. More distortion. More fraud.

Reduce the thing to its core and this is what you will find:

The Federal Reserve attempts to fix the price of the dearest commodity of all — the price of time itself.

What king ever sought such power?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Goodbye, Free Market

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Fremdschämen.

Fremdschämen is a noun of the German language. It translates this way:

Embarrassment for those incapable of feeling embarrassment.

Today we suffer embarrassment for Mr. Jerome Powell and his fellows of the Federal Reserve…

For no action they take lowers their heads in shame… or blushes their cheeks with embarrassment.

Mr. Powell is simply in the hands of Wall Street… and on his knees to Wall Street.

Well does he know the taste of shoeblack.

Yesterday Mr. Powell got a fresh coat on his tongue. Details to follow.

But first, let us look in on his masters…

A Banner Day on Wall Street

Wall Street was in full roar today.

The Dow Jones jumped an additional 582 points. The S&P gained 58 points; the Nasdaq, 169 points of its own.

CNBC, by way of explanation:

Stocks rose on Tuesday as a record jump in retail sales — coupled with positive trial results from a potential coronavirus treatment and hopes of more stimulus — sent market sentiment soaring.

Government number-torturers reported this morning that May retail sales jumped a record 17.7%.

The chronically erring Dow Jones survey of economists had projected a 7.7% increase.

Yet we are not surprised by the surge. April’s numbers were true abominations. But certain economic restrictions were waived in May.

A trampolining back was therefore expected.

Meantime, a medicine named dexamethasone — a widely available medicine — is evidently effective in the treatment of deathly ill coronavirus patients.

It reportedly axed hospital deaths by perhaps one-third.

Thus the market had its spree today. But it merely added to yesterday afternoon’s joys…

Powell Licks Wall Street’s Shoes

The Dow Jones had been off 762 points in early trading yesterday, quaking with coronavirus-related fear.

But then Mr. Powell sank to his knees… and tongued Wall Street’s wingtips…

For the Federal Reserve announced it intends to purchase individual corporate bonds — not merely ETFs.

By its own admission, it will:

Begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.

We will not burden you with the plan’s intricacies. You need only know this:

Yesterday’s announcement “pressed the risk-on button,” as money man Bill Blain styles it…

“Central Banks Are Now de facto Guarantors of the Corporate Bond Market”

Fears about the rising number of reopening coronavirus hotspots and economic threats were superseded by unbounded joy as the Fed announced it will buy secondary market corporate bonds direct[ly] rather than through ETFs, without any need for companies to certify their eligibility. That pressed the risk-on button — and markets recovered.

And so the free market sinks deeper into oblivion:

Central banks are now de facto guarantors of the corporate bond market.

What has all this QE Infinity and ZIRP interest rates created?… Where market prices have become meaningless as a result of financial asset inflation? Where junk bonds are priced like AAA securities, allowing private equity funds to thrive?

I am beginning to wonder if there is any point in thinking about markets any more… Just follow the central banks… don’t think. Just buy.

“Don’t think. Just buy.”

We think the proper advice might rather run this way: “Don’t buy. Just think.”

Yet we do not dispense financial advice.

Picking Winners and Losers

Our own Nomi Prins penetrates to the core of yesterday’s message. Nomi rings dead center when she says:

As if the Fed hasn’t done enough to destroy honest markets, now it plans to start buying individual corporate bonds. It’s just another step closer to the Fed deciding the winners and losers in the market.

Thus the Federal Reserve is a referee who has taken a bribe, a butcher who thumbs the scales, a rogue, a traitor to justice.

A central banker with a conscience might lower his head in shame… and a red flush of embarrassment might stain his cheeks.

Yet Mr. Powell holds his head high and puffs his chest, proud as any peacock.

His cheeks, meantime, are pale.

Yet ours are scarlet — scarlet with embarrassment for the man incapable of embarrassment.

“From Lender of Last Resort to Stockjobber”

The Federal Reserve was originally fashioned to be the “lender of last resort.” Yet that designation is presently a cruel and mocking jest.

It has passed from lender of last resort to stockjobber.

Economist Thomas M. Humphrey is the author of Lender of Last Resort: What It Is, Whence It Came, and Why the Fed Isn’t It.

