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In The Long Run We Are All Alive

August 29, 2020

In The Long Run We Are All Alive

In 1976, economist Herbert Stein, father of Ben Stein, the economics professor in Ferris Bueller’s Day Off, observed that U.S. government debt was on an unsustainable trajectory.  He, thus, established Stein’s Law:

“If something cannot go on forever, it will stop.”

Stein may have been right in theory.  Yet the unsustainable trend of U.S. government debt outlasted his life.  Herbert Stein died in 1999, several decades before the crackup.  Those reading this may not be so lucky.

Sometimes the end of the world comes and goes, while some of us are still here.  We believe our present episode of debt, deficits, and state sponsored economic destruction, is one of these times.

We’ll have more on this in just a moment.  But first, let’s peer back several hundred years.  There we find context, edification, and instruction.

In 1696, William Whiston, a protégé of Isaac Newton, wrote a book.  It had the grandiose title, “A New Theory of the Earth from its Original to the Consummation of all Things.”  In it he proclaimed, among other things, that the global flood of Noah had been caused by a comet.

Mr. Whiston took his book very serious.  The good people of London took it very serious too.  Perhaps it was Whiston’s conviction.  Or his great fear of comets.  But, for whatever reason, it never occurred to Londoners that he was a Category 5 quack.

Like Neil Ferguson, and his mathematical biology cohorts at Imperial College, London, Whiston’s research filled a void.  Much like today’s epidemiological models, the science was bunk.  Nonetheless, the results supplied prophecies of the apocalypse to meet a growing demand.

It was just a matter of time before Whiston’s research would cause trouble…

Judgement Day

…click on the above link to read the rest of the article…

Is High Inflation Now A Bigger Danger Than A Deflationary Crash?

August 27, 2020

Is High Inflation Now A Bigger Danger Than A Deflationary Crash?

What’s the more likely event at this point: a deflationary crash or runaway inflation?

For a long time, Peak Prosperity co-founder Adam Taggart and I have hewed to the “Ka-POOM!” theory, which states that a major deflation will scare the central banks so badly that they overreact and pour too much liquidity into the system, thereby destroying it.

To visualize how this will play out, think of what happened in Beirut this week. Customs officials there stored thousands of tons of ammonium nitrate fertilizer at their seaport, for years.  The pile just sat there doing absolutely nothing.

After years of inaction, the port authorities became lulled into the erroneous conclusion that nothing would ever happen.

But then one day a spark came to life, starting a fire, and then all at once — POOM! — the entire thing blew up with devastating effect.

This analogy works pretty well here as we approach the Keynesian endgame facing the global economy.  The pile of $trillions in bad debts issued over the past decades has been the fertilizer.  Covid-19 was the spark. And now we’re simply waiting for the entire economic and financial system to explode.

The same process began in the US and has been unfolding across the world ever since after the gold standard was abandoned in 1971.  Untethered from any restraint, all that was left to staunch the flow of red ink was self-restraint and a concern for the future, both of which were in short supply.

Not only has debt been growing far faster than income (GDP) at the national level, but debts have been growing exponentially (i.e., ‘compounding’) ever since 1971:

That debt growth is a nearly perfect exponential curve upon which the entire systems of politics, banking and the economy have come to rely.

…click on the above link to read the rest of the article…

On Inflation (& How It’s Not What Happens Next)

August 23, 2020

On Inflation (& How It’s Not What Happens Next)

Everyone is convinced the dollar is going to inflate because more dollars are entering the system.

But are they really?

That is the question that sparked a succinct Twitter thread by Travis K (@ColoradoTravis) explaining why inflation is not what happens next (emphasis ours):

Let’s take a look at how dollars are born and how they die.

A dollar is ‘born’ when a loan is made against collateral on a bank’s balance sheet. Banks can issue multiples of dollars for every dollar of collateral they have.

It’s this multiplication effect that expands the amount of total dollars.

Generally, banks are limited in how much they can lend – let’s say it’s 10x their collateral. So for every dollar of collateral they have, they can lend 10 dollars.

By so lending, they ‘birth’ new dollars into the system.

As banks lend more, more dollars are created and the money supply increases. This multiplicative lending is the chief driver of total dollars in the system.

Banks lending a lot → more total dollars and inflation.

When do dollars die?

Dollars ‘die’ when debts are paid back. This reverses the multiplication effect of lending, leading to less total dollars in the system and a contraction of total dollars in circulation.

So what is the Fed ‘printer’ doing – creating dollars, right? Actually no, not really.

