Sunday, July 5, 2020

Wall Street Soars While The Real Economy Slowly Dies

Main Street is the real economy that exists far from Wall Street. It can be seen in the large areas of America where most of us live. After twelve long years of near or zero interest rates, massive government deficits, and watching tons of money and stimulus being poured into the economy we remain mired in slow growth. On top of this, we now are seeing covid-19 monkey hammering many sectors of the economy into submission. Small businesses have taken the brunt of this assault. The demise of millions of small businesses underlines  the bleak picture we face, this means unpaid rents and more empty storefronts as Main Street withers on the vine. Until now much of the damage has been masked by a massive government giveaway. Unfortunately, the damage all this has wrought will become apparent over the coming months from the strong headwinds facing our economy.

The Financial Sector Has Grown Too Large
Today the financial sector plays an oversize role in our economy as savers poured money into paper promises such as pensions, bonds, and stocks. Our economy continues to be propped up by a combination of unhealthy policies which include massive government spending on top of the artificially low-interest rates and easy money. This has allowed the mega-rich and politically connected to thrive while a huge majority of Americans wither on the vine. The price of stocks and action on Wall Street should not be confused with what is happening in homes across America.

The real economy is neither vibrant nor healthy and current trends should give us pause. An example of this is seen in agriculture. Even if you don't farm for a living it is important to realize that farm income is not contained in a closed-loop but spills into other parts of the economy, this is true in all of the sectors of our economy. An even bigger issue is how online giant Amazon is allowed to decimate retailers and small businesses aided by the USPS and governments granting it special rates, privileges, and tax abatements. In many parts of America, Wall Street money has become the largest obstacle for small businesses trying to remain competitive. How does a small business abandoned by the banking community compete with companies able to access billions of dollars of low-cost capital?

The truth is small business owners often tied to brick and mortar are forced to wear many hats and their workers are often required to perform several different and distinct tasks. This often means large companies are better candidates for utilizing robots and automation as a way to reduce labor costs. This means a company such as Amazon gains a huge advantage over small and local businesses and helps explain why its CEO Jeff Bezos recently endorsed the idea of a higher minimum wage. For Bezos, this is a bonus in that it will help eliminate competition all across America as he doubles down on adding more robots to his workforce.

Click On Image To Enlarge
It is important to remember that it is not uncommon to see a time lag before the impact of events is truly revealed, this is why a lot of people will be surprised and shocked by the reality that is about to unfold. Government programs to prop up the economy can only mask the truth for so long. With the demise of so many small businesses unemployment which has skyrocketed is here to stay. We can expect many of the employers that remain in business will be doing an about-face on how they view staffing and hiring. For the last several years because it has been difficult to find workers many employers have carried more people on their payrolls than they really needed as a sort of "insurance" in case someone quit. Employers have been forced to pay high wages for workers residing at, shall we say, the bottom of the barrel. These workers often carry so many bad habits that in many ways they are more trouble than they are worth. But those days are over.

We are about to see the problems in the other sectors of the economy raising their ugly heads and dish out massive pain. When the temporary props, such as the $600 a week to the unemployed, stimulus checks, the Payroll Protection Program (PPP), and aid to State and local governments, come to an end, look out below. These programs being used to move us forward will not gracefully expire, but merely set the stage for another round of props perpetuating this false economy to evolve. In the end, our future has a way of being tied to reality and certain economic laws as well as laws of nature that hope and delusion cannot defy. While these bonds can be ignored for a time the force they have over us at some point will suddenly pull us crashing to the ground.

For decades the financial sector has been given rule over the real economy and over events happening in the shops and stores throughout the land. In an effort to stay rooted in reality we should ponder the possibility that we are being played or duped by the financial sector. This includes not just how strong the economy really is, but as to the links and bonds with the economy through both financial institutions and the government. The real economy that lives beyond our financial institutions may be in a death struggle. Those in power tend to warp and skew both numbers and future projections in a self-serving way. A combination of low-interest rates, government spending, and easy money coupled with massive stock buybacks have given many people a false impression all is well, but looking at the numbers and beyond it becomes clear something is dreadfully wrong. 

