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A Potemkin economy has lured the Fed, economists, and Wall Street analysts into a potentially dangerous assumption of economic normalcy. However, with a review of how we got here, we can better understand the costs and consequences of monetary interventions.

“In 1783, after the Russian annexation of Crimea from the Ottoman Empire and the liquidation of the Cossack Zaporozhian Sich, GrigoryPotemkin became governor of the region. Crimea, devastated by the war, and the Muslim Tatar inhabitants became viewed as a potential fifth column of the Ottoman Empire. Potemkin’s major tasks were to pacify and rebuild the country by bringing in Russian settlers.

In 1787, as a new war was about to break out between Russia and the Ottoman Empire, Catherine II, with her court and several ambassadors, made an unprecedented six-month trip to New Russia. One purpose of this trip was to impress Russia’s allies prior to the war. Another purpose was to familiarize herself, supposedly directly, with her new possessions.To help accomplish this, Potemkin set up “mobile villages” on the banks of the Dnieper River. As soon as the barge carrying the Empress and ambassadors arrived, Potemkin’s men, dressed as peasants, would populate the village. Once the barge left, the village was disassembled, then rebuilt downstream overnight.” – Wikipedia

While there is some debate about the accuracy of the story, in politics and economics, a Potemkin village is any construction (literal or figurative) whose sole purpose is to provide an external façade to lead the population to believe the country is faring better than reality.

A reasonable amount of data suggests the Federal Reserve and the Government created such a facade.

A Potemkin Market

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

How Durable Is The Potemkin Economy?

November 17, 2021

How Durable Is The Potemkin Economy?

“Increased borrowing must be matched by increased ability to repay. Otherwise, we aren’t expanding the economy – we’re merely puffing it up.” – Henry Alexander of Morgan Guaranty Trust

The original Potemkin Village dates to the late 1700s. At that time, Russian Governor Grigory Aleksandrovich Potemkin constructed facades to hide the poor condition of his town from Empress Catherine II.

Since then, Potemkin Village represents a false construct, physical or narrative, created to hide the actual situation.

As the pandemic ravaged the economy, the Federal Reserve, White House, and Congress went to work and built a Potemkin economy around the ailing economy.

As a result, the curb appeal of today’s economic recovery is beautiful. However, when our clients’ wealth is at stake, we understand looks can be deceiving. As such, we prefer to open the front door and explore the real economy. In the long run, it is sustainable economic growth that supports asset prices. In the short run, however, investors may continue to be mesmerized by the Potemkin economy. At some point, any differences between the Potemkin economy and the actual economy will become problematic for investors.

Selling A Narrative

Narratives of a booming economic recovery can only mislead the public and investors for so long. Toss in robust economic data, and the façade seems awfully real.

Consider the following:

Nominal GDP is now 4.5% above the high-water mark set pre-pandemic. Historically, economic recoveries do not get more “V-shaped!”

Potemkin economy, How Durable Is The Potemkin Economy?

Retail Sales are running about 12% above its trend of the last ten years. The premium represents nearly five years of growth at the prior trend.

CPI and Core CPI (excluding food and energy) are nearly triple their respective growth rates of the last five years.

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

Potemkin Nation

August 23, 2021

Potemkin Nation

There are advantages to learning about history. One of the big ones is that patterns repeat themselves across historical time, and if you know what happened just before other societies went through the important inflection points in their life cycle, you can tolerably often figure out when one of those is about to happen in the place and time where you happen to be living. I was reminded of this last week when news dispatches from Afghanistan started showing up in the news aggregator sites I watch.

Afghanistan, in case any of my readers spent the last twenty years living under a rock, was invaded and mostly conquered by the United States in late 2001. Officially, this was in retaliation for the terrorist attacks that year; in the world of unmentionable facts, it was one of two beachheads established as part of the Bush II administration’s monumentally stupid attempt to conquer and pacify the Middle East—the other was of course Iraq. A puppet Afghani government was duly installed and propped up by a steadily increasing expenditure of American dollars, munitions, and lives, while the US military went through the usual pantomime of nation-building and the corporate media took turns alternating between fawning over the latest imperial project and pretending to disapprove of it.

By 2016, however, the great majority of Americans were sick of this and other “forever wars” pursued by our elite classes. Revulsion against Hillary Clinton’s enthusiastic cheerleading for a new war in Syria was thus one of the factors that gave Donald Trump his narrow win in that year’s election. I predicted in early 2021, once it became clear that Joe Biden had scraped out an equally narrow win in the 2020 election, that his administration would quietly copy as many of Trump’s policies as Biden’s handlers thought they could get away with…

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Three Massive Bubbles in 17 Years: When Will This One Bust? A 60% Decline Coming?

September 12, 2017

Three Massive Bubbles in 17 Years: When Will This One Bust? A 60% Decline Coming?

John Hussman’s presents a message no one wants to hear because nearly everyone is too busy believing for the third time in 17 years that “It’s different this time”.

Last week Hussman wrote about Valuations, Sufficient Statistics, and Breathtaking Risks. This week it’s more of the same with his post Behind the Potemkin Village.

The markets are so overvalued now that Hussman expects a 60% decline from here.

There’s an apocryphal story that in 1787, during the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper River, which would be disassembled after she passed by, and rebuilt again downstream overnight.

When one examines the collapses of the tech bubble and the housing bubble, it’s evident that one of the central elements of those collapses was the gradual recognition by investors that the overvalued pieces of paper they were holding were actually little Potemkin Villages; temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there. What sort of “catalyst” is needed for a Potemkin Village or a Ponzi scheme to disappoint? Only the gradual or sudden discovery of the reality behind it: the recognition that there is no “there” there.

Market returns don’t just emerge from nowhere. They are driven by the sum of three factors: growth in fundamentals, income from cash distributions, and changes in valuations (the ratio of prices to fundamentals). For example, the 10% annual total return of the S&P 500 since 1960 also derives from growth in S&P 500 revenues averaging 5.7% annually since the 2000 peak, dividend income averaging about 3.0% annually, and a much steeper increase in the S&P 500 price/revenue ratio contributing 1.3% annually (taking the current price/revenue multiple to the same level observed at the 2000 market peak).

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

Stocks, the Economy and the Money Supply – What to Watch

January 27, 2016

Stocks, the Economy and the Money Supply – What to Watch

In previous articles we have occasionally discussed the interaction between economic indicators and the stock market. Among the topics we have touched upon: for one thing, the capitalization-weighted indexes can hardly be called “leading indicators” of the economy anymore. In fact, if one studies specific major turning points over the past two decades or so, it is clear that the market seems to “know” very little (at least not in advance).

The impression one gets is actually that the major indexes are acting like coincident rather than leading indicators of the economy. However, the market is not completely bereft of leading indicator qualities. What seems to be leading the economy are not the cap-weighted indexes, but market internals.

Even while the SPX still rose, resp. went sideways in 2015, market internals began to deteriorate (here shown: S&P hi/low percent, NYSE a/d line, SPX stocks above 200 & 50 day ma) – click to enlarge.

We believe we can explain why this is the case. In an economy in which the money supply can be expanded ex nihilo by central planners and/or commercial banks, the pace of money supply growth tends to lead both stock market returns and the performance of the economy as measured in terms of aggregate data.

Readers may have noticed our habit of adding the qualifier “as measured by aggregate data”. We are doing this because the boom period is a kind of Potemkin village: seemingly busy economic activity and surging accounting profits are masking the fact that a great deal of capital is consumed. Simply put, accounts are falsified, because loose monetary policy distorts and falsifies the entire economy’s price structure.

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

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