The printer only increases the collateral banks have to lend against. It does not directly ‘birth’ dollars, only *potential* dollars.

Banks are still the midwives, and the only ones who birth dollars into the system by lending.

The Fed can increase collateral by 1000x but unless the banks lend against that collateral, dollars will not enter circulation for you and I to interact with.

…click on the above link to read the rest of the article…

Weekly Commentary: Moral Hazard Quagmire

August 22, 2020

Weekly Commentary: Moral Hazard Quagmire

The Nasdaq100 jumped another 3.5% this week, increasing 2020 gains to 32.3%. Amazon gained 4.3% during the week, boosting y-t-d gains to 77.8% – and market capitalization to $1.626 TN. Apple surged 8.2% this week, increasing 2020 gains to 69.4%. Apple’s market capitalization ended the week at a world-beating $2.127 TN. Microsoft rose 2.0% (up 35.1% y-t-d, mkt cap $1.612 TN). Google rose 4.8% (up 18.2% y-t-d, mkt cap $1.073 TN), and Facebook gained 2.2% (up 30.1%, mkt cap $761bn). The Nasdaq100 now trades with a price-to-earnings ratio of 37.4.
This era will be analyzed and debated for decades to come – if not much longer. Market Bubbles, over-indebtedness, inequality, financial instability and economic maladjustment – festering for years – can no longer be disregarded as cyclical phenomena. Ben Bernanke has declared understanding the forces behind the Great Depression is the “Holy Grail of economics”. It’s ironic. That the Fed never repeats its failure to aggressively expand the money supply in time of crisis is a key facet of the Bernanke doctrine – policy failing he asserts was a primary contributor to Depression-era financial and economic collapse. Yet this era’s unprecedented period of monetary stimulus is fundamental to current financial, economic, social and geopolitical instabilities.

August 18 – Bloomberg (Craig Torres): “The concentration of market power in a handful of companies lies behind several disturbing trends in the U.S. economy, like the deepening of inequality and financial instability, two Federal Reserve Board economists say in a new paper. Isabel Cairo and Jae Sim identify a decline in competition, with large firms controlling more of their markets, as a common cause in a series of important shifts over the last four decades. Those include a fall in labor share, or the chunk of output that goes to workers, even as corporate profits increased; and a surge in wealth and income inequality, as the net worth of the top 5% of households almost tripled between 1983 and 2016. 

…click on the above link to read the rest of the article…

They’ve Done It Again

August 21, 2020

They’ve Done It Again

They’ve Done It Again

The stars are back in their courses. The angels are back in the heavens. And the Perfections are back within sight…

For merely 148 trading days after bottoming… the S&P returned to record heights today.

The index closed the day at 3,389 — eclipsing its February 19 height of 3,386.

Thus Jerome Powell’s maniacal persistence has yielded a reward truly fantastic. He has successfully reflated the bubble.

The Federal Reserve has itself become the market.

Shannon Saccocia, Boston Private’s chief investment officer:

Equity markets are reflecting the massive monetary and fiscal stimulus that has been injected over the past four months… the rationale to diversify away from risk assets is hard to pinpoint.

For many the rationale to diversify away from risk assets is indeed hard to pinpoint…

No Longer Considered a Bear Market Rally

Bank of America has concluded its August Global Fund Manager survey. This survey revealed that:

The majority of professional investors no longer believe this market spree represents a bear market rally.

It is as genuine as gold itself, they believe.

What is more, 31% of those surveyed believe it is “early cycle” — the highest percentage since the financial crisis.

Meantime, Deutsche Bank reports, “companies have already restarted buybacks or are considering doing so.”

Buybacks were of course a primary source of helium for the bubble presently reflating.

And the Federal Reserve’s artificially depressed rates opened the taps…

Corporations Take on More Debt Than Ever

These exorbitantly low rates enabled corporations to pile on cheap debt.

With this debt they often purchased their own stock… which reduced shares outstanding… and raised the price per share.

That is, corporations often took on debt to conduct financial sorcery.

And now — as Deutsche Bank reports — the sorcerers are at their tricks again.

…click on the above link to read the rest of the article…

Panic in Real Estate

August 21, 2020

Panic in Real Estate

COMMENT: I live in central West Texas, I am passing on to you the fact that there is a “rush” of sales in rural property’s. Houses with small amounts of land attached are “flying off of the shelves” so to speak. This is occurring throughout all of West Texas and in the Panhandle. The effort to getting out of the cities. Even cities as small as 25,000 is in full swing! People are well aware of the potential of what is in the near future and are not sitting around wondering what they should do.

