Sunday, March 29, 2020

Getting Good And Accurate Economic News Is Not Easy

Obtaining good and accurate economic news is a huge challenge. The information flowing from the media or analyst is often so corrupted by bias or agendas that it can't be trusted. Another barrier to decent information is that these people tend to be so misinformed or lazy that they produce rubbish without conscience or effort. This is the reason we are given such silly explanations each day to justify market moves. This is also apparent in the way stock analysts at companies we have never heard of are given credit for moving markets.

Much of the lack of quality economic news stems from a general ignorance when it comes to economics and the fact in today's fast-moving manipulated markets it is impossible to come up with accurate details to account for what is happening. At times it is only by removing or evening out the peaks and valleys of a market move we can get a better picture of what is happening. Even looking back a consensus of why something occurred or who is to blame cannot be determined. It is often a case of too many cooks in the kitchen creating a stew that is uneatable with no sure culprit to hold accountable.

An example of unsound economic news can be seen in the way the media tends to overuse the "bad news is good news" line to explain why markets are moving in an illogical way. Things like running the same numbers for days when tallying the toll of those infected with covid-19 or simply contributing the market soaring to rumors is often a sign of  lazy stupid reporting. Taking the opinion of this or that source and claiming it accurately portrays what is happening occurs far too often. Still, if history is any indication, by the time these talking heads excitingly spew forth their lines with great conviction and a few of the latest buzz phrases, we are hooked.

Kudlow Is An Example Of A Man With A Mission
Another problem is that investors wishing to be out front of the market listen to lying or overly optimistic politicians making statements about a bill intended to do this or that. Often these so-called bills are not likely to pass as portrayed or have not even been written. To top this off, many of the numbers they put out make little sense. This "bungling of numbers" is seldom questioned but can further muddle a confusing or misleading situation. It is best to remain skeptical and withhold trusting these clowns.

Years ago I stumbled upon a book by Jay and David Levy titled, "Profits And The future Of American Society." It presented a dramatic new perspective on capitalism by focusing on profit and how economic growth flowed from people and companies making money. At the time it was written little did anyone think the profit stream would be drastically altered by the financial sector exploding in size. The fact this happened at the same time the government increased its share of the economy and deficit spending soared has obliterated price discovery and how we value things. Another factor skewing valuations was that tax laws were changed to make investments in intangible schemes such as stocks more enticing.

Leasing to many businesses and also backing a few start-ups over the years has allowed me to see first hand how, why, and what makes an economy tick. It is frightening how many people go into business clueless as to how money is made but focused on the perks and glamour of success. Realistically, the value of a company should be based on real profits. While things like growth potential and how a company is taxed should factor into its valuation, the issue of its real worth should be solidly rooted in the profits its operation is able to earn. A lack of understanding in economics and the capitalist system has allowed the financial system to become a far greater part of the economy than it should be.

Add For Covid-19 (click to enlarge)
Over the last several years low-interest rates have allowed debt to increase at around two and a half times faster than the GDP. This trend coupled with savings flowing into stocks and other forms of paper promises has caused the value of these intangible assets to soar. This translates into a great deal of what people view as wealth being attributed to the value of intangible assets rather than linked to concrete and visible items such as factories, real estate or gold. The intrinsic value of intangible assets is simply what people are willing to pay for them based on the buyer's faith and little more. Simply put, the way we value assets both tangible and intangible is very different.

The appearance of covid-19 has brought a bit of common sense back into market valuations. Even with the Feds massive injection of liquidity and emergency rate cuts investors are being forced to reconsider stock valuations. The global supply chain was already under pressure because of the US-China trade war but covid-19 has not simply added an additional strain and large disruptions in product flows but it has blown it apart. Even a bigger issue is that large areas across the world are now being put under quarantine or regulations that are closing or limiting the hours businesses can be open.

The importance of the current reset may be under-reported in the news. Many businesses, especially smaller ones, will have a difficult time getting a loan. This means they will immediately begin to slow payments to creditors and vendors creating a liquidity crisis. Another issue is many businesses are deeply in debt or lack sufficient funds to survive tough times. Ramping up the central banks' printing presses and adding to what is known as government or public debt may not bring about the hearty long-term growth we seek, instead, it may simply add to inequality. If anything this action highlights the economy has become far too dependent on deficit spending by the government. Add the recent 2,5 trillion dollars now slated for covid-19 relief to the chart above and this becomes very clear.

The mainstream financial media has a very strong bias to positive news and tends to spin what is before them to reflect the news as an opportunity for investors. In what appears an effort to stay in the good grace of the Financial-Political Complex they seldom question Modern Monetary Theory or bring up the subject of our ballooning national deficit in a serious way. This is not suggesting that quality economic news is easy to generate but the bar has been set far to low and few so-called reporters of economic news are willing to make an effort to raise it. The one thing we can all be sure of is that getting real and well thought out reports and opinions will continue to take a backseat to feel good fluff pieces cranked out for the general public and those eager to put their money at risk.

Friday, March 27, 2020

America's Government Gets "Big Fail" On Covid-19 Test

Because of hidden agendas, incompetence and inconsistent or a lack of testing we have no idea how far this has spread across the world. The covid-19 crisis has been poorly handled in America.  The first article on this site concerning this subject appeared way back on February 2, this was well before it was on most people's radar. As a matter of fact, it started to get a bit embarrassing to be this focused on a distant virus. Looking back I found that since then, eight articles had covid-19 or coronavirus in the title, others probably mentioned it as a factor in events that were unfolding.

Best Interactive Chart Ever (click to enlarge)
We could say the world has gone "corona crazy.' Whether it is an overreaction is difficult to say but one thing that stands out is that America's response has been an appalling series of flip-flops and disinformation. This pandemic has brought with it a lot of variables that are difficult to predict. Simply declaring this a war against covid-19 and pledging to win is no substitute for implementing a sound strategy. The government has failed both on the medical side and economically.

Italy and Spain remain the go-to countries for the truth of what is happening, they are just a couple of the few telling the truth. It is clear the fast-moving Covid-19 is spreading across the globe and just how bad things will become remains to be seen.  Bill Gates the founder of Microsoft which has studied the subject of pandemics and predicted that something like coronavirus was coming recently revealed his thoughts on what needs to be done. Gates indicated we face a major challenge.

 Politics And Grandstanding For The Masses
Like many Americans frustrated by how dysfunctional Washington has become, I vehemently opposed the second federal covid-19 economic rescue package. The 110-page bill, which Trump fully supported rapidly worked its way through Congress with overwhelming support and became law. The chamber approved the bill less than an hour after the text was released. This bill aimed at assisting millions of Americans directly was in addition to the $8.3 billion emergency spending bill already approved to curb the spread of covid-19. Two major reasons for strongly objecting to this bill were, we have no idea what it will cost and it missed its target while dealing a crushing blow to small businesses across America.