Today we see a landscape of empty and under-leased buildings that once housed thriving businesses that provided Americans with good-paying jobs. This makes it difficult to think things are getting better. When looking at new job formation details show the growth in low paying part-time jobs and many people have left the job market, many too retire early because their skills are no longer needed. To shed even more light on our woes we only need to take a closer look at auto sales, 31% of those buying cars are taking out sub-prime loans and these loans are being stretched out far longer than ever before. Student debt continues has grown at an alarming pace and will affect the disposable income of many of our youth for years to come. Ironically in stark contrast, job opportunities are on the wane.
Empty Storefronts Are Far Too Common
On more than one occasion the Fed has noted its concern that lower stock prices dampen consumer spending and damage the concept of the wealth effect which drives consumer spending. Far too little attention has been paid to how consumers are spending their money but the focus has been on the amount spent. This translates into the Fed going down the path of propping up valuations rather than focusing on the health of the economy and what is best for it in the long run.

Promises have been made, and expectations have been raised that the economy will power through, but are they realistic? After twelve  long years of near or zero interest rates, massive government deficits, and watching tons of money and stimulus being poured into the economy we remain mired in slow growth. Now, the weight of carrying a large number of unemployed and people who have been dropped from the workforce is about to wear down society through attrition. Most of these people have little in the way of savings, this means the burden of caring for them will be transferred to society. If too many people shift into this category the fabric that holds us together as a nation and as a people will be shred to ruin. All this continues to be made worse by new mandates and regulations flowing out of Washington and the lack of needed reform.

We should never underestimate just how far untethered computer-driven trading can distance itself from the true economy. This increases the possibility we may be in another phase of the "Wash, Rinse, Repeat" cycle that flushes money away from the common man and into the hands of the 1% that eats our lunch. The truth is most Americans only get to smell the feast and have no seat at the table when the Wall Street elite dine. We get little more than the promise that our pension or 401 will be solvent when we need the money, that is if we are lucky enough to have either. Sadly, the average American is lucky if they are allowed even a few scraps that fall from the table, again highlighting why bankers have been reviled throughout history. It is ironic this massive sector of our economy produces nothing but holds such power.

Wednesday, July 1, 2020

National Coin Shortage Shines Light On Worthless Penny

A shortage of coins is appearing across America due to the covid‐19 pandemic significantly disrupting the supply chain and normal circulation patterns for U.S. coins. The U.S. Mint halted production due to covid-19 which has caused Fed Chair Powell to admit to lawmakers the Fed will be rationing coins until the problem is resolved. Powell said; "What's happened is that with the partial closure of the economy, the flow of coins through the economy ... it's kind of stopped." He went on to say the shortage which is expected to be temporary is due to the business closures that prevented people from spending their coins, as well as a lack of places that are open where people can trade coins for paper bills.

We can only hope that this will cause more people to question the usefulness of the penny which is a blemish on the face of America. It is costly to produce, no friend to the environment and it wastes America’s resources while sapping our productivity. It cost our country billions of dollars, year after year. According to the “citizens to retire the penny” it cost the Country one hundred million dollars a year to produce the penny, and more then $15 billion dollars annually is wasted just in handling it. Coins are designed by the government to be a simple and efficient medium for the exchange of goods and services. For many years there have been discussions about discontinuing the penny which has become obsolete because of its minuscule purchasing value. The penny is a perfect example of our government's inefficiency and waste, and the cost is a burden carried by business. If an employee is paid $12.00 an hour they receive twenty cents per minute. Businesses simply cannot afford to pay an employee to handle and count pennies, the cost of the labor exceeds their value.

Pennies Make A Great Bathroom Floor
In March of 2012 Canada made the decision to do away with its puny penny coin, loved by some but an annoyance to many, it was withdrawn from circulation because it costs too much to make and had become a pecuniary pest. Ottawa said the penny retained only one-twentieth of its original purchasing power. Because it costs 1.6 cents to produce each one-cent coin stamped out, discontinuing the penny was expected to save around $11 million a year.

"It was just one of those no-brainer slam dunks. It's a place where we can save money," said legislator Pat Martin, who has long campaigned for the penny to be abolished. In the middle of 2014 the Toronto Sun reported that since circulation of the penny was discontinued on Feb. 4, 2013, more than four billion of the copper coins had been recovered, equivalent to a face value of approximately $40 million. The Royal Canadian Mint at the time estimated that approximately 6 billion pennies were in circulation when production of the coin ceased in 2012. I suspect the number has dropped substantially since then and its use has become non-existent. Once the distribution of the coin ceased vendors were no longer expected to return pennies as change for cash purchases and were encouraged to round purchases to the nearest five cents.

