Monetary and Fiscal Policy Won’t Help

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s take a look…

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

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

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

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

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

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

Keynes’ idea was straightforward.

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

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

Here’s the problem:

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

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

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

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

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

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

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

And neither monetary policy nor fiscal policy will change that.


Jim Rickards
for The Daily Reckoning

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

Economy Won’t Recover Until 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s the problem.

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

The hard truth is 96.8 is less than 100.

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

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

This is the reality of this depression.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Jim Rickards
for The Daily Reckoning

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Depression and the Great American Exodus

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Is the worst of the economic collapse over?

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

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

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

Here, the news is not good at all.

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

A simple example will make the point.

Just Not Enough Growth

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

That moves the benchmark to 90 in 2020.

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

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

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

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

But the situation is even worse than I just described.

Worse Than a Technical Recession

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

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

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

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

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

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

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

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

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

The New Depression

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

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

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

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

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

But that’s not the definition of depression.

Defining Depression

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

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

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

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

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

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

Depressions Leave Lasting Impressions

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

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

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

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

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

The Great American Exodus

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

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

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

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

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

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

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

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

Investors Will Learn the Hard Way

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

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

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

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


Jim Rickards
for The Daily Reckoning

The post Depression and the Great American Exodus appeared first on Daily Reckoning.

Investing in a World Gone “Covidious”

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

How do you invest in a world gone covidiously cuckoo?

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

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

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

He probably means you and me, folks.

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

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

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

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

Don’t say he didn’t warn you!

Much Lower Fatality Rates Than New York

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

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

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

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

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

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

Time-Price Theory Meets COVID-19

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Better and Better

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

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

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

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

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

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

Don’t let the lockdown control freaks control you.


George Gilder
for The Daily Reckoning

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

Investors Feel Bulletproof Again

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why is that?

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

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

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

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

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

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

Take the case of German payment technologies company Wirecard…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And that looks increasingly likely.


Dan Amoss
for The Daily Reckoning

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

“Great Job Numbers”

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“Great job numbers.”

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

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

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

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

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

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

Mr. Trump’s delirium was broadly shared…

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

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

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

A leading question perhaps. The answer nonetheless follows.

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

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

But the gravity of additional news soon tugged them earthward…

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

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

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

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

First among these were airline and cruise line stocks.

The major indexes nonetheless maintained the vertical…

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

But can you trust today’s unemployment numbers?

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

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

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

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

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

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

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

Now roll the calendar forward one month…

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

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

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

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

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

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

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

And unemployment remains the highest since the Great Depression.

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

Says Torsten Slok, Deutsche Bank’s chief economist:

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

30 million jobs!

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

Yet let them eat cake, says the stock market…

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

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

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

We have credited the Federal Reserve with responsibility.

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


Brian Maher
Managing editor, The Daily Reckoning

The post “Great Job Numbers” appeared first on Daily Reckoning.

The Return of Stagflation

This post The Return of Stagflation appeared first on Daily Reckoning.

The U.S. Treasury Department has been issuing record amounts of new debt since the coronavirus lockdowns began.

This debt issuance is an important factor driving markets for stocks, bonds, currencies and precious metals.

Today I’ll explain how a large supply of new U.S. Treasury securities has temporarily tightened liquidity in Wall Street’s money markets. Then I’ll discuss the long-run consequences of the soaring national debt.

Looking beyond the short term, in the months and years ahead, the ever-growing supply of U.S. Treasuries will be extremely bullish for precious metals prices and certain other assets that thrive in inflationary environments.

First, let’s consider the short-term environment, which is still characterized by powerful deflationary forces.

Deflation Dominates

Even though measures of bank loan growth and money supply are surging, this is not yet inflationary because money velocity has plummeted.

Bank loan growth has risen because we’ve seen company after company draw down their revolving lines of credit. They sought to boost liquid reserves on their balance sheets. This is a precautionary move, characteristic of behavior in a recession.

These companies are not going to invest in plant expansions or hiring with all this new debt. Rather, they’re hoarding liquidity to try to ride out what could be an extended recession.