Following a major selloff in the stock markets, the White House and Senate leaders announced they reached a deal during the wee hours Wednesday morning on another massive stimulus package. Senate Democratic Leader Charles Schumer (N.Y.) proudly hailed the legislation as "the largest rescue package in American history." The bill which totals 883 pages is their answer as to how we prevent the nation from falling into a deep recession because of the coronavirus crisis. The Hill reports the Senate proposal will inject approximately $2 trillion into the economy. It will provide tax rebates, four months expanded unemployment benefits and a slew of business tax-relief provisions aimed at shoring up individual, family and business finances.

The celebration started with markets embarking on the largest one day rise in decades and this was before negotiations were even finished. Staffers worked into Wednesday morning to finish the text of the bill which was to be voted on before the ink was dry on the printed version. “At last we have a deal. ... the Senate has reached a bipartisan agreement," McConnell said during a speech on the Senate floor after 1:30 a.m. McConnell pledged the Senate would pass the bill later in the day. The legislation includes $500 billion for a major corporate liquidity program, $367 billion for a small business loan program, $100 billion for hospitals and $150 billion for state and local governments but the poorly crafted pork-packed bill does not stop there.

A major component to many Americans is that it gives a one-time check of $1,200 to Americans who make up to $75,000. This is the kind of "throw the kitchen sink at it" stupidity that drives many financially aware Americans crazy, individuals with no or little tax liability would receive the same amount but if you make $75,001 your screwed. When politicians go into full-scale pandering fairness is not an issue as long as they have the cover of calling it "bipartisan" and can claim things would be far worse if they had not taken action. It should be noted this bill limits stock buybacks by some companies but at the same time injects such a massive amount of fresh money into the economy many people expect it to send stock prices higher, how high and for how long has yet to be determined.  It must be pointed out, that two trillion dollars translates into $6,000 per man, woman, and child in America, and yes this is deficit spending!
Virus Curve (click to enlarge)
In order to protect the economy, President Trump has put out a timeline for when Americans should put this behind us and return to work. This may not be prudent or appropriate. This will not end well if we decide to put our heads in the sand. Using the chart at the right for a relevant comparison, we see, at this point, the US and several other countries are at the very start of the curve. This means we should expect things to get much uglier in the coming weeks.

While most of us are focused on ourselves and protecting those we love, a report from NBC News highlights the fact covid-19 threatens to inflict "carnage" on refugees around the world who often live in cramped conditions, lack access to clean water and are in countries with failing or stretched medical systems. This is also true in many poor and developing nations. Because of the absence of extensive testing at refugee camps in the Middle East, Africa or Asia, it's unclear whether the virus has already reached them and is rapidly spreading. Humanitarian aid groups and organizations told NBC News that from Syria to Bangladesh to Uganda, the people who have fled war and persecution are at risk, and only urgent international action can avert a catastrophe. Sadly, countries are so mired in their own problems little aid is forthcoming.

If you are into analogies, it could be said that we are all like frogs in a pot of water and the water temperature is slowly rising. I see a giant problem brewing. let us do some numbers. In a city of a quarter of a million people, some experts estimate 40% to 80% of people may get this bug. Of those American health officials say as many as 20% may need to be hospitalized.
So go with 50% catch rate= 125,000 infected
     go with only 10% hospitalized rate = 12,500
We sure don't have the beds in my area. Note, this is 5% of the population.
I'm not focused on how many people die - handling the care of these people alone creates a massive problem!

Readers of AdvancingTime should be aware that an article on March 8, predicted the corona-virus had the potential to foster a major liquidity crisis, call it a liquidity issue if you want, that would cause the system to freeze up as people and companies decided to, or were  forced, to hoard the money they have as fear grew that new cash would not be rolling in. The first article on AdvancingTime concerning the coronavirus occurred on February 2, when it was only a blip on the radar and contained to China where there were only 17,205 confirmed cases. At that time AdvancingTime warned it would make markets impossible to predict. I write this to remind you covid-19 has been a growing part of the landscape for some time. Like many of you, I will be glad when we can move on to other topics.


Footnote; Below is a list of covid-19 articles that have appeared on AdvancingTime.
    https://brucewilds.blogspot.com/2020/02/coronavirus-makes-market-impossible-to.html
    https://brucewilds.blogspot.com/2020/02/coronavirus-ignored-to-protect-stock.html
    https://brucewilds.blogspot.com/2020/02/cdc-rather-powerless-in-halting-spread.html
    https://brucewilds.blogspot.com/2020/02/coronavirus-to-hammer-japan-and-yen.html
    https://brucewilds.blogspot.com/2020/03/coronavirus-five-things-we-need-to-know.html
    https://brucewilds.blogspot.com/2020/03/impact-of-raging-covid-19-has-yet-to.html
    https://brucewilds.blogspot.com/2020/03/major-liquidity-crisis-likely-as-covid.html
    https://brucewilds.blogspot.com/2020/03/covid-19-rescue-plan-should-be.html

Monday, March 23, 2020

The Financial System Isn't The Economy - Mind The Gap

The financial system is not the economy even though many people do not recognize the distinction. This means the gigantic efforts by the world's central banks and governments to essentially "bail-out" both will prove somewhat ineffective. Covid-19 has become the catalyst for a major reset of both the financial sector and the Main Street economy, this article will attempt to give some clarity as to what we might find still standing on the other side of this crisis. Note the use of the word crisis, anyone who does not view the covid-19 now as a watershed event is oblivious to the world around them

Originally the title to this piece was "Mind The Lag-Time Gap - The Worst Is Yet To Come." You may call me Captain Obvious if you hone in on the later part of this title but the first portion is the most important part. We should make a real effort to remember to mind the gap between events appearing on the radar and when they actually impact day to day life. There is such a thing as lag-time, everything is not immediate in our fast-moving world, some events take time to play out. The covid-19 crisis is greatly complicated because we have no real idea of how long it will persist. Hints have been made, possibly to ready the population, that this could or will likely continue for months.

The Sell-off Has Been Dramatic (click to enlarge)
The scale, scope, and speed at which world markets have sold off and lost value as investors try to get in front of this thing has been dramatic. Global stock and bond markets have seen an estimated $25 trillion of 'paper' wealth erased in the last month. This has erased all the gains from the December 2018 crash lows with more of the impact focused on stocks than bonds. In its wake, the sell-off has stripped many people of their savings and jeopardized the future existence of many businesses and financial institutions.

On the flip-side of the carnage is the ramping up of promises that a flood of money and aid is forthcoming. All options are on the table to get money into the hands that need it, some of it in the way of adding liquidity, some of it as a gift to anyone with their hand out. The specifics are spotty at best but one thing we can be sure of is that those lobbying hardest will get the most. The questions that remain to be answered are, how well this will work and will this infusion of cash be enough?

This Has Become A giant Game Of Jenga
As the world faces the biggest financial bailout in history it is now being reported in the news the US, in conjunction with the Federal Reserve, will now lend up to $4 trillion to businesses affected by the coronavirus pandemic. "Working with the Federal Reserve - we’ll have up to $4 trillion of liquidity that we can use to support the economy," Treasury Secretary Steven Mnuchin. told Fox News on Sunday. What Mnuchin, a former Goldman Sachs executive, did not talk about is how dangerous these volatile  markets are for the average investor.