As for the issue of the American penny, simply put, the American penny doesn't make sense! Let it be decreed that the penny when weighed and measured is found lacking. Other nations have either ceased to produce or have removed low denomination coins the list includes Australia, Brazil, Finland, Israel, the Netherlands, New Zealand, Norway, Sweden, Switzerland, Britain, and as stated above Canada. By the time it was discontinued many Canadians considered the penny more of a nuisance than a useful coin. They often stored them in jars, threw them away in water fountains, or refuse them as change. Financial institutions faced increasing costs for handling, storing, and transporting pennies, and over time the penny had become a burden to the economy.

The Penny No Longer Makes Sense
To many people the penny is simply a horrible little thing with no redeeming value that destroys vacuum cleaners when they accidentally suck one up.  Still, we find that not only does the government continue making the penny but over the years it has even made new versions of the penny. Voters need to remind Washington that it is not the job of the well-paid employees of the treasury to create collectibles or to pander to small segments of the population by designing coins commemorating or recognizing minor events.

The debate against continuing the penny is overwhelming, anyone still supporting it most likely has not given the subject much thought or is simply resistant to change, “the penny doesn't make sense".  From an environmental standpoint, the penny is also a disaster when you consider all the energy used to make, transport, and distribute this useless coin. Currently, it costs the U.S. Mint 1.66 cents to make each one-cent coin, meaning that taxpayers are losing 0.66 of a cent for each one of the 9.1 billion pennies the Mint produces each year. That is a loss of $60,181,440 to produce pennies in 2016. The U.S. Mint makes an average of  21 million pennies per day which adds up to around nine billion pennies annually. If we just get rid of the penny, the U.S. Mint would cut its work in half. This figure does not include the time, fuel, expense, and hassle of carting all of those pennies around to the banks, merchants, etc.

If we stop making pennies we would also save all this cost associated with it. Remember the penny coin, has almost no purchasing power today and the cost of making the pennies is higher than face value. The melt value of pennies ranges from more than two cents for the pre-1982 copper pennies, to nearly a full cent for the zinc pennies. Logically, sooner or later the penny is destined to the dustbin of history. Ditching the penny would cost literally nothing and with a flourish of the executive pen create huge annual savings for business but such a move remains fiercely opposed by metal alloy industries and Coinstar, which makes millions each year by helping people get rid of their unwanted change.

According to the folks at RetireThePenny.org, the average American wastes 2.4 hours a year handling pennies or waiting for people who handle them. This statistic is the result of compiling several penny-handling related events. These events include the ubiquitous 30 second period we sometimes spend waiting for someone who has to dig through their pockets or purse to find that last cent so they can pay for something with exact change. They probably do this, so they don't get stuck with any more pennies. Still, we should not expect the government to take action anytime soon in our country so focused on pandering to those who fear change. It seems we may need some kind of push to bring about the penny’s final demise, because if we wait for those in charge of such things to do the logical thing we may be waiting until the end of time. Small things matter, if our politicians can’t get this right how can they ever deal with the more important issues facing our nation?


Footnote; Please feel free to reprint this article and share it with friends or the White House, thanks. 

Thursday, June 25, 2020

The Importance Of Where And What Consumers Buy

How people spend their money has more impact on the economy than most people realize. What consumers buy matters a great deal. When looking at the policies flowing out of Washington it is clear many politicians seem to have no idea that all consumer spending and purchases are not created equal. Certain purchases result in money bouncing around a community sparking future economic growth which enriches everyone. Other purchases simply give the money wings allowing it to exit not only the community but often the country.

Many economists point to the consumer as being the lynch-pin to our economy.  Given that retail sales make up roughly 40% of personal consumption expenditures which in turn comprise roughly 70% of our GDP, their impact on the economy is important. These numbers, however, only tell a small part of the story. Sadly, because of economic laziness or ignorance, this is where the link between how and where money is spent gets lost in the noise. Ironically while President Trump decries our trade deficit he seems unable to put one and one together and understand it is shortsighted consumers driving the deficit.

A detailed breakdown of how people receiving a stimulus check would provide a great deal of information about the finances of individual Americans. It would also be very interesting to randomly delve deep into the finances of a few hundred Americans and learn the truth about where we stand. By deep, I mean looking at where they get their income, debt, total obligations, savings, retirement plans, net worth, the whole caboodle. This kind of deep economic discovery has never been done to my knowledge but instead, we tend to garner our information from superficial polls. 