They are acting!

J

REPLY: There is a massive exodus from California and New York in particular. Even in North New Jersey, houses are selling in just days and over asking prices for cash. People are bailing out of New York City in herds. Here in Florida, condos are selling as fast as they can get them up in St Petersbourg. These lockdowns and COVID restrictions that are insane in the major cities have set in motion a massive exodus that these authoritarians never anticipated. As they flex their muscles to try to make this so draconian over nothing, they are complete the cycle which has been pointing to the collapse of urbanization, and the rich will flee.

One of my favorite stories of the Sovereign Debt Crisis is the City of Mainz, in Germany, around 1440. The goldsmith Johannes Gutenberg invented the printing press, which began the Printing Revolution that enabled the Renaissance to flourish with the printing press which could produce up to 3,600 pages per workday compared to the hand-copying by scribes which would produce only about 40 pages per day. The printing press then spread within several decades to over two hundred cities in a dozen European countries.

…click on the above link to read the rest of the article…

Here’s Why the “Impossible” Economic Collapse Is Unavoidable

August 15, 2020

Here’s Why the “Impossible” Economic Collapse Is Unavoidable

This is why denormalization is an extinction event for much of our high-cost, high-complexity, heavily regulated economy.

A collapse of major chunks of the economy is widely viewed as “impossible” because the federal government can borrow and spend unlimited amounts of money because the Federal Reserve can create unlimited amounts of money: the government borrows $1 trillion by selling $1 trillion in Treasury bonds, the Fed prints $1 trillion dollars to buy the bonds. Rinse and repeat to near-infinity.

With this cheery wind at their backs, conventional pundits are predicting super-rebounds in auto sales and other consumption as consumers weary of Covid-19 and anxious to blow their recent savings borrow and spend like no tomorrow.

As for the 30+ million unemployed–they don’t matter. Conventional analysts write them off because they weren’t big drivers of “growth” anyways–they didn’t have big, secure salaries and ample wealth/credit lines.

What this happy confidence in near-infinite money-printing and V-shaped spending orgies overlooks is what I’ve termed denormalization, an implosion of the Old Normal so complete that the expected minor adjustment to a New Normal is no longer possible.

The “New Normal” Is De-Normalization

We’re already in a post-normal world because the expansion of globalization and financialization needed to fuel the Old Normal has reversed into contraction. This reversal is an extinction event for all sectors and institutions with high fixed costs: air travel, resort tourism, healthcare, higher education, local government services, etc. because their fixed cost structures are so high they are no longer financially viable if they’re operating at less than full capacity.

Only getting back to 70% of previous capacity, revenues, tax receipts, etc. dooms them to collapse.

And there’s no way to cut their fixed costs without fatally disrupting all the sectors that are dependent on them.

…click on the above link to read the rest of the article…

Today’s Contemplation: Collapse Cometh II

August 15, 2020

Image for post
Monte Alban, Mexico (1988) Photo by author.

…click on the above link to read the rest of the article…

No Payment, No Problem: Bizarre New World of Consumer Debt

August 8, 2020

No Payment, No Problem: Bizarre New World of Consumer Debt

All kinds of weird records are being broken. But it’s scheduled to expire, and then what?

The New York Fed released a doozie of a household credit report. It summarized what individual lenders have been reporting about their own practices: If you can’t make the payments on your mortgage, auto loan, credit card debt, or student loan, just ask for a deferral or forbearance, and you won’t have to make the payments, and the loan won’t count as delinquent if it wasn’t delinquent before. And even if it was delinquent before, you can “cure” a delinquency by getting the loan deferred and modified. No payment, no problem.

Nearly all student loans go into forbearance, delinquencies plunge.

Student loan borrowers were automatically rolled into forbearance under the CARES Act, and even though many students had stopped making payments, delinquency rates plunged because the Department of Education had decided to report as “current” all those loans that are in forbearance, even if they were delinquent. Yup, according to New York Fed data, the delinquency rate of student loan borrowers, though many had stopped making payments, plunged from 10.75% in Q1, to 6.97% in Q2, the lowest since 2007:

Student loan forbearance is available until September 30, and interest is waived until then, instead of being added to the loan. In a blog post, the New York Fed said that 88% of the student-loan borrowers, including private-loan borrowers and  Federal Family Education Loan borrowers, had a “scheduled payment of $0,” meaning that at least 88% of the student loans were in some form of forbearance. Until September 30. And then what?

Delinquent loans are “cured” without catch-up payments.