Unfortunately, as with most programs unleashed by the "Financial-Political Complex," we can expect much of the money to rapidly flow to enriching those atop the wealth pyramid. Another certainty is that when all is said and done those in charge will rapidly claim things would have been far worse if they had not taken such draconian actions. People have shown they have a very short memory when it comes to the truth.  Many Americans also have a difficult time understanding a large reason for the rapid growth of inequality is because the wealthy one-tenth of one percent of the population controls and shapes the nation's policy to their advantage.

So far covid-19 is a new entry on to the scene. The reality of how it will affect the economy has yet to be realized and will trickle down to society. What I deem the Financial-Political Complex will protect its own with a massive bailout under the guise of "the greater good." This extension of crony capitalism will throw just enough to the masses to silence their outrage. Large businesses will be the winners while the big losers again will be the middle-class, small businesses, and social mobility.

A few of the things that may change society are detailed below. Many people think the impact on labor force participation will remain mild with workers viewing all this as transitory. As the impact of COVID-19 take root and if activity fails to rapidly normalize, it is possible more workers may reevaluate their life and decide to exit the labor force altogether. The same will happen with many small business owners that come to the conclusion this is a sign to close their doors and retire. Covid-19 has fed fear and insecurity, these are not feelings that increase investors' desire or take on new risks.

While you hear about the massive aid package the Financial-Political Complex is concocting to prop up this mess we should not forget they are responsible for much of the damage flowing from this crisis. For years they ignored the growing weakness on Main Street and focused on rising GDP numbers that were driven by government deficit spending. Addressing this now is like trying to turn a battleship around in a lake the size of a bathtub, nearly impossible. If it can be done it will take a long time. No matter how much money they throw at this the economy will not turn around on a dime or spring back. Regardless of how the financial sector fares the economy is destined to feel a great deal of pain. 

We are in the second inning of a long game. It is only as this lingers that we begin to feel the full power of the lag-time effect. Anyone that thinks next month will be a return to business as usual and fails to mind the gap between expectations and reality is primed for disappointment. Too big to fail has become deeply embedded in our crony capitalist society and a key part of the Financial-Political Complex now running the show. If you are not part of this group I suggest you prepare to be thrown under the bus for "the greater good."

Saturday, March 21, 2020

Damage Done To Market Signals End Of Buy The Dip Era

The damage done to markets will act as a barrier to higher stock prices in the future. This should force investors to return to reality. We have crossed the tipping point with the destruction of small businesses by the government in the name of the "greater good." The heavy lifter, the great job creator, and the most productive part of society has been thrown under the bus. Most of the support being provided by the government is set to flow towards the most vulnerable parts of society, big business, and Wall Street banks. if anything small businesses are being asked to pay a great deal of the cost.

A few years back someone pointed out that a corporate chart indicating how a company works often ignores the truth of who is really making decisions and getting things done. For example, Fred may be the director of maintenance, and also the brother of the company's owner, this puts him in charge of deciding when to replace machinery, however, Todd the maintenance foreman actually make the decision based on how often units require repair. In this case, if you want to sell equipment Todd is the man you want to talk to. My point is that things are not always as they appear.

Severe Losses Have Been Abrupt (click to enlarge)
This is a very complex market and it is important to sort out who is selling, who is buying, and why. The motivation behind investors' actions speaks volumes as to where this market is going. It is difficult to argue there is a lack of visibility as to what lies ahead.  We often forget the important distinction that the financial system is different from the economy. We must realize that many of the remedies being pursued as an economic solution to this crisis are a massive tax that falls squarely upon the backs of small business. This will most likely come back to punish politicians and the bankers now forming plans to mitigate the damage caused by covid-19.

The fact is we are in a perfect storm. Years of malinvestment and over-leverage have combined with fear and a deadly disease bringing the economy to a dead halt. If the Fed had not stepped in with an unprecedented blast of liquidity-providing instruments and facilities, the global financial markets would have simply collapsed as a 6.5 trillion dollar funding gap closed in on itself. This resulted in an indiscriminate sell-off of all dollar denominated assets. It also triggered the first ever launch of virtually unlimited dollar swap lines between the Fed and all other central banks.

This doesn't mean the crisis is over, believe it or not, we are in the early innings of a brutal game. To those trained to "buy the dip," doing so could prove disastrous. Hopefully, we can look forward to the natural demise of this trading strategy which has been an American tradition since the market imploded in 1987 and Alan Greenspan propped it up. Do not be surprised if BTD which has destroyed true price discovery now becomes a huge factor in slowing the markets' decline and results in violent whipsawing between loses and gains. 

BTD Has Created A Problem (click to enlarge)
Do not expect BTD to go gracefully into the night. This time, if the markets have become too damaged to recover, it will most likely result in huge losses for anyone trying to pick a bottom. The saying, don't try to catch a falling knife may prove to be far better advice than buying each time the market notches it's way lower. I would suggest a person waits until the panic subsides and a clearer view of the future emerges before even considering stepping into the breach.

Low-interest rates tend to feed the animal spirits on Wall Street more than they stimulate Main Street. One question we must ask is, did the Fed create a new problem by pouring new stimulus into the financial system and rapidly cutting rates over the last few weeks? Saying, "failure is not an option" or "whatever it takes" while inspiring may not alter how events unfold. If people start seeing this as a sign they should re-leverage and leap into buying and taking on debt, watch out. Such actions would add a great deal of instability to markets that are already very fragile.

We are being told the economy will come out of this strong because of "pent up demand" to that I say, poppycock. The money given to intelligent people will mostly go to paying past obligations and things such as rent. As for large companies like Macy's, why would they want to rush out and open new stores? Instead what you will have is a huge number of debt defaults, stores and office space going empty, and closing businesses forced to sell off equipment for pennies on the dollar as they liquidate inventory at massive discounts.

The damage already inflicted upon the economy by covid-19 has pulled a key support block out of the debt pyramid. Today central banks are rushing in across the world to prop things up before we reach what is known as a "Minsky moment" when an unsustainable mountain of debt collapses in upon itself. To many of us who view the economy under "old school rules," this is where we are. The financial system has become a glorified pyramid scheme.

Last week was the kind that will try an investor's soul. Ironically at its end, I found myself on the phone with a young man thinking about getting into stocks for the first time and as a four-decade trader of commodities and stocks, all I could say is don't. History shows that at some point when inflation begins to exceed the rate of interest paid on savings people start altering their buying habits which creates a self-driving feedback loop. This appears to be where we are today and will not end well.

Thursday, March 19, 2020

Paper Wealth Is Vanishing Into A The Big Black Hole

Few people watch their investments daily but rather chose to peek at them every now and then. This is the main reason a lot more Americans are not waking up today sick to their stomach and in near panic from the devastation markets have wreaked upon their savings as trillions of dollars have vanished into a big black hole. After the carnage in the market today a young gal told me the market would jump right back, she knew this because her boyfriend, also rather young, worked for an accountant and knew about these things. Most likely they think this because in their short lives they have never witnessed anything but a market that always rapidly recovered and moved ever higher. This is the basis of, "buy the dip" which has been a market trading mantra for years and years.