From which:

While there exists such an entity as the classical lender of last resort (LLR) — the traditional, standard LLR model, to be exact — the Fed has rarely adhered to it… The Fed has deviated from the classical model in so many ways as to make a mockery of the notion that it is an LLR. In short, the Fed may be many things, crisis manager included. But it is not an LLR in the traditional sense of that term.

What is the proper function of the central bank, by Humphrey’s lights?

Six Mandates of Sound Central Banking

As summarized by Wikipedia, a central bank exists to:

(1) protect the money stock instead of saving individual institutions; (2) rescue solvent institutions only; (3) let insolvent institutions default; (4) charge penalty rates; (5) require good collateral; and (6) announce the conditions before a crisis so that the market knows exactly what to expect.

A word of explanation, perhaps, on “penalty rates.”

The central bank should charge interest rates above the market rate.

Otherwise the central bank would be a lender of resort — not the lender of last resort.

A high rate further encourages debtors to retire their debts rapidly… to shake loose the heavy burden as soon as circumstances allowed.

Yet what does the Federal Reserve’s actual record reveal?

(1) “Emphasis on credit (loans) as opposed to money,” (2) “taking junk collateral,” (3) “charging subsidy rates,” (4) “rescuing insolvent firms too big and interconnected to fail,” (5) “extension of loan repayment deadlines,” (6) “no pre-announced commitment.

Professional Incompetence

That is, the Federal Reserve takes sound central banking and knocks it 180 degrees out of phase.

It wars against all six mandates — and massively against Nos. 1, 2, 3, 4 and 5.

Imagine a plumber who does not patch leaks but creates leaks… a doctor who does not mend bones but cracks bones… a head shrinker who does not shrink heads but expands heads.

Now you have the flavor of it.

Yet the Federal Reserve’s professional pride is unruffled. It displays no embarrassment, no shame at a job done wrong.

In fact, it believes it is a job done right…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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The Fed’s Forever War Against Savers

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The war on savers rages into its second decade.

And yesterday Field Marshal Powell vowed indefinite bombing, shelling, machine-gunning and bayoneting… until the white flag rises over enemy lines.

It is war to the knife… and from the knife to the hilt.

The only peace terms he will accept are these:

Complete, undiluted and unconditional surrender.

These hoarding hellcats must be vanquished. And their cities must be sowed with salt… as triumphant Rome vanquished Carthage… and sowed it with salt.

Here is yesterday’s dispatch from headquarters:

We are going to be deploying our tools — all of our tools — to the fullest extent for as long as it takes… We are not thinking about raising rates; we are not even thinking about thinking of raising rates.

Zero Rates Through at Least 2022

Powell and staff indicated they will clamp rates to zero, or near zero… through 2022.

We wager rates will remain clamped to zero longer yet.

Deflation hangs over the battlefield like a thick cloud of chlorine gas. And the Federal Reserve’s 2% inflation target appears more wishful than ever.

We do not expect any rate hikes until it lifts. And we hazard little will lift until 2022 has passed.

Meantime, Marshal Powell reminded us yesterday that the pre-pandemic 3.5% unemployment rate yielded little inflation.

He suggested, that is, that unemployment could sink below 3.5% before inflation menaced.

But it could be a long, long while before unemployment drops to pre-pandemic levels.

As we recently noted:

After the last financial crisis, over six years lapsed before employment fully recovered — 76 months.

If we assume a parallel recovery… pre-pandemic unemployment would return in 2026.

Of course comes our disclaimer: Pre-pandemic unemployment would return before 2026.

We simply do not know. Nor does anyone.

But who can say if pre-pandemic levels of unemployment will ever return?

The Fed Doesn’t Expect a “V-Shaped” Recovery

Even Powell himself is nagged by doubts:

Unemployment remains historically high. My assumption is there will be a significant chunk … well into the millions of people, who don’t get to go back to their old job… and there may not be a job in that industry for them for some time.

The Federal Reserve therefore fears an arduous and protracted recovery. This is the argument of one Joseph Brusuelas, chief economist at RSM:

It is clear that the Fed does not anticipate a V-shaped economic recovery and is positioned to move forcefully to support the economy…

Adds Charlie Ripley, senior investment strategist at Allianz:

The Fed understands we are just in the beginning phases of the economic recovery and making rash changes to policy or forward guidance is premature at this time.