…click on the above link to read the rest of the article…

US Facing Mounting Debt Amid Global Pandemic – ABC

July 25, 2020

US Facing Mounting Debt Amid Global Pandemic – ABC

Good interview with Professor Barry Eichengreen of UC Berkeley, a good friend of GMM, and odds on favorite to be a Nobel laureate one day.   We agree with him that now is not the time to worry about the public debt as we are already down this rabbit hole and the economy is on the verge of complete implosion, risking plunging our society into anarchy without another rescue package.

We also hate what we see: large well-capitalized corporations and entities getting PPP loans, which will be forgiven, some dead beats using their PPP loans to buy Teslas, trade stocks, and gamble in Las Vegas, not to mention the lack of planning and total incompetence of the policymakers.    He quotes Voltaire’s famous exhortation,  used many times here at the Global Macro Monitor,  “do not let the perfect be the enemy of the good.”

Voltaire

No MMT Discussion? 

Did you also notice not one peep about the Fed buying up all the Treasury debt and effectively monetizing the deficit…err MMT…and supporting other debt markets?

We heard some bozo on CNBC today saying the Treasury is having no problem floating its debt to the market.  Are. You. Fricking. Kidding. Me?  What market?

Nobody really knows for certain,  but our priors are if the U.S. Treasury was completely dependent on the markets to finance itself – that is no central bank (Fed and foreign) buying of its marketable debt — the 10-year yield would be well north of 6 percent, and that is very generous, in our opinion.

Do Your Homework

Folks, do your homework.   Granted, it’s impossible to completely grasp all the intricacies of the global economy and markets with their infinite feedback loops, and futile to even try,  but at least try and grasp the basics.

…click on the above link to read the rest of the article…

Money Supply Growth in May Again Surges to an All-Time High

July 18, 2020

MONEY SUPPLY GROWTH IN MAY AGAIN SURGES TO AN ALL-TIME HIGH

Money supply growth surged to another all-time high in May, following April’s all-time high that came in the wake of unprecedented quantitative easing, central bank asset purchases, and various stimulus packages.

The growth rate has never been higher, with the 1970s the only period that comes close. It was expected that money supply growth would surge in recent months. This usually happens in the wake of the early months of a recession or financial crisis. The magnitude of the growth rate, however, was unexpected.

During May 2020, year-over-year (YOY) growth in the money supply was at 29.8 percent. That’s up from April’s rate of 21.3 percent, and up from May 2019’s rate of 2.15 percent. Historically, this is a very large surge in growth both month over month and year over year. It is also quite a reversal from the trend that only just ended in August of last year, when growth rates were nearly bottoming out around 2 percent. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we’d seen since 2007.

tms1.png

tms

The money supply metric used here—the “true” or Rothbard-Salerno money supply measure (TMS)—is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler’s checks, and retail money funds).

…click on the above link to read the rest of the article…

Rabobank: “We Live In A Pretty Crazy World Right Now”

July 13, 2020

Rabobank: “We Live In A Pretty Crazy World Right Now”

Crazy World

I think we can all agree that we live in a pretty crazy world right now: and that’s an appropriate title for the Daily today too, for reasons that will be explained shortly.

It’s a world where we are seeing staggering increases in public-sector deficits. We have already seen WW2 level spending in the UK, for just one example: and yet the British Chancellor is now planning to introduce 10 deregulated “free ports” across the country where UK taxes and tariffs will not apply at all. It’s obviously the inverse tactic of spending more money on left-behind places. Yet will somewhere like Luton hypothetically become the next mini-Hong Kong just because there are no regulations and no taxes to be paid there? We shall see: and those deficits will swell even further. Laffer would approve of course: and using the logic his fans always push for, by cutting taxation to zero, presumably tax revenue will now be infinity.

Equally, it’s a world where despite one in three Americans worrying about making rent, there appears reticence from the White House to push for a new major fiscal package. Is this all political timing, and huge stimulus looms in weeks? Or do the it-will-all-be-fine arguments from economic advisors like Stephen Moore and Larry Kudlow reflect the official line?

It’s a world where despite all this state largesse, or absence of state largesse, bond yields continue to move lower anyway: the US 5-year touching 0.25% last week (though at the giddy heights of 0.29% at time of writing) as it does not throw in the kitchen sink; the UK 5-year gilt is at -0.07% even though they ARE throwing in that ‘no-taxes-here’ sink.

…click on the above link to read the rest of the article…

The World Is Drowning In Debt

July 13, 2020

The World Is Drowning In Debt

According to the IMF, global fiscal support in response to the crisis will be more than 9 trillion US dollars, approximately 12% of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way in which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105% of GDP.