An article by Lance Roberts that appeared on Real Investment Advice took a shot at explaining the bounce we just saw in retail sales at a time many consumers are tapped out. Robert wrote you should “never count the consumer out,” as they always find a way to go further into debt because psychologically, consumers are "trained” to “shop till they drop." He claims that as long as individuals have a paycheck; they will spend it. Give them a tax refund; they will spend it. Issue them a credit card; they will max it out. Give them a government stimulus check; they will spend it as well. Don’t believe me, then why is consumer debt at record levels?

The fact is, consumers should take a long look at how their purchases will impact the economy over time. Robert makes the point that most consumers will spend if they have or can borrow the money. Taking this to the next level, few people realize what is registered as growth does not necessarily transfer into economic strength. This point is something that has been covered time and time again on this blog in articles such as, Healthcare Spending Wrongly Feeds Our GDP, and Economic Growth Does Not Equal Economic Strength.

The following examples highlight this matter. Just for fun imagine the money allowing for these purchases is flowing from the recent 2.3 trillion dollar CARES Act.

  • Consumer one decides to put a new roof put on his home. This includes tear off and re-shingling. This labor-intense job pays a lot of local workers from those delivering and hauling away the old roof to those selling the shingles, those installing them, and even some folks at the local landfill. As a bonus, the shingles are made here in America. Putting even more ceiling on the cake is that it improves not only his property but raises values in his neighborhood enriching those living nearby.
  • Consumer two uses their money as a down payment on a new Hyundai. The Hyundai Motor Company is a South Korean multinational automotive manufacturer headquartered in Seoul. Hyundai builds the vast majority of its vehicles at its plant in Ulsan, South Korea. It also operates plants all over the world with one in Mexico and a plant in Alabama. When I tried to research how likely the car was to be made here I hit a wall. One thing for certain is that it is packed full of South Korean parts and with each sale a bunch of dollars heads overseas.
  • In the final example consumer three slaps, small businesses, brick and mortar retailers, and the 30 million-plus Americans recently unemployed in the face. His online purchase from Amazon of products made in China and shipped from a facility located in another state. Just like in the case of consumer two a bunch of the money heads overseas but real disaster for the community is absolutely none of the money stays there. This sets the area up for a new wave of store closings, prolonged unemployment, and declining real estate prices.
And It's Gone!

Many of our economic problems stem from the many consumers out there making poor decisions. This includes things such as paying too much for a car they cannot afford or maintain.These automobiles generally do not last long and often get put on a hook. The least responsible consumers tend not to fulfill obligations due but to take on new debt and squander every penny they can lay their hands on. Online shopping and companies such as Amazon are like heroin to an addict when it comes to promoting spending that destroys real economic strength.

Those people that have choose to skip paying the essentials such as home mortgages and rent will most likely come to regret it as they are hit with penalties and their actions come back to haunt them. The elephant in the room when it comes to growing the economy is how "the broken window theory" is spun and interpreted. The gist of this theory is that if a hooligan breaks the window of a bakery, the subsequent repair expenditures by the baker will have no net benefits for the economy. Interestingly, it is not uncommon to see destruction touted as a good thing because it promotes spending. The idea destruction is good based on this reasoning discounts several facts.

One has to do with where the money is coming from but whether it is from an insurance company or the baker it still means the money is diverted from being used on another purchase. Repairing a broken window is maintenance spending which doesn’t improve growth because it doesn’t improve productivity; it would have occurred anyway. The only thing a broken window does is it makes the maintenance spending occur earlier, lowering the use life of the window. While maintenance spending may keep the economy going it doesn’t provide a boost. Instead, it is better to invest the money in something which creates wealth by increasing productivity.

Many people and even economists have real misconceptions as to how the economy works. Where money flows and who it enriches is a key component of economics, the failure to consider this is a blind spot many people have. After years of being told everything revolves around spending, this diminishes the important role savings plays in the scheme of a balanced economy. Fans of Keynesian economics that encourage government spending to stabilize the economy during a downturn tend to discount the importance that where and how money is spent matters a great deal.

Saturday, June 20, 2020

Starry Starry Night An Ode To Idealist - We Are doomed

The images of protest and violence that fill viewing screens across the globe underline the fact we are not on the way to nirvana, a state of idyllic peace and happiness. In my younger days, I was a full-blown idealist full of optimistic thoughts of how if we all worked together we could create a wonderful world. It soon became apparent that many people were not interested in work or doing, "their fair share" just for the sake of adding to the overall health and well-being of the community. This is the fatal flaw in the socialist theory. Adding to the problem is the human-animal by nature, while considered a social creature, seems unable to agree on much of anything. This of course extends to how we live, goals, and even the kind of lifestyle we wish to live.