The Federal Reserve’s fears may well prove true…

We have cited evidence recently that each recession is fiercer than the previous. And that additional debt is required to put down each successive menace.

Comparing the 1990, 2001 and 2008 Recessions

Once again, Michael Lebowitz and Jack Scott of Real Inves‌tment Advice:

  • The [2008–09] recession was broader based and affected more industries, citizens and nations than the prior recessions of 1990 and 2001…
  • The 2008–09 recession and recovery also required significantly more fiscal and monetary policy to boost economic activity…
  • The amount of federal, corporate and individual debt was significantly lower in 1990 and 2001 than 2008–09…
  • The natural economic growth rate for 1990 and 2001 was higher than the rate going into the 2008–09 recession.

“The economic growth rate going forward may be half of the already weak pace heading into the current recession,” these gentlemen conclude.

We in turn conclude that zero interest rates will be with us for years… as will the warfare against savers.

The Fed Will Keep Buying Ammunition

But the enemy of the saver is the ally of the speculator.

The Federal Reserve intends to purchase roughly $120 billion of Treasury notes and mortgage-backed securities each month of the year.

Its balance sheet may swell to 40% of the United States economy by year’s end.

What percentage of the United States economy did it represent in 2007?

A mere 6%… if you can believe it.

These assets represents ammunition in support of Wall Street.

And as long as the Federal Reserve rains down ammunition upon savers… Wall Street can advance under the covering fire.

Powell insists he’s battling for the economy’s life.. If my policies prosper Wall Street, be it so, says he (with a wink and a nod):

We’re not focused on moving asset prices in a particular direction at all — it’s just we want markets to be working, and partly as a result of what we’ve done, they are working.

Just so. But the stock market has evidently advanced too far. And the stock market has evidently advanced too fast.

The Market’s Worst Day Since March

Today the market took to its heels… and fell into panicked and headlong retreat.

The Dow Jones pulled back 1,861 points on the day. Both the S&P and the Nasdaq took similar trouncings.

The S&P did, however, manage to hold the 3,000 line.

The combined rout nonetheless represents the market’s greatest daily plunge since mid-March… at the height of the havoc.

The reasons on offer in the mainstream press reduce to two:

A) Yesterday Powell’s dour comments emptied ice water upon the heads of sunny-siders expecting the “V-shaped recovery.”

B) A resurgence of coronavirus cases following reopenings may delay additional economic progress.

Texas, Arizona, Florida, North Carolina and California — among others — report what the journalists like to call “alarming” increases.

“This Thing’s Going to Linger Longer Than Probably the Market Had Thought Of”

And so, says Mr. Dan Deming, managing director at KKM Financial, reports CNBC:

“You’re seeing the psychology in the market get retested today” as traders weigh the recent uptick in coronavirus hospitalizations and a grim outlook from the U.S. central bank… “The sense is maybe the market got ahead of itself, which makes sense given the fact that we’ve come so far so fast.

“The reality is this thing’s going to linger longer than probably the market had thought of.”

But the stock market should take heart:

The full arsenal of the Federal Reserve is in back of it.

Savers, meantime, must only despair:

The full arsenal of the Federal Reserve is against them…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Popular Delusions and the Madness of Crowds

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The oppressed rise to their feet. Police sink to their knees. Silence is violence.

And violence is speech.

From sea to glittering sea, from one continent to the next… protests yet rage.

An injustice somewhere on a Minneapolis street evidently threatens justice everywhere.

It certainly threatens the peace everywhere.

Here in Baltimore, storefronts up Charles Street and down Charles Street are barricaded against bricks:

IMG 1

IMG 2

IMG 3

Is there a greater symbol of hope, of love, than a plywood sheet stretched across a storefront window?

We have yet to encounter one in this world.

“When a Man Enters a Crowd He Exits Civilization”

We have nothing to say against protests, of course. If a man wishes to march against perceived injustice, let him march… lest the heavens fall.

Yet our spacious and tolerant disposition places us in a pickle jar. For a man in a protest is a man in a crowd…

And when a man enters a crowd he exits civilization.

He goes in, his blood goes up… and his reason goes out.

As Herr Nietzsche observed, madness is a rarity in individuals — but the rule in crowds.

Or as argued Mr. Charles Mackay, author of the 1841 classic Extraordinary Popular Delusions and the Madness of Crowds:

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

“A Crowd Runs Not on Thought but on Hormones”

A man in a crowd ceases to be a man but a face.