Countering the deflationary force of companies hoarding liquidity is the fire hose of liquidity coming from the Treasury and the Fed…

Wall Street’s primary dealers can only absorb so much Treasury debt in a short time frame before finding a permanent home for these securities among their client base of hedge funds, insurers and pension funds.

The Fed’s balance sheet will be the permanent home for many of these Treasuries. So the Fed will likely stand by to absorb any excess supply of Treasuries in the event that yields rise at a pace that they dislike.

Tighter Liquidity Is Bearish for Risk Assets Like Stocks

Some media outlets have mentioned the epic surge in Treasury debt auctions, but it hasn’t gotten broad attention in the financial media.

Several outlets reported on Treasury’s May announcement that it planned to auction $2.999 trillion in securities during the April–June 2020 quarter. It targeted an end-of-June cash balance of $800 billion at the Fed.

That’s a mind-boggling number. And keep in mind that most of this cash hoard was raised from selling new bonds — not from taxing cash out of the existing economy.

Here’s my key point: There has been an ongoing boom in U.S. Treasury security auctions to fund the commitments that the Treasury Department made to dole out stimulus money.

The Federal Reserve has absorbed much of this Treasury security issuance by buying them from primary dealers on Wall Street. However, unless the Fed expands its balance sheet by at least another trillion dollars in the months ahead, liquidity on Wall Street will tighten.

And tighter liquidity is bearish for risk assets like stocks.

The last few times there was a surge in sales of U.S. Treasuries to refill a depleted Treasury account at the Fed (in late 2015–early 2016, and late 2017–early 2018), the Fed wasn’t in balance sheet expansion mode.

So liquidity on Wall Street tightened and those assets at the margins of the global dollar funding system, including emerging markets, corrected sharply.

The takeaway is that if the Fed wants to avoid a repeat of those risk-off episodes and keep liquidity loose on Wall Street, it must reaccelerate its pace of Treasury purchases.

But lately, it has been slowing its purchases from the torrid pace of late March.

I wouldn’t be surprised to see a reacceleration of Fed purchases of Treasuries. The longer this goes on (the Fed financing the Treasury’s deficit), the more the U.S. risks the reputation of the dollar as a store of value.

Now I’ll pivot to the longer-run consequences of the Treasury’s epic binge of bond issuance…

Epic Binge of Debt

The blue line in this chart shows the U.S. national debt by fiscal year (which ends in September) since 1970. Fiscal 2019 ended with $22.7 trillion in debt. The annual growth rate of the debt in the post-recession years since fiscal 2010 has been 3–9%.


In the dotted lines, I added a hypothetical increase of $5 trillion in new debt in fiscal 2020 and $2 trillion in fiscal 2021. We’re already at $25.7 trillion in debt as of June 1, and we still have three months of debt-issuing left in fiscal 2020.

If fiscal 2020 debt jumps $5 trillion from the prior year, the growth rate in the orange line will accelerate to 22%. We haven’t seen these growth rates in the national debt since the late 1970s and early 1980s.

Note that the highest growth rates in the national debt have coincided with strong conditions for gold prices.

A steady acceleration in the national debt throughout the 1970s fueled gold’s first big bull market in U.S. dollar terms. And the exploding deficits of the 2000s drove gold from $300 to $1,900 in 10 years.


Let’s add this bit of context to today’s investing environment: This will be the first time the U.S. will experience accelerating growth in the national debt while the Fed has rates pinned at zero and is buying many of the newly issued Treasury bonds.

All of this activity — which was taken in response to an abrupt March 2020 move into recession and a bear market in stocks — is rapidly boosting the money supply.

We’re seeing an unprecedented injection of newly printed cash into the U.S. economy in a brief time.

New cash enters the U.S. economy through two primary channels: through new bank loans and through rising federal budget deficits.

The bank loan channel will likely be dormant for a few years, because much of the corporate borrowing on revolving credit lines will be repaid once the worst of the crisis passes. Plus, the default of corporate loans will be a deflationary offset to the recent uptick in corporate borrowing.