Click On Picture To Bring Up Video
Vincent is a song by Don McLean written as a tribute to Vincent van Gogh. It is also known by its opening line, "Starry Starry Night", a reference to Van Gogh's 1889 painting  The song, by Don McLean, in some ways, is an ode to idealists everywhere. The lyrics are a comparison to Van Gogh's actual life.

They take us on a musical journey from Van Gogh's vantage point looking out from the asylum at Saint-Remy. History shows Van Gogh to have been a troubled soul that lived in torment and spending time in the mental asylum where he painted mainly from his room or the courtyard garden. Later he went further afield to paint. Van Gogh attempted suicide by shooting himself in the chest, which ultimately led to his death two days later. 

Vincent Van Gogh  is among the most famous and influential figures in the history of Western art. In just over a decade, the Dutch post-impressionist painter created about 2,100 pieces of artwork. This includes around 860 oil paintings, many of these were done during the last two years of his life. They include landscapes, still lifes, portraits, and self-portraits, Starry Starry Night is the most famous. Most people are unaware of the fact that Van Gogh was never famous as a painter during his lifetime and constantly struggled with poverty. He sold only one painting while he was alive

Click to see more images of Van Gogh in Arles
Years ago I had the good  fortune to be able to visit the beautiful city of Arles, France where Van Gogh lived for more than a year, he experienced great productivity there before suffering from a mental breakdown. Van Gogh was a prolific correspondent and wrote nearly as many letters as he created paintings. In one of the last letters, some four days before his death, he wrote, ‘I try to do as well as certain painters whom I have greatly loved and admired.’

The most telling part of the lyrics is the line, "But I could have told you, Vincent, This world was never meant for one As beautiful as you." This can be interpreted to mean that idealists or those who see the world through rose-colored glasses are doomed to a life of disappointment and pain. This extends into most areas of life, that is why luck is such a treasured commodity. This line in the song should also be considered a warning to idealists that over time they will suffer a thousand cuts.

It would be unfair to those of you that have read to this point not to make an effort to return to the inspiration that caused me to write this article. Sadly, the cynics reading this will tell you the only thing you can count on is that those in charge will never fail to fail us. Being thrown under the bus is more common than we want to talk about. Many idealist are simply naive, this translates into their lack of experience, wisdom, or judgment as setting them up for a life of great disappointments. While it has been said, pioneers take all the arrows, it could also be said that idealists leave themselves open to a life of heartbreak.

Life is full of lessons and many of them are learned from the harsh reality that slaps us in the face each day, one of these is that a vocal minority can create chaos. Another is that those with an agenda will often gain power by devoting a great deal of their energy to this goal. After gaining power these people justify the actions they take by saying they serve "the greater good." For the many of us that have seen too much, it has gotten to the point where we should think about lowering our expectations the world will suddenly get better.

Fed's Action Obliterates True Price Discovery Mechanism

The Federal Reserve continues to destroy true price discovery in this market by executing short squeeze after short squeeze. Moral hazard be damned, the Fed's desire to support the market has overruled common sense. We have seen this time after time with well-timed announcements being made simply to fire up bullish enthusiasm and spark a rally. We recently observed this when a Fed announcement resulted in a dramatic intraday reversal causing the S&P500 to surge more than 100 points from session lows and closing above its 200-day moving average.

Fed's Action Obliterates True Price Discovery
This time it was because the Fed announced it would start to buy corporate bonds the next day. A late Bloomberg report that Trump was seeking a $1 trillion infrastructure proposal to stimulate the economy also added fuel to the fire. Trump's proposal focused on 5G and rural broadband. The report added it was still under discussion and would need the backing of Congress to move forward. Still, this is an indication the false economy continues to ramp up. Government stimulus has been a key feature of the global equities rally even as unemployment has soared and signs that a second wave of the virus has started to emerge.

Until now, the size and pace of Fed balance sheet expansion have put a floor under global equity markets and driven equities higher. Yet Powell is going out of his way to signal that more economic support is on the way. The problem with market manipulation is that once it starts, where does it end? This is an area of moral hazard that once breached is difficult to turn back. Another issue is that the Fed is not alone in playing this game, the Trump administration also has invested a great deal in keeping markets moving higher. In recent years we have witnessed more central banks and government intervention in markets. This supports the argument that true price discovery has been massively distorted.