The sad reality is when markets fall they sometimes do not come back. The article below looks at the damage and pain being foisted upon some average Americans nearing retirement.  Back in early 2017, I penned an article that delved into the subject of high-earning Americans, where their wealth came from, and just as importantly where it was stored. This got me thinking about the so-called wealth effect as well as how all that wealth was held. Many of the really big earners in recent years have benefited greatly from the surging stock prices as much of their income has come from financial markets and gains in equities. This also is true for the many working Americans that have invested in a 401K and other savings instruments.

Wealth Can Rapidly Vanish click to enlarge
Imagine the shock this morning of a fictitious couple named Joe and Jill Average that are nearing retirement with a net worth last month of around 250 thousand dollars when they check to see how they are doing after hearing "murmurs" the market has slipped. If three-quarters of their nest-egg was in the market, they will be horrified to find that the mere pullback of stocks in recent weeks has ripped away over 60 thousand dollars or around 25% of their wealth. 

Rising markets have become the pathway to a better future for many people. After more than a decade of rising stock prices, many people have come to assume this is normal and the trend would continue. When people have more than they need or want to put money away for a rainy day where do most store it? For many people, the answer is into some form of intangible investment that promises good returns. When rating people on a "wealth chart" by how many tangible assets they own you might be shocked to find much of the wealth people own is in the form of intangible assets that can be full of risk.
Safely Storing Away Wealth Not Always Easy

In our modern world, the possibility of cyber-crime or cyber-theft raises the risk to even a higher level but an even greater example of how wealth can rapidly vanish into a big black hole is evident in the recent stock market action where trillions of dollars are now simply gone. Paper wealth can be viewed as a promise of future value. Unfortunately, this leaves much of society and many rich individuals vulnerable to rapid financial loss if the tides of fortune shift or if values rapidly change.

Currently not only are we faced with banks paying little in the way of interest but we must also fear they or the government might reach in and seize part of our money. By adopting policies that spurred people to pull their money out of banks and other safe investments in search of higher yields we have driven up stock prices. Some of these stocks have reached unbelievable multiples.

People often do not understand money and wealth. Myths about both run rampant and become intertwined with deeply rooted personal feelings acquired or passed down from parents. These feelings often muddy and skew how people deal with wealth. An example would be anyone who felt deep down that money was the root of all evil would react to winning the lottery far differently than someone with the belief that you can buy happiness. I have even heard poor people say they didn't see much point in buying a ticket for a lottery of  several hundred thousand dollars because "that's not much money" Today the use of the B-word "billions" is so prevalent in society it is understandable many people live with distorted values.

Annuities, pensions, stocks and such promises of future payment tend to dominate the list of favorite vessels in which to store wealth and many of these are leveraged to maximize returns and garner higher yields on our investment. Cash is another option but holding it in your possession leaves one open to theft and means the money will earn no interest. What is often missing or overlooked is tangible fully paid for items and things that are likely to hold their value and in the direct possession of the owner. People tend to avoid tangible assets in their control because they are often inconvenient. Valuables can be a pain to have about and they often need to be insured which also calls attention to their existence.

Truth be told most people are not overly endowed with discipline this includes many people that amass a fortune. This often means that many wealthy people tend to "misplace" or lose track of where they have placed their wealth. Sometimes it is simply put into a system that is on autopilot. Years ago I purchased a property from a doctor on contract. The doctor having also bought the property on contract had me send the payments to the man he purchased it from so he would not be bothered. After many years I contacted the doctor to discuss a discount for a cash payoff and his accountant discovered the first seller had been paid off years before but continued taking the money. Needless to say, the doctor was shocked and getting his money back proved difficult.

When you subcontract out control of your wealth or turn it over to a money manager you often get promises but no ironclad guarantee. Confidence in a money manager can quickly be dashed, all the people invested with Bernie Madoff discovered just how suddenly things can go south and promises turn hollow. While it has become both fashionable and common in recent years to let someone who knows and specializes in financial planning and markets to control this segment of our lives I feel it is a big mistake and a dereliction of duty. If wealth came with a warning notice it would say, "Holder Beware, This Commodity May Vanish, Spoil, Or Grow Obsolete At Any Time!"

Sunday, March 15, 2020

Covid-19 Rescue Plan Should Be Vehemently Opposed

More than a few reasons exist to vehemently oppose the federal covid-19 economic rescue package. This is the hastily drawn up package, which Trump said he fully supports and is rapidly working its way through Washington on its way to becoming law. The two major reasons for strongly objecting to this bill are, we have no idea what it will cost and it will totally miss its target while dealing a crushing blow to small businesses across America. Still, because of politics, the measure passed in an overwhelming 363-40 vote in the House soon after Speaker Nancy Pelosi, and Treasury Secretary Steven Mnuchin reached an agreement.

 Politics And Grandstanding For The Masses
The 110-page bill is being painted as proof lawmakers could work together during a crisis after being sharply divided over party lines during the failed impeachment of President Trump.  By framing the poorly and hastily crafted pork-packed bill this way promoters are positioned to demonize those unwilling to support it. The chamber approved the bill less than an hour after the text was released. This bill is aimed at assisting millions of Americans directly and is in addition to the $8.3 billion emergency spending bill already approved to curb the spread of covid-19.

Jim Banks, a congressman from northeast Indiana was among 40 Republicans who opposed the bill. Interestingly, the rest of Indiana's nine-member delegation, six Republicans and two Democrats, voted in favor of the act which has been named "Families First Coronavirus Response Act." Banks claimed it was because "Some language will mean major harm for small businesses and our economy." Bank's office referred to a message sent to House leaders from the National Federation of Independent Business, which objected to a provision of the legislation that would require employers with fewer than 500 workers to provide paid medical and family leave. The question is, how many struggling businesses with two to twenty workers have the resources to weather this storm. 

90% Of Businesses Are Small (click to enlarge)
The bill scheduled to go to the Senate will provide free testing for the virus, expand unemployment assistance and increase spending on nutrition programs. Banks tweeted: "There is much in this bill we need to pass, but as the NFIB said in their letter of opposition, the bill would impose potentially unsustainable mandates on small businesses' hurting not helping the backbone of our local economies."

The NFIB correctly contends that "many small business owners simply cannot afford the cost of the new mandate at the same time as they experience increasingly slower sales." The advocacy organization said that many businesses "may not stay afloat" long enough to claim quarterly tax credits provided by the paid-leave provision. According to the bill, employers would have to provide 14 days of paid sick leave for at least two-thirds of a worker's pay. This applies to employees who have the coronavirus, are caring for a family member who has it or who need to care for children due to facilities being closed. For those now forced to take on this burden, this is enough to make their heads spin, unlike government agencies small business owners cannot turn to taxpayers when they can't pay their bills.