The latter channel of cash injection into the U.S. economy (high federal budget deficits) will be the one to watch. As deficits expand, the banking system will be flooded with new deposits, including those from the stimulus checks going out in the mail.

Much of the money that has been sent out to households is being saved. That’s why the latest official savings rate number skyrocketed. As the months pass, more and more of this money will start to circulate through the economy.

But will this newly created money be spent on the same basket of goods and services that was consumed by the typical household in 2019? I doubt it.

As consumer confidence remains low, this new money supply will tend to boost the prices of necessities (or “nondiscretionary” items). Higher prices for necessities will leave less room in household budgets for discretionary items.

Discretionary items include things like restaurants, travel and leisure — all the sectors that employed many people, have been hit the hardest by the coronavirus shutdowns and thus will likely request even more federal relief in the near future.


The capacity (or supply) within these sectors will thus remain limited. Income support from the federal government will cushion the demand hit that would have resulted from the depressed consumption of people who’ve lost jobs within these downsized sectors.

The end result will be persistently high federal deficits, steady supplies of new cash entering the economy and a U.S. economy that more closely resembles the 1970s than the economy that most Americans have become accustomed to.

In summary, the cost of the national debt won’t be borne by higher tax rates “on our children and grandchildren,” as politicians and talking heads like to say.

Instead, the cost of the national debt will be borne by holders of Federal Reserve notes, which will buy less than expected in the long run.

Said another way, the cost of endless national deficits is manifested in future inflation.

Once today’s precautionary savings-driven deflation episode ends, we’ll be facing a “stagflation” economy with high unemployment and chronically high inflation in the most commonly consumed items within a typical consumption basket.

And you can expect gold to soar, just like it did in the 1970s when we last confronted stagflation.


Dan Amoss
for The Daily Reckoning

The post The Return of Stagflation appeared first on Daily Reckoning.

South Africa’s recession deepens in first quarter as mining plummets

 South Africa's recession deepened in the first quarter of 2020, with official data on Tuesday showing that gross domestic product contracted 2% from the previous three months, led by declines in mining and manufacturing. The economy was already frail before the coronavirus pandemic hit South Africa in March, with January-March being the third consecutive quarter of contraction and following a 1.4% decline in GDP in October-December.

Central Banks Driving Gold

This post Central Banks Driving Gold appeared first on Daily Reckoning.

Gold as an asset class is confusing to most investors. Even sophisticated investors are accustomed to hearing gold ridiculed as a “shiny rock” and hearing serious gold analysts mocked as “gold bugs,” “gold nuts” or worse.

As a gold analyst, I grew used to this a long time ago. But, it’s still disconcerting when one realizes the extent to which gold is simply not taken seriously or is treated as a mere commodity no different than soy beans or wheat.

The reasons for this disparaging approach to gold are not difficult to discern. Economic elites and academic economists control the central banks. The central banks control what we now consider “money” (dollars, euros, yen and other major currencies).

Those who control the money supply can indirectly control economies and the destiny of nations simply by deciding when and how much to ease or tighten credit conditions, and when to favor (or disfavor) certain types of lending.

When you ease credit conditions in a difficult environment, you help favored institutions (mainly banks) to survive. If you tighten credit conditions in a difficult environment, you can more or less guarantee that certain companies, banks or even nations will fail.

This power is based on money and the money is controlled by central banks, primarily the Federal Reserve System. However, the money-based power depends on a monopoly on money creation.

As long as investors and institutions are forced into a dollar-based system, then control of the dollar equates to control of those institutions. The minute another form of money competes with the dollar (or euro, etc.) as a store of value and medium of exchange, then the control of the power elites is broken.

This is why the elites disparage and marginalize gold. It’s easy to show why gold is a better form of money, why it’s more reliable than central bank money for preserving wealth, and why it’s a threat to the money-monopoly that the elites depend upon to maintain power.

Not only is gold a superior form of money, it’s also not under the control of any central bank or group of individuals. Yes, miners control new output, but annual output is only about 1.8% of all the above-ground gold in the world.