If we add government and private debt, we are talking about 200 trillion US dollars of debt, a global increase of over 35% of GDP, well above the 20% seen after the 2008 crisis, and all in a single year.

This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented to support bloated government spending, and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.

Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis and to help large companies that were already in trouble in 2018 and 2019, the so-called ‘zombie’ companies.

According to Bank Of International Settlements, the percentage of zombie companies – those that cannot cover their debt interest payments with operating profits – has exploded in the period of giant stimuli and negative real rates, and the figure will skyrocket again.

That is why all this new debt is not going to boost the recovery, it will likely prolong the recession.

…click on the above link to read the rest of the article…

A Serious Message From Chris Martenson

July 11, 2020

A Serious Message From Chris Martenson

Time is running short to brace for impact

Like a windstorm toppling a hollowed-out tree, SARS-CoV-2 didn’t cause the current recession so much as it exposed how rotten things already were.

Even before SARS-CoV-2, households were struggling. Far too many were limping along without any savings at all, one crisis away from financial ruin.

Debts at every level were at record highs before SARS-CoV-2 came along, and the Federal Reserve was already busy bailing out the US financial system before the virus hit.

The shale oil industry had failed to generate any profits for over a decade before anyone ever heard of Covid19.

The worldwide wealth gap was already record levels before we were forced into lockdown.

What the coronavirus pandemic has done, though, is give the ruling authorities aircover to accelerate all of these trends to warp speed.

Billionaires have been, by far, the largest winners in this story so far.  Ditto for mega corporations.  Main Street and small and medium-sized businesses have been utterly crushed.

Where the Great Financial Crisis in 2008 could have been — and should have been — a wake-up call to operate the system more equitably and sustainably, it was used instead as an excuse to make things even worse.

No bank executives were charged or even went to jail for any crimes they played in bringing the financial system to the brink of disaster.  Accounting deceit, wire fraud, and forgery — anybody remember ‘robosigning’?  That was forgery, a felony, and not one charge was ever leveled.  Instead, the Too Big To Fail banks were bailed out and got bigger at the expense of smaller, more responsible firms.

My point here is that SARS-CoV-2 has laid bare our true value systems.  Some countries have done an admirable job of showing they care about their citizens, making public safety and health their top priority.  Other countries, such as mine (the US), have demonstrated the opposite.

…click on the above link to read the rest of the article…

The Great American Shale Oil & Gas Massacre: Bankruptcies, Defaulted Debts, Worthless Shares, Collapsed Prices of Oil & Gas

July 11, 2020

The Great American Shale Oil & Gas Massacre: Bankruptcies, Defaulted Debts, Worthless Shares, Collapsed Prices of Oil & Gas

The bankruptcy epicenter is in Texas.

The Great American Oil Bust started in mid-2014, when the price of crude-oil benchmark WTI began its long decline from over $100 a barrel to, briefly, minus -$37 a barrel in April 2020. Bankruptcies of US companies in the oil and gas sector started piling up in 2015. In 2016, the total amount of debt listed in these filings hit $82 billion. Bankruptcy filings continued, with smaller dollar amounts of debt involved. In 2019, the shakeout got rougher.

And this year promises to be a banner year, as larger oil-and-gas companies with billions of dollars in debt collapsed, after having wobbled through the prior years of the oil bust.

The 44 bankruptcy filings in the first half of 2020 among US exploration and production companies (E&P), oilfield services companies (OFS), and “midstream” companies (gather, transport, process, and store oil and natural gas) involved $55 billion in debts, according to data compiled by law firm Haynes and Boone. This first-half total beat all prior full-year totals of the Great American Oil Bust except the full-year total of 2016:

The cumulative amount of secured and unsecured debts that the 446 US oil and gas companies disclosed in their bankruptcy filings from January 2015 through June 2020 jumped to $262 billion:

The three biggies: In the first half of 2020, nine of the 44 US oil and gas companies that filed for bankruptcy listed over $1 billion in debts, including the three biggies with debts ranging from $9 billion to nearly $12 billion, according to data by Haynes and Boone.

These three companies – oil-field services companies Diamond Offshore and McDermott and natural-gas fracking pioneer Chesapeake – are the biggest in terms of debts that have toppled in the Great American Oil Bust so far. Those three companies combined listed $31 billion in debts, accounting for 56% of the $55 billion in total debts listed by all 44 companies to file so far this year:

…click on the above link to read the rest of the article…

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