Below is a list of what this legislation promises to do:
  • Requires private health plans to cover covid-19 testing at no cost, and allocates $1 billion for testing for uninsured Americans
  • Ensures employers with fewer than 500 employees and government employers offer two weeks of paid sick leave through 2020.
  • Requires those same employers to provide up to 3 months of paid family and medical leave for people forced to quarantine due to the virus or care for family because of the outbreak
  • Offers payroll tax credits for employers providing those leave benefits
  • Puts $1 billion into emergency state grants for providing unemployment insurance benefits. It includes $500 million for staffing and logistical costs for states, with an additional $500 million reserved for states that see a 10% increase in unemployment
  • Puts $500 million into food assistance for low-income pregnant women and mothers with young children, $400 million into local food banks and $250 million into a senior nutrition program
  • Suspends the Supplemental Nutrition Assistance Program work requirements for the duration of the crisis

In an effort to silence GOP opposition Trump wrote this bill “will follow my direction for free CoronaVirus tests, and paid sick leave for our impacted American workers.” He also said he directed Mnuchin and Labor Secretary Eugene Scalia “to issue regulations that will provide flexibility so that in no way will Small Businesses be hurt.” Many political pundits see Trump's declaration of a national emergency on Friday and his endorsement of this package as an effort to mitigate damage from his administration's initially weak response to the crisis.

In what appeared a contrived stunt to rally stocks, Trump declared a national emergency, 15 minutes before the market closed on Friday. In his declaration, Trump said he would temporarily waive the interest on federal student loans but more importantly directed his administration to buy oil for its strategic reserve. This caused oil and stocks to soar. The reality and fears of widespread economic disruption with workers, either sick or laid off has resulted in all major U.S. stock indexes dropping by more than 8% for the week despite rising on Friday.

As expected, in a series of tweets, the president said “I fully support” the legislation negotiated by Pelosi and Treasury Secretary Steven Mnuchin and said he looks forward to signing it “ASAP!” The Senate has canceled its recess plans and is expected to take it up Monday. Senate Majority Leader Mitch McConnell said senators “will need to carefully review” the proposal. “But I believe the vast majority of Senators in both parties will agree we should act swiftly to secure relief for American workers, families, and small businesses,” he said.

4,000 Queue For Hours At Chicago O'Hare
It is difficult to think the incompetent clowns in Washington have a handle on the cost of this bill or that the Congressional Budget Office has had time it asset it. The information is so sparse few of us are able to get details about the language it contains but one thing is certain, the politicians are rushing to pander and pour forth "free stuff." Sadly, few are considering the unintended consequences that will flow from their so-called efforts to blunt the economic damage of the global pandemic.

Never underestimate the stupidity of government. An example of their lack of competence can be seen at the 16 US airports approved to handle Americans returning to the country. At these airports, unimaginable long lines of people crowd together for hours and hours without masks. This is also playing out in other airports, a passenger arriving at JFK confirmed that they were told to share pens and there was no hand sanitizer. "So if we didn’t have the virus before, we have a great chance of getting it now!" one passenger stated.

The reason to vehemently oppose the "Families First Coronavirus Response Act." is that it is ill-conceived. Why will anyone want to work, especially government workers when they can get paid to stay home? How do you staff healthcare facilities when nobody comes to work? The greatest irony of this farce is that small business owners will be the first to take it on the chin. Privately-owned companies with fewer than 20 are the backbone of America and what makes it work. This means Trump may not understand at what point a small business becomes a medium or large business or simply doesn't care. Ironically, the members of the NFIB strongly supported this same President that is throwing them under the bus.

Wednesday, March 11, 2020

The Delicate Balancing Act To Protect Wealth Is Full On

We Are Walking A Tightrope
The delicate balancing act to protect wealth is now in full crisis mode. The key players are central banks across the world and the corrupt bankrupt governments they seek to protect. At risk is the global financial system that has served them so well over the decades. For years these so-called guardians of the economy have siphoned wealth away from the many and into the hands of a few. Now unless they can pull a few more rabbits out of their hats rubber may hit the road.

President Donald Trump announced in a White House news conference that he would seek payroll tax relief and other measures to help businesses deal with the coronavirus outbreak. The Associated Press reported Trump said they were discussing “a possible payroll tax cut or relief, substantial relief, very substantial relief, that’s big, that’s a big number,” Administration officials said the White House wasn’t ready to roll out specific economic proposals, CNBC reported. Trump also said he was seeking help for hourly-wage workers to ensure they’re “not going to miss a paycheck” and “don’t get penalized for something that’s not their fault.” These were in reaction to a large market drop as the covid-19 outbreak spread.

President Trump's proposal to cut payroll taxes is targeted at reinforcing investor confidence in the hope it will give markets a reason to rebound. It ignores the fact America's deficit spending is already out of control. An analogy would be for a near-bankrupt parent giving their irresponsible child a raise in their allowance after finding they had been wasting money on lottery tickets. Simply put this does not get to the root of the problem and will just increase the national debt. Other efforts to stimulate the economy may fare no better in their overall effect. It is difficult to envision any program that efficiently gets economic relief to those most hurt by covid-19.

This translates into the idea we once again may be about to test the theory that "this time is different." Like many of those skeptical of the financial house these folks have constructed through new creative and untried methods, I wait and watch. How creative they will be in coming days has yet to be determined. Make no mistake, this is about keeping asset prices high and rising. It has nothing to do with returning markets to the principle of true price discovery which is the bedrock of a free, healthy, and open economic system. Unfortunately, to many people, asset value has become more important than the economy and those in charge of such things have lowered interest rates and printed money to support them.

This has created a false economy. Paper promises and things such as propping up the holding's of  pension funds has become increasingly important in maintaining the illusion there is light at the end of the economic tunnel. While central bankers claim to embrace a goal of 2% inflation they have to be tickled pink they have deceived the masses into believing it has not been achieved. The problem is that the moment people think inflation is on the rise these banks will lose the ability to continue their policies of easy and cheap credit.

If covid-19 does become the catalyst for a long-overdue reset of the global financial system, the amount of real wealth that does escape the crisis will set the bar that determines the rate of inflation or deflation in the coming years. Pensions, annuities, and even investments in stocks and such all fall into the area of paper promises that are often recorded somewhere far from sight as a digital entry on a computer. An enormous amount of wealth has been poured into intangible assets based on the faith they are a safe place to store it.

In the years just before the 2008 financial meltdown, there was a great deal of talk about the "Wealth Effect." In 2007 many economists gave a lot of credit for the strong economy to rising home prices making people feel wealthier. This is because the wealth effect tends to drive consumers towards going forth and confidently buying things, This underlines why protecting asset prices is so important. While many people do not own stock directly many people do indirectly through various saving vehicles or from investing in retirement accounts. Many pension funds are also heavily invested in the markets. A falling market would most likely cause consumers to feel poorer and cause them to reduce spending.