The value of gold is determined not by new output, but by the above-ground supply, which is 190,000 metric tonnes. Most of that above-ground supply is either owned by central banks and finance ministries (about 34,000 metric tonnes) or is held privately either as jewelry (“wearable wealth”) or bullion (coins and bars).

The floating supply available for day-to-day trading and investment is only a small fraction of the total supply. Gold is valuable and is a powerful form of money, but it’s not under the control of any single institution or group of institutions.

Clearly gold is a threat to the central bank money monopoly. Gold cannot be made to disappear (it’s too valuable), and it would be almost impossible to confiscate (despite persistent rumors to that effect).

If gold is a threat to central bank money and cannot be made to disappear, then it must be discredited. It becomes important for central bankers and academic economists to construct a narrative that’s easily absorbed by everyday investors that says gold is not money.

The narrative goes like this:

There’s not enough gold in the world to support trade and commerce. (That’s false: there’s always enough gold, it’s just a question of price. The same amount of gold supports a larger amount of transactions when the price is raised).

Gold supply cannot expand fast enough to keep up with economic growth. (That’s false: It confuses the official supply with the total supply. Central banks can always expand the official supply by printing money and buying gold from private hands. That expands the money supply and supports economic expansion).

Gold causes financial panics and crashes. (That’s false: There were panics and crashes during the gold standard and panics and crashes since the gold standard ended. Panics and crashes are not caused or cured by gold. They are caused by a loss of confidence in banks, paper money or the economy. There is no correlation between gold and financial panic).

Gold caused and prolonged the Great Depression. (That’s false: Even Milton Friedman and Ben Bernanke have written that the Great Depression was caused by the Fed. During the Great Depression, base money supply could be 250% of the market value of official gold. Actual money supply never exceeded 100% of the gold value. In other words, the Fed could have more than doubled the money supply even with a gold standard. It failed to do so. That’s a Fed failure not a gold failure).

You get the point. There’s a clever narrative about why gold is not money. But, the narrative is false. It’s simply the case that everyday citizens believe what the economists say (usually a bad idea) or don’t know enough economic history to refute the economists (and how could you know the history if they stopped teaching it fifty years ago).

The bottom line is that economists know that gold could be a perfectly usable form of money. The reason they don’t want it is because it dilutes their monopoly power over printed money and therefore reduces their political power over people and nations.

To marginalize gold, they created a phony narrative about why gold doesn’t work as money. Most people were too easily impressed by the narrative or simply didn’t know enough to challenge it. Therefore the narrative wins even if it is false.

If gold is viable as a form of money, what does gold’s recent price trading range combined with fundamental factors tell us about its investment prospects?

Right now, my models are telling me that gold is poised to breakout of its recent narrow trading range.

As always in technical analysis, the term “breakout” can mean sharply higher or sharply lower prices. Using fundamental analysis, a breakout to sharply higher prices is the expected outcome. This may be the last opportunity to buy gold below $2,000 per ounce.

For the past three months, gold has been trading in a range between $1,685 per ounce and $1,790 per ounce (it’s trading at about $1,782 today). For most of those three months gold was trading in a fairly narrow band.

When trading a volatile asset narrows to that extent, it’s a sign that the asset is ready for a material technical breakout. The question is will gold breakout to the upside or downside?

To answer that question, we can turn to fundamental analysis. (Technical analysis is data rich and is useful for spotting patterns, but it has low predictive analytic power).

One of the most important fundamental factors forcing gold higher is shown in Chart 1 below. This shows central bank purchases of gold bullion from 2017 to 2020 (each year is shown as a separate line measured in metric tonnes on the left scale).

Chart 1 – Central Bank purchases of gold
(in metric tonnes) 2017 – 2020


Chart 1 shows significant purchases of gold with 2019 running ahead of 2017 and 2018 at about 500 metric tonnes.

The chart also shows over 150 metric tonnes of gold purchases through April 2020, which puts 2020 on track to show 450 metric tonnes purchased for the year if present trends hold.

Of course, the actual result could be higher or lower. Cumulative central bank purchases from January 2017 to April 2020 are approximately 2,050 metric tonnes.

