We watch. We wait. We wonder.
‘The first panacea for a mismanaged nation is inflation,’ wrote Hemingway. ‘The second is war…’ he continued. And the third is concrete.
We’ll probably see all of them in the years ahead.
Russian roulette
Top macroeconomists are calling for a recession ‘before the end of 2020.’ What? We’ve already been waiting for years…
We’d like to see some action before then, if for no other reason than that we are tired of waiting.
It is like someone playing Russian roulette by himself, while you watch. He spins the chamber. He pulls the trigger. Nothing happens. You know how it is going to turn out. You’d just like to see him get it over with, so you could go on with your day.
In markets, things always take longer than you expect to begin. But once the hammer finds the chamber with the bullet in it…everything moves fast. Until the next major trend is underway.
When that will be…we don’t know. But it must be getting close. The Financial Times reports:
The number of borrowers in the US who are seriously behind on their car loans rose to the highest level on record in 2018, raising concerns about the deterioration of consumer credit despite strength in the broader economy.
What? The tide hasn’t even gone out yet, and a lot of swimmers are losing their shorts.
But why would consumers be unable to keep up with car payments…when unemployment is supposed to be at a record high? Our guess is that the ‘jobs, jobs, jobs’ that the administration crows about are more statistical fiction than Main Street fact.
But it hardly matters.
Busts and booms
In our Diary, we’ve taken for granted that the economy — guided by the Fed and egged on by Wall Street — will blow itself up.
More and more debt piles up. The economy, burdened and hobbled by car payments, mortgage payments, corporate debt payments, and interest on the national debt, staggers…and then falls.
This is not a prediction. It is an observation. Cycles are called ‘cycles’ because they repeat themselves. The credit cycle is no exception. Bust follows boom. Always has. Always will.
We’ve been looking at what will happen next. That is, when the next trends and policies, the ones that will dominate for years ahead, reveal themselves. Our guess — a view we share with Alan Greenspan — is that we’re headed for stagflation.
Central banks, worldwide, have added some $21 trillion in new cash over the last 16 years. Almost all of that money went into the financial economy. That is how the rich got so much richer during that period. Their asset prices rose; they floated on a rising tide of cash.
That is also how worldwide debt rose to $250 trillion today, from only about $50 trillion 16 years ago.
As asset prices rose — the Dow, for example, rose nearly 300% over the past 10 years — so did the collateral of consumers, businesses, and speculators, which could then be leveraged to borrow vast new sums. Globally, the ratio of output to debt rose from its traditional 1-to-1.5 level to 1-to-3.5 today.
All of these excesses and absurdities will be corrected, of course; Mr Market will take care of that. Then, the leverage works in the other direction — collapsing asset prices, credit, and the real economy.
That is how the cycle goes. Elegantly. Effortlessly. Inevitably. An excess of animal spirits is cured by a shortage of animal spirits. Too much credit is cured by too little credit. And a bubble is cured by a crash.
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Scammy wheels
And that will set in motion all the usual clunky and scammy wheels that pretend to reverse the natural correction. Interest rates will be cut to zero…and then below zero.
And quantitative easing (QE) is no longer like that little hammer that you’re only supposed to use to break the glass in case of an emergency…Now, it hangs on the Fed’s toolbelt next to its stretchy measuring tape.
And it won’t take the feds long to find other tools; soon, they’ll be buying ETFs and launching huge ‘infrastructure’ programs to ‘get the economy going again.’
That’s where the concrete comes in. At one point in the 1990s, after the Japanese stock market had collapsed nearly 70%, Japan was pouring more concrete than the USA. The idea was to ‘get the economy moving again’ by cementing up every riverbed…damming every river and building bridges to nowhere and roads to where no one wanted to go.
Then, the Chinese took over the concrete lead. They built factories, roads, bridges…and apartments by the millions. Cement production…and cement usage…rose to staggering levels. If it had all been dumped on Washington, poured out over the capital and allowed to harden, well…it would have been a good thing.
Last week, the Fed stopped its normalisation program 300 basis points short of normal.
In other words, instead of raising its key rate into the 5-6% range — which would be normal for the end of a 10-year boom, and give it 500 basis points to cut like it did in the 2008 crisis — the fed funds rate is only running around 2.4%.
This leaves policymakers little monetary ammunition; they’ll have to blow their brains out with fiscal policy — running bigger deficits (also financed by the Fed’s made-up money) — to stop the correction.
Our guess is that concrete sales will rise as infrastructure projects get underway. But a better place for your money is probably gold. More federal spending, in a slumpy economy, will most likely mean higher rates of inflation.
Since 2003, the US has enjoyed an era of low inflation. Even so, prices have officially risen almost 40%, while the real cost of living for real people has risen much more.
Over the next 16 years, you should expect your money to lose value even faster…perhaps with prices 2 to 3 times higher by 2035 than they are today.
So, what do we do? Watch. Wait. Wonder. And buy gold…maybe it will go up. Maybe it won’t. But it won’t go away. And a lot of other things will.
Regards,
Bill Bonner