While it may be a stressful exercise it is important to occasionally think about the many or multitudes of places your wealth might vanish into or how it could seep away. Much like a shell game where wealth is transferred in our modern society wealth is always on the move. It zips across borders at the click of a button and just because you deposit it with a local institution does not mean it stays in your community. We saw shades of this decades ago during the savings and loan crisis when huge beautiful buildings were constructed in certain areas from wealth transferred in from other parts of the country. Those areas were the big winners rather than those holding worthless notes when the loans used to build them went into default.
Be Skeptical, Be Cautious, Get Smart!

Wealth and how things are valued is not constant but fungible and constantly changing. wealth comes in many forms, it can be held in the form of paper, promises, or as something more tangible and real such as property or goods. Vessels to store wealth such as IRAs and 401 accounts have grown at a massive rate during the last several decades and were relatively minor players until recently. Currencies, also known as fiat money, are also just IOUs or paper promises.

Today tens of trillions of dollars worth of these IOUs are sitting in offshore banking accounts in places such as the Cayman Islands. Today government and businesses are borrowing hundreds of billions of dollars each year by issuing bonds some that will not return investor's money for decades. Today homes, apartments, and buildings are being built, some poorly constructed, with loans guaranteed more or less by the American people. Today America's national debt is over 23 trillion dollars and is rising. Today currencies such as the euro and yen are even more fundamentally flawed than the dollar.

I could do this a bit longer but I suspect I've made the point. Defining wealth is one thing but it is important to delve into its nature to truly understand just how elusive it can be. I hate to blow a hole in the idea that you can safely tuck your money away in an offshore banking account but I have to ask where all the money deposited in the Caymans really is. Banks do not just sit on deposits and keep them safe. The bottom-line is that it is up to each of us to protect our wealth. The vessels where we store our wealth can be very precarious. Be careful out there and remember that capital preservation is job one.



Footnote; In the past, I have written several pieces about subjects such as writing off the rising amount of bad debt, and how debt is like a mirage moving into the distance, how bad debt is resolved. These are subjects that may soon rise in importance if we move into unstable times. The links to these posts are listed below.
 http://brucewilds.blogspot.com/2015/12/writing-off-rising-amount-of-bad-dept.html
http://brucewilds.blogspot.com/2017/09/how-bad-debt-is-resolved-hint-it-is-not.html

Sunday, March 8, 2020

Major Liquidity Crisis Likely As Covid-19 Spreads

The corona-virus has the potential to foster a major liquidity crisis, call it a liquidity issue if you want but the system could be on its way to freezing up! People and companies may decide to, or be forced, to hoard the money they have when they begin to fear new cash will not be rolling in. Paying existing bills becomes difficult when you are not working or find you must close your business for an extended length of time. At this point, the one thing that is crystal clear is that it is impossible to know how severe this will be or long how long this will go on.

Liquidity Is The First Casualty In A Financial Crisis
As to the long and short term economic consequences of this outbreak, it is difficult to say. certain sectors of the economy will without a doubt take it squarely on the chin. Businesses involved in events or dependent on people gathering or moving  about are in peril. Also, the disruption of production and deliveries will have a massive effect on business. Many small businesses simply do not have the financial resources to absorb losses and weather this storm. this means they will fail. This will create a large number of defaults on loans to lenders, suppliers, workers, and landlords. 

All these people also have financial obligations that will continue. Things such as taxes, insurance, utilities, loan payments, and more. Those businesses and people in the weakest condition will be unable to borrow and this creates the possibility of a domino effect starting that could ripple through the financial system. It is difficult to argue this won't develop into an adverse feedback loop. History shows that banks have a way of failing us when we need them most and that is why liquidity is generally the first casualty in a financial crisis. This coupled with supply line disruptions and the reality that if payments are not made goods do not get shipped is most problematic.

A huge part of the problem is the same massive gains leverage brings, also showers us with huge losses that paralyze both individuals and financial institutions. A lot of leverage has built up within the financial system since 2008. This means that high yield bonds suffer, and anything, person or group with less than stellar credit finds they are unable to get new money and are forced to watch as even existing credit-lines are cut. During even the minor market pullbacks often new loan issuance grinds to a complete halt as lenders adopt a more "cautious" attitude towards risk.

The bottom-line is banks do not like to loan money to those that need it but prefer to line the pockets of those who dwell in their inner circle. This inner circle is comprised of big business, Wall Street, bankers, and those with connections. It means  that many of the credit-lines that existed prior to 2008 have gone the way of the dinosaurs with banks claiming new government regulations are to blame for the way they do business today, this is especially clear in the commercial real estate market. CEO Chris Maher of New Jersey’s Ocean First Bank told Reuters a few years ago that,
“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”
This is why even if we do not know what the future will bring in a financial crisis when liquidity drys up cash rapidly becomes king.  When negotiating, the one-word people wanting to reach an agreement don't want to hear is "IF"! This is why I will never call the holder of cash stupid unless it is during a long period of massive inflation. With this in mind, how well banks fare if assets retrench will depend a great deal on the collateral they have glommed onto. Falling oil prices are already putting pressure on a slew of oil patch loans and bonds and it is also important to remember historically banks have been poor managers of any tangible assets that require day to day care.

In Late 2018 The "Smart Money" Exited Fast
For those many bulls crushed this week in the wild rush to the exits, it is too late. We don't know how long this downtrend will last but as usual, it is the slow movers and common folks that will suffer its brunt. If the chart off to the left is any indication, it seems much of the "smart money" exits the market before things get really ugly. The biggest problem the bulls face is the carnage may be far from over this is exacerbated by the fact many shorts got out of the market long ago and today many traders are playing on borrowed money so the margin calls will be fierce.

As noted above, small businesses simply do not have the financial resources to absorb losses and weather this storm. These are the stores, shops, and line the streets of our communities. Main Street has long been ignored even abused by Washington and our US Postal Service which drives a dagger in their hearts by delivering Amazon packages on Sunday. No fast easy fix is available for these folks during a liquidity crisis. Trying to target money to this sector means rapidly analyzing hundreds of thousands of small concerns that keep their records and recipients in shoe-boxes. It literally means determining which businesses are worthy of loans and which have no future. At one time small local banks did this but that link has diminished in the era of big business.

This means the Fed dropping interest rates, creating more slow-moving government programs to be incompetently administered, and pouring more money into the system so people can pay past debts may not move us forward. a major liquidity crisis could usher in a period that will someday be referred to as "The Great Reset" where values are shaken to their core. In this particular case, it means that assets such as stocks could take it hard on the chin and not recover for decades when adjusted for inflation. The stock market surge since 2008 has reinforced the myth that stocks always quickly recover, however, Japan stands as evidence this is not true.

All those owning shares of GE, GM, (pre-2008 GM shares lost all value) and a slew of other companies caught up in the last crisis will confirm that holding on to an investment does not always make you whole. With liquidity on the wane and traders rather nervous this might be a bad time to try and catch a "falling knife" a market axiom for trying to pick the bottom in a falling market. While the idea of buying stocks when the market is out of favor sounds great pulling the trigger is difficult in an unstable market which causes many investors to alter their plans. Be careful out there, and remember capital preservation is job one!