The BOJ Buying ETFs Is Distorting Markets
In many ways, government entities investing in or buying stock, are transferring part of industry or commerce from the private-sector to state ownership or control. While the state may not choose to exercise control over various decisions a company makes the entity that owns the stocks can control perceived valuations by being the market maker that sets prices. True price discovery and properly pricing assets are the bedrock of free markets. The feedback loops between asset prices and input signals are critical in determining value, this is especially true when we focus on assets such as stocks, bonds, currencies, or paper promises that carry no utility value and can perform no useful task.

The Federal Reserve was intended to act as the “lender of last resort" but as Nomi Prins says, "As if the Fed hasn’t done enough to destroy honest markets, now it plans to start buying individual corporate bonds. It’s just another step closer to the Fed deciding the winners and losers in the market." This has forced even the most bearish of us to finally concede that, for whatever reason you want to claim, the Fed under the leadership of its Chairman J. Powell has crossed the Rubicon and the point of no return.  

Crossing the Rubicon means the point of no return. This high-level idiom comes from an event in ancient Roman history. In 49 BC Julius Caesar's army crossed the Rubicon River, this was forbidden. It was an event from which he knew  there is no way back. When Julius Caesar crossed the Rubicon, he started a five-year Roman civil war. At the war's end, Julius Caesar was declared dictator for life. Putting the Fed's recent actions into context and what it means for investors, the miserable policies adopted by the Fed, which has allowed other central banks to do the same, has created a new environment redefining risk and value. This highlights the fact there is nothing normal about what is happening, this is far from normal.

Savers, investors, and a new wave of speculators as a result of Central banks expanding balance sheets while reducing interest rates are now embracing any investment that promises yield. This combined with rising government spending has disaster written all over it, not just in America but across the globe. This and a slew of other horrible moves have created a bubble in bond and equities. Only the claim that no inflation exists and this is the only way to halt deflation allows this reckless policy to continue, however, when people realize the fallacy of this assertion it will be to late too stop the economic and financial carnage it will create.

The Shrinking Private Sector (click to enlarge)
Unfortunately, the money flowing from the Government-Financial complex is not reaching the parts of the economy where it is most needed. For a small business, the economy remains a disaster. Investors should remember the true unemployment picture has yet to reveal itself. As the government grew larger it seems to have become oblivious to the importance and fragility of many small businesses or how much it cost a community when they close. Small business has been the big loser over the last several months and hundreds of thousands will soon have to close.  With so many tenants looking at foregoing rent small landlords that don't have deep pockets also face huge problems. 

The idea we are about to experience a
“V-shaped recovery” is rubbish. Many people are afraid to fly, travel, or eat out at a restaurant. The government's solution to give the masses just enough to silence their outrage is a bizarre extension of crony capitalism. It feeds large businesses with access to cheap capital are the winners and the big losers are the middle-class, small businesses, and social mobility. All those people that want a higher minimum wage can forget that ever happening as tens of millions remain out of work. It is difficult to argue true price discovery exists and risk is not being discounted when prices fail to reflect unemployment at around 20% and ignore news of a sharp escalation in Korean tensions or the deadly clashes between Indian and Chinese border troops.

Bubbles always pop, this time is not different. Exacerbating the current situation is that many investors in these "paper promises" have become over-leveraged. This puts them at great risk if a sudden decline in the value of these assets occurs. The disconnect that has taken place between Wall Street and the economy is not logical. We are in uncharted waters and should consider the possibility the destruction of true price discovery will only add to the demise of fiat currencies across the world. I contend this will fuel the desire of people to once again hold tangible assets rather than trusting the promises now being made. To say things are messed up is an understatement.

Sunday, June 14, 2020

Inequality On Rise - Many Of 99% Dirt Poor As Rich Gain

Inequality has soared over the last several months with billionaires seeing huge gains in their wealth while many people are getting slammed. Much of the adverse effect on the average American has so far been masked by trillions of dollars flowing from the government in the way of temporary stimulus checks. The covid-19 crisis and how it has been handled by the governments and the central banks have resulted in creating a twilight-zone economy. The moment the current $600 a week federal unemployment benefits run out at the end of July, many people will find they are caught in a financial vise with few options. Getting that unemployment money is the biggest reason many people who've lost jobs are able to keep a roof over their heads. Knowing many of these people are not going back to work is a big problem. You are not alone if you are having difficulty reconciling the growing divide between Wall Street markets that seem totally ignoring economic reality.