He ceases to be an independent unit but a cog in a lunatic machine.

A man in a crowd does not think for himself. The crowd thinks for him.

That is, the man ceases to think whatsoever.

For a crowd runs not on thought but on hormones.

The crowd’s lusts become the man’s lusts, its will becomes his will, its devils become his devils.

It is these devils — in fact — that unite the crowd.

A Crowd Needs a Devil

These devils may appear in the form of policemen, of whites, of blacks, of Muslims, of Christians, of Chinamen, of Russians, of conservatives, of progressives, of capitalists, of anti-capitalists, of greenhouse gas-geysers, of meat-munchers.

One crowd has its devil. A second crowd, another. A third, a devil of its own.

Above all:

Any crowd’s hate for devils vastly exceeds its love for angels.

Angels do not get the blood up. Angels do not bubble the hormones. Angels do not furl the fingers into fists.

Devils do get the blood up. Devils do bubble the hormones. Devils do furl the fingers into fists.

And throughout America, throughout parts of the world beyond…

The blood is presently up, the hormones are a-bubble, the fingers are furling into fists.

Many of these fists are crashing into heads.

That is, the crowd is proceeding against its devil.

A Crowd Is Not Necessarily a Street Mob

But by our comprehensive standards, a crowd is not merely a mass on a street.

A nation is a sort of crowd — a supercrowd.

And no greater menace exists than a supercrowd after a devil.

It is given to the same madnesses as the street crowd… only its madnesses are amplified by the tens, by the hundreds, by the thousands and the millions.

They often leave “rivers of blood” and a “harvest of groans and tears” trailing behind them.

From the aforesaid Extraordinary Popular Delusions and the Madness of Crowds:

In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion and run after it till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple, and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity.

The Madness of Market Crowds

A market too is a crowd… and equally susceptible to lunacy.

Mr. Mackay consecrates page upon page to the Tulip delirium (1636–37), the Mississippi Bubble (1718–20) and the related South Sea Bubble (1720).

It is a pity the fellow no longer writes.

The stock market bubble of 1929, the technology bubble of 2000 and the housing bubble of 2008 added entire chapters to the literature of mass delusion.

Additional chapters — no doubt — await writing.

Here is the common element that unites the street protest, the nation at war, the frothing markets:

The man in a crowd.

Would a man outside a crowd hurl bricks at police… march off to war… buy stocks at the peak of a bubble?

He would not.

Only the man under crowd influence does any of it.

Man Must Choose Between Freedom and Happiness

Mankind confronts a choice, argued George Orwell in 1984. He must choose between freedom and happiness.

And the mass of men prefer happiness to freedom:

The choice for mankind lay between freedom and happiness and that, for the great bulk of mankind, happiness was better.

By our lights, the great bulk of men seek the peace and contentment of herd living — of life in a crowd.

And perhaps, even, their choice is the proper choice.

Freedom is too hot for most hands, as Mencken described it — or too cold for most spines, as Nietzsche described it.

Either way… freedom runs to temperatures too extreme for most constitutions.

“Freedom Includes the Freedom to Starve”

The crowd offers safety. Strength of numbers. Solidarity. Companionship.

The free man must go upon his own hook, scratch along under his own steam, weave his own safety net, face cruel fate alone.

Do not forget:

Freedom includes the freedom to starve.

We therefore have no heat against the man who prefers happiness to freedom.

We enjoy happiness ourself. And safety. And security.

Extremes of heat and cold, meantime, immiserate us.

And — despite all evidence — we enjoy companionship.

We nonetheless confess a vast respect for the man who never wanders into a crowd, for the man who does not flock.

For we prefer humanity in batches of one.

The free man’s example is the eagle, the free and noble eagle.

“The Eagle Does Not Flock. You Find Him One by One”

We would emulate the solitary eagle over the flocking birds — over the birds that crowd.

For the eagle does not flock. You find him one by one.

That is, the eagle takes the individual view. In our experience, that view is often the higher view, the superior view.

The free man is the eagle high aloft, wheeling on motionless wings, on steady wings, on confident wings.

He is free to starve, it is true. But he is also free to soar.

And the man in a crowd?

As the bird in a flock… he is free only to follow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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