The illusion that covid-19 would be a nothing burger is beginning to dissipate. Initially, President Trump had tried to shrug this off as "no big thing" and continues to boast that "We have a perfectly coordinated and fine tuned-plan." This narrative is rapidly losing validity as huge areas in America declare they are under various states of emergencies. Events have grown to where Trump's fantasy-land approach is in disarray, his "See, Hear, And Speak No Evil" method of containment has proven disastrous. The fact is, if all goes poorly in the coming months, covid-19 may someday be looked back on as Trump's Katrina moment.

Saturday, March 7, 2020

Impact Of Raging Covid-19 Has Yet To Show Its Face

The fast-moving Covid-19 is spreading across the globe and just how bad things become remains to be seen but it will be ugly. It now appears the new coronavirus may be significantly different from Sars. Scientists have discovered the new virus has an HIV-like mutation that increases its ability to bind with human cells. This ability could be up to 1,000 times as strong as the Sars virus, according to new research in China and Europe. This discovery could be a key that helps explain not only how the infection has spread but also where it came from and aid in designing drugs to fight it.

Pandemic Alert - This Is "Just The Start"
An article in the South China Morning Post reports scientists said in a recent paper that this new virus uses an outreaching spike protein to hook on to the host cell. Normally this protein is inactive. This finding suggests that 2019-nCoV [the new coronavirus] may be significantly different from the Sars coronavirus in the infection pathway it employs. Compared to the Sars’ way of entry, this binding method is “100 to 1,000 times” as efficient, according to the study. Just two weeks after its release, the paper has already become the most viewed ever on Chinaxiv.org, a platform used by the Chinese Academy of Sciences to release scientific research papers before they have been peer-reviewed.

It is important to acknowledge that propaganda has gone full tilt and China's Communist Party is not telling the truth. An article that explores "group-think" in China today delves into how decades have created a society conditioned to be manipulated.  China is busy playing the long game and now pointing at other countries as having caused this and the World Health Organization (WHO) is in their pocket. The bottom-line is that a lot more testing is needed from open and honest countries before the truth. Sadly, when it comes to this Japan may even be unreliable because it has so much resting upon the upcoming Impolitic games. Italy and South Korea currently may be the best place to see how nasty things really get.

As for the public reaction at this time, it varies widely, from the unconcerned to the more intense view noted by a person that commented;  Danish Maersk Shipping says that only 50% of Chinamen can work, a billion and a half? (800 million sick or dead?) Bad getting worse...
There won't be a China when the virus has run its course. China is already finished. The entire country is a wasteland full of corpses by now.
>Up to 24-day incubation, no symptoms showing during this time
>Contagious during the asymptotic period, spreads without you even knowing you’ve got it
>Spreads via air, contact, droplets, water, feces, lives on surfaces up to 9 days
>Causes viral pneumonia, organ failure, the high death rate
>No vaccine for any Corona type virus has ever been successful, even after 18 years of trying
>No treatment or cure, you either survive or you don’t
>If you do recover, no immunity, can get it again, worse the 2nd time
>International flights and travel still continuing, business as usual


The above comment appears very extreme but does raise some questions. With coronavirus having become such a huge issue I thought it might be a good idea to include a link as to what a couple of fellas with many years of "feet on the ground" experience in China have to say on the subject. Their YouTube video at this link; https://www.youtube.com/watch?v=7MFoS-M4uF0 is very important in that it adds credence to the notion China has been far from transparent. North Korea and Iran are also bad places to look for truth. Still, Iran has been more open than some people expected.

Iran Has Been More Transparent Than Expected
It has been reported that Iran Health Ministry spokesman Kianoush Jahanpour claims the large number of new cases is due to more labs handling virus tests. He also warned that the public should expect more cases in the future. What was not said is we will never really know the true number of infected individuals because people with minor symptoms will never be tested and many people may never receive proper healthcare.

A big part of getting real information about how fast this virus is spreading comes from the fact we simply don't know. Slow-moving incompetent governments with strong agendas generate and control both the data and the narrative. Whether the goal of a government is to limit panic, deflect criticism from its failings, or simply generate the impression they have control of the situation we pay the price. The long latency period before someone shows symptoms makes it is quite possible for a person to be carrying the virus but show no signs whatever when they arrive at the airport and pass through screening.

In Milan, I Ask Do They Need The Guns?
While economies around the world are being shaken by the coronavirus markets are also coming up against the same lack of real information when it comes to assessing the real damage being done or how long it will last. As the title of this piece indicates the impact of this raging virus has yet to show its face. It may be years before we know the extent of the carnage this pandemic inflicts upon financial markets as well as the streets where people live. Covid-19 may be the catalyst for a global economic reset long overdue or simply a huge bump in the road.

Until now Trump and his administration have come across as rather evasive over the full extent of the corona crisis. It appears this is to bolster the flagging stock market which the President often sites as proof of his great leadership abilities. In a recent press conference, the President sidestepped the question of whether we might lock-down whole cities in America as they have in other countries. We have also seen those in charge of the US response pushing back the idea of the public buying masks because healthcare workers have a greater need for them. Vice President Pence has also had to come clean on the fact the CDC and others in-charge of testing have not done a lot of tests because they were in short supply and the problem has not been resolved as promised. 

The governments and institutions in charge of formulating a response are not fine well-oiled machines. Because of hidden agendas, incompetence and a lack of testing we have no idea how far this has spread across the world. We also have no idea how long it will stay with us. Adding to the problem is that many areas have few health care facilities as well as the previously mentioned shortage of test kits. Here in America, until recently, the CDC would not test a person for the coronavirus unless they had traveled to South Korea, China, or Italy. This includes even those with visible symptoms. What has shown its face and been revealed is just how unprepared we are for such an outbreak and what a miserable failure the WHO has been. We should thank our lucky stars this Covid-19 has not up to this point proven far more deadly than it has.

Thursday, March 5, 2020

Fed Chairman Confirms Fed's Role As The Great Enabler


At Best, The Fed Is Simply A Flawed Institution
As questions swirl about the Fed's independence Fed Chair Powell has been busy trying to explain his reason for the  "emergency" 50bps rate cut. Regardless of what he says Fed Chair Powell has confirmed the Fed plans to continue its role as the great enabler. This means central banks across the globe can now lower their rates or do additional stimulus without damaging the delicate balance in the relationship in the value of one major currency to another. This is a delicate balance they have long held in check to stabilize the financial system and add credence to the myth no major currency can fail.

            Powell said,  “My colleagues and I took this action to help the U.S. economy 
            keep strong in the face of new risks to the economic outlook.”

Whether Powell succumbed to pressure from the highly critical words of the President for not acting immediately or fear the coronavirus would take a toll on the economy is not clear. As Powell tried to explain his actions, many of us who pay attention to such things cried "Bullshit." Not only is a rate cut uncalled for at this time, but because it will also do little to strengthen the economy. What it will do is continue to prop up asset prices and encourage risk-taking and malinvestment. This is a big deal and may even result in more negative interest rates across the world which could create greater problems.