"Most Shorted" Stocks Soar As Bears Cover
Many market watchers and pundits are troubled and confounded by the recent market action. Several explanations exist with each one having some validity but great uncertainty remains. In a manipulated environment such as we have today where markets are propped up and manipulated with no true price discovery, all investments have become risky. The markets are reflecting a V-shaped recovery that Citigroup warns may be far too optimistic.

A slew of new investors, most inexperienced, have stepped into the breach and bought the dip under the impression it will lead to prosperity. This is evident in the area of the most shorted stocks which are on such a rant as those most negative on the economy are forced to capitulate to a soaring market. This is occurring while Citi writes its model still shows that a greater than 70% probability of a down market in the next 12 months remains.


Another area where this can be witnessed is in how a newly IPO'd company has exploded to become the most valuable truck-maker in the world, despite having no sales ever. Stock in Arizona-based Electric trucking startup Nikola soared last week, more than doubling in one day. This gave the company a market value of over $30 billion. This occurred after Nikola founder, Trevor Milton, tweeted about taking in reservations for the company’s light-duty truck called ‘Badger’ starting in late June. Its medium-duty truck is due in 2021, and a heavy-duty truck in 2023.

Proposed Badger Truck Not Yet Produced
To put this in context, during 2019, Ford with a lesser market cap of $28.7 billion sold 5.5 million cars while Nikola sold none. This type of major disconnect from reality strengthens the argument that much wealth is an illusion financially manufactured and related to positioning. The idea you can become a billionaire in a matter of hours is hard to comprehend at a time many Americans are worried about losing their job. 

Many questions remain unanswered when it comes to the economy and many potential risks could affect the markets in the coming months. Biden could defeat Trump and the Democrats sweep Congress. Covid-19 could unleash a second blow setting back the reopening of businesses. Another big issue is the protest and civil unrest could grow much worse when the real impact of unemployment shows its ugly face. The fact that many older experienced traders are appalled at the stupidity and euphoria of this market does not matter. None of these issues seem relevant to those arguing that substantial Fed-induced liquidity has rendered traditional fundamental analysis moot.

Circling back to growing inequality, it is important to remember some stock indexes are making new highs at the same time NPR reports Americans are skipping payments on mortgages, auto loans, and other bills. Wealth inequality has soared in recent years and now stands at the worst it has been during the entire U.S. post-war period. Simply put, statistics show many Americans lack the money to pay for a $500 repair. Driving a decent car doesn't make a person middle-class or economically equal, especially if they are up to their eyeballs in debt to do so. While companies have temporarily put collection activities on hold due to the covid-19 pandemic, this will likely lead to a huge number of foreclosures, evictions, auto repossessions, and credit downgrades. 

The explosion in the national debt only bolsters the masses for a moment before finding its way into the pockets of the .01% that pulls the strings in Washington and controls our fate. Inequality has been growing and it is far worse for society and the world than first thought we are witnessing the further collapse of the middle class. The number of people living on government transfers of wealth has grown over the years, the National Debt Clock provides some rather shocking data concerning the number of people that are currently "receiving benefits" from the government or are unemployed. Many of the American's that are now experiencing the slip into this economic quagmire and rough times will tell you, "I never thought it would happen to me." In the end, it is likely a great number of these people will become a burden to society.

A More Recent Chart Hard To Find! click to enlarge
In a piece titled; "The Morass That Swallowed the Middle Class" Matthew Shaw delves into how much of the inequality debate focuses on the gains of  the "1%,” while far less attention has been paid to the economic well-being of others. What is broadly termed the middle class is all too often just lumped into a diverse group labeled the 99%. In truth, many of these people are dirt poor. Much of this centers around just how out of touch our "professional elite" are with the general population and the economy. By our professional elite, I refer to those who make the rules and their minions, their aids, the academics, the financial institutions, economists, and the media, all of which have tied their wagon to the status quo. Conflict and corruption also enter into this because we often find those setting the rules also tend to want a bigger piece of the pie.

This growth in inequality is a "pox on the house" of society. For decades the rich and powerful have been increasingly grabbing a larger slice of the economic pie. A great deal of growing corporate profits come from cutting back on the greatest expense businesses have to pay and that is labor. This is and will substantially increase in coming years as robots displace humans in the workforce. Robots are here and more are being deployed each day, soon this will prove to be a big deal. The topic of our future and culture always circles back and is directly linked to the issue of jobs vanishing as automation and an army of robots march into our workplace. Rest assured when push comes to shove those displaced from the job market will find they are only given enough to scrape by and ensure they remain docile and behave. If and when this becomes an issue conflict and violence will arise it is possible that someday they will be brought to heel by an army of robots designed to keep them under control. 