In fact, central banks went from being net sellers to net buyers of gold in 2010, and that net buying position has persisted ever since. The largest buyers are Russia and China, but significant purchases have also been made by Iran, Turkey, Kazakhstan, Mexico and Vietnam.

Here’s the bottom line:

Central banks have a monopoly on central bank money. Gold is the competitor to central bank money and most central banks would prefer to ignore gold. Yet, central banks in the aggregate are net buyers of gold.

In effect, central banks are signaling through their actions that they are losing confidence in their own money and their money monopoly. They’re getting ready for the day when confidence in central bank money will collapse across the board. In that world, gold will be the only form of money anyone wants.

Central banks are voting with their printing presses in favor of gold. What are you waiting for?

Here’s a once in a lifetime opportunity to front run central banks and acquire your own gold at attractive prices before the curtain drops on paper money.


Jim Rickards
for The Daily Reckoning

The post Central Banks Driving Gold appeared first on Daily Reckoning.

Central Banks: Gold’s Greatest Ally

This post Central Banks: Gold’s Greatest Ally appeared first on Daily Reckoning.

You’re likely aware of the price action in gold lately. Gold has rallied from $1,591 per ounce on April 1 to $1,782 per ounce as of today. That’s a 12% gain in less than three months.

My earlier forecast was that gold would hit $1,776 by the Fourth of July. I guess I was a bit early!

Today’s price of $1,782 per ounce is the highest since 2012 and a 70% gain from the low of $1,050 per ounce at the end of the last bear market in December 2015.

The history of gold bull markets (1971–80 and 1999–2011) shows that the most powerful gains come toward the end of the bull market, not at the beginning.

That means even if you’ve missed out on the gold rally so far, you could still score huge gains as gold trends toward $10,000 per ounce or higher over the next four years.

As I’ve stated on multiple occasions, I didn’t just come up with that number out of the blue or to be controversial.

It’s simply the implied nondeflationary price of gold based on the M1 money supply and assuming it will have a 40% gold backing.

What’s driving this bull market in gold?

It’s not retail investors (apart from a small number who understand the dynamics) and it’s not institutional investors (institutional portfolio allocations to gold are typically about 1–2%).

Instead, the steady buying is coming from central banks (especially Russia and China) and from the super-rich, who typically store their gold in private nonbank vaults in Switzerland and other good rule-of-law jurisdictions.

The drive toward larger portfolio allocations to gold (in some cases up to 10%) is coming not just from the rich themselves but from their wealth managers and portfolio advisers.

This is a sea change.

For decades, wealth managers have rejected gold and pushed their clients into stocks, corporate credit and alternative investments including private equity. Recently all of those portfolio allocations have backfired. Equity markets crashed in March and are set for another fall soon after recovering over half the losses.

Corporate credit downgrades are at an all-time high and that market is being propped up by the Fed in nonsustainable ways. Private equity looks increasingly illiquid as IPO markets dry up and most hedge fund investors have badly underperformed.

This leaves gold as one of the best performing asset classes around.

But it’s still early. Here’s how I expect the process to play out…

As confidence in the dollar is eroded due to Fed money printing and congressional super-deficits, investors gradually look for alternative stores of wealth including gold.

These trends begin slowly and then gather momentum. As the dollar price of gold begins to soar, investors take notice. Even more people invest in gold, driving the price still higher.

Investors like to say that the price of gold is going up. But what is really happening is that the value of the dollar is going down (it takes more dollars to buy the same amount of gold).

This is the real inflation and the real dollar collapse most investors miss at the early stages.

Eventually, confidence in the dollar is lost completely, central bankers need to restore confidence, and they turn to some type of gold standard to do so.

We’re a long way from that point right now.

But if central banks, the super-rich and their advisers are all jumping on the gold bandwagon, what are you waiting for?

Gold’s worst ever bear market (2011–15) is behind us and gold is positioned for new highs of over $2,000 per ounce in the short run and much higher over the next several years.

The time to go for the gold is now.


Jim Rickards
for The Daily Reckoning

The post Central Banks: Gold’s Greatest Ally appeared first on Daily Reckoning.