In the Austrian business cycle theory, malinvestments are badly allocated business investments, due to the artificially low cost of credit and an unsustainable increase in the money supply. A strong case can be made that we already suffer from far to much leverage in our markets and this rate cut only encourages savers suffering from low-interest rates to take on more risk in search of higher yields. It has been pointed out on many occasions that low-interest rates do not extend down to low-income individuals with poor credit and many people fall into this category. Instead, over time these rates fuel inequality and punish the poor. Unfortunately, the concept that a rising tide floats all boats or trickle-down economics tends to heavily favor the rich. 

We see this in housing where few of the new apartment construction funds are generated locally and much of the building is no-longer based on real need but centered around the whims of huge real estate companies. This is part of the reason roughly 80% of new apartment construction is now for the high-end luxury market. Again the government and Wall Street money is driving this train. While retailers close and large buildings go empty across the land new buildings are being put up on speculation and bogus public-private partnerships are plowing vast sums of money into projects geared to compete with those that already exist. the fact is all across America the Fed is putting the small guy out of business.

Feds Low Rates Have Enabled This (click to enlarge)
Of course, the elephant in the room is the stock market and not the economy. When people like Trump point to the market as proof that all is well they put stocks in front of the real indicator of our economic strength which is the middle and lower class. The disconnect between the working people and the financial community is apparent in the difficulty people with small businesses have getting loans or financing a project while big business is fed billions of dollars by the banks and Wall Street. If anyone is losing confidence in the system it is these people. 

As you witness wild market swings and gyrations now taking place, it is important to realize this is part of the process necessary to break the well-ingrained habit of "buy the dip." This method of trading has worked since October 19th, 1987 when the Dow Jones Industrial Average (DJIA) dropped 22.6 percent in a single trading session. That is the day the actions by Fed Chairman Greenspan galvanized the mantras "buy the dip" and "don't fight the Fed." Greenspan did this by affirming the Federal reserve would be there "to serve as a source of liquidity to support the economic and financial system." 

The trading patterns flowing from investors buying the dip have become ingrained in the algorithms embedded deep inside the computers that drive much of the stock market's action. As noted at the beginning of this article, to the chagrin of those with a negative view of the Fed, Powell has confirmed the Fed plans to continue as the great enabler allowing central banks across the globe to lower their rates or do additional stimulus without weakening their currency compared to the dollar. I continue to contend this explains the recent weakness in the dollar and the strength in the yen as wealth continues to flow out of China.

The rapid expansion of debt and credit during the last decade could not have occurred without the Fed being complicit. When things move too far in one direction adjustments do occur. Do not be surprised if the dollar again jumps higher as the reality sets in that many countries will do far worse than America in the coming months. For now, we watch and wait while the market again tries to discover its true value both here in America and across the world.

Monday, March 2, 2020

Next Economic Downturn May Last Forever And A Day

Market Manipulation Has Created Big Problems
Based on how Japan has fared over the last several decades it is difficult to see the green shoots of a global economic spring forth as a result of lower interest rates. In fact, the next economic downturn will likely envelope the planet and may last forever and a day. This is because central bank intervention and manipulation often carries with it negative unintended consequences. People often forget how lucky Japan has been during its trying times to be located next to China. Because of China's years of booming growth, Japan has been able to mitigate much of the pain that occurred when its economic bubble burst in 1992.

In the decades since, Japan's stock market has never again come near the lofty peak it hit back then. During the years after Japan's fall from grace, it was able to soften the impact of its economic problems by strengthening ties with rapidly growing China which needed help in developing its export-driven economy. Today many people feel the global economy is in a bubble eerily similar to the one experienced by Japan before its implosion. The question is not whether the market and economy are about to undergo a massive reset but when. Concern is also growing as to how deep, painful, and long the next downturn will last.

A huge factor in the world trudging forward following 2008 is the massive growth in the money supply and debt over the last several decades. This growth in debt and credit has exploded making the financial sector a far bigger part of our economy than it should be. The economy has become more about asset values than solid growth in production, this has added to inequality and this does not create a healthy environment for investors. Much of this trend has been predicated on central banks continuing to move interest rates lower and lower. While rate cuts, tax cuts, and deficit spending can temporarily mask economic weakness or halt declining asset prices they come at a price. This can be seen in the way they destroy true price discovery.

Following the financial crisis of 2008, governments and bankers have joined together to form the "Financial-Political Complex." Years ago President Eisenhower warned the American people about the Industrial Military Complex, but nobody warned us of this new threat. Instead, we were told to embrace the closer ties between the bankers and government officials as a good thing. While this evil alliance halted and reversed the carnage taking place in the stock markets it did little to solve the core issues we faced, in fact, by allowing the government to ignore and avoid necessary reforms it has made them far worse. While market manipulation has created a wealth effect it has mainly enriched those at the top.

We have dodged many economic challenges since 2008 as the so-called economic recovery grew long in the tooth. Time after time, the creative folks that make up the Financial-Political Complex have been able to pull rabbits out of their hats and manipulates asset prices ever higher. This has extended the illusion that all is well. Today, they are faced with a new challenge, the coronavirus, it has battered markets as it spreads across the globe. This monster has halted travel, put hundreds of millions of people into weeks of lock-down quarantines, disrupted supply chains, and respects no borders.

The economic impact of this event cannot be simply brushed aside or denied. Because it strikes at the very heart of  the economy it cannot be easily fixed by lowering interest rates. It attacks both supply and demand as well as production and productivity. It will also hit hard the small businesses that form the backbone of our communities and make things work. While large companies can get loans and money from Wall Street and banks, small business is often shunned by both as an area where it is difficult to make a profit. Most small businesses with just a few workers do not have the financial resources to suffer through weeks or months where employees don't work and they have no income. In most cases, their bills will continue to roll in and this means many will be forced to close.

On Monday the Financial-Political Complex again defied the markets will by thwarting its effort to correct. The BOJ which already owns 80% of all outstanding ETF's bought a record 101 billion yen of ETFs to stabilize the market. China's PBOC also jumped in with promises of support and so did the IMF. This was followed by Kudlow and Mnuchin calling for Fed Chairman Jay Powell to do what Trump wants, which is to rapidly lower interest rates. Near the end of the day, Trump was able to shore up the markets by voicing an optimistic tone about progress on vaccines and treatments. All this resulted in the Dow finishing the day a massive 1,850 points off its overnight lows.

The problem is that for a decade the actions of the Financial-Political Complex have destroyed true price discovery and increased inequality. Their policies have rewarded the same group of people, banks, and institutions that created many of our financial problems. It is time they face reality and admit they are on the wrong path. The argument all this has been done for the greater good is beginning to fall on deaf ears as confidence in the financial system weakens. This can be seen in the Sanders for President movement, a growing number of voters have joined Sanders in demanding change, when he calls for a revolution they hear him, and say yes.