The reality is the vast majority of people face diminishing prospects. This concerning trend is highlighted in an IMF report focused on data showing how middle-income households have continued moving down, rather than up, as income distribution in the United States has shifted since the 1970s. The U.S. middle class has never recovered after being “hollowed out” when manufacturing jobs fled America and incomes fell. Current trends indicate the "equality gap" is not expected to narrow in the future. Growing income inequality is not just an American problem but it is an issue across the globe and no magic or silver bullet exists to address the conundrum brought about by this concentration of power and wealth. The images of cities burning and widespread looting as a result of police brutality are also being fueled by rising economic inequality. Today's social unrest reflects just how broken our culture and the economy have become. The sad thing is, many of those that have taken to the streets in protest will say that whatever actions society takes, "It ain't enough."

Friday, June 12, 2020

Kids Find Out There Is Such A Thing As A Free Lunch


EBT Cards For Kids - Click To Enlarge
Across America, kids are receiving Electronic Benefit Transfer, or EBT, cards in their names. Each card will be loaded with around $365. This is meant to provide these young people who would otherwise have access to free or reduced-price meals when schools are open with a "free lunch." The school system here where I live in Indiana and the School District of Philadelphia are just two of the districts busy reminding parents that help with summertime meals is on the way to their mailboxes.

In many school districts, all students will be receiving a card. This is being done so they will have access to meals during the summer. These are going out to both young children and high school students. If a child in Pre-K happens to be in a grade school participating in the federal free and reduced lunch program the child is included in this program and will be eligible to receive this benefit. Both the children and parents can thank the wisdom of lawmakers for this benefit while those concerned about the exploding national deficit are left to pray it will be properly used.  

There are no income requirements in areas where a high percentage of district families are low-income because it means the entire district qualifies for free or reduced-price meals. Apparently, even the legal status of the child does not affect eligibility for P-EBT. School-aged children who are undocumented non-citizens enrolled in a free/reduced lunch school program need not worry, they receive the P-EBT benefits. Any child that receives free/reduced lunch qualifies. There are no other filtered criteria. This means many school systems are busy letting parents know that help with summertime meals is on the way to their mailboxes.

Families can use the P-EBT benefit to purchase food items at EBT authorized retailers, including most major grocery stores. Many gas stations also accept EBT, but you can only use your benefits to pay for specific items. If you receive Supplemental Nutrition Assistance Program (SNAP) benefits, you can purchase food items such as cereal, dairy products, snacks, and candy, but you can’t buy prepared foods, toiletries, over-the-counter medicine, alcohol, or tobacco. Unused benefits will rollover month-to-month and must be used within 365 days. The theory is that families that don't need the benefit can simply return it.

 A lot of questions may arise concerning who will get these cards and how they will be used.  Such as, if a child's issued P-EBT card has their other parent’s name on it but you have custody of the child and that is the child's address of record with the school, you can use it for the child? The answer is yes. As to the ID requirement for using the P-EBT card at the grocery store, the Grocery Retailers Association is aware of the process for P-EBT and have been informed of the card design as well as benefit projections. By federal statute, retailers cannot ask for ID for EBT purchases if they do not request ID on regular debit card purchases.

Another Program Ripe For Abuse
During the covid-19 pandemic, many schools and groups have tried to get food to hungry children but they have failed in their efforts. Many areas used a special waiver issued by the United States Department of Agriculture (USDA) to modify the Summer Food Service Program and offer grab-and-go meals. Under this plan, families were allowed to pick up packaged meals on behalf of their children at school and in other non-congregate settings. Cities nationwide adopted this model, including New York, Los Angeles, Chicago, Atlanta, and Cleveland. Sadly, parents wouldn't even bother to pick up the meals.

This leaves many of us wondering how many kids are really sitting at home with nothing to eat. At times it seems the government is bending over backward to spend money where it does not need to be spent. The quality of what some may think is a free lunch  has yet to be determined. When all is said and done it is easy to see this program is ripe for abuse. These cards are good as gold and could even be sold at a discount for cash. Considering how many children in this country are obese, it is likely a great deal of soda pop, chips, candy, and cookies will be bought with EBT cards.