Sorry you missed out Peoplenomics.com report Wednesday (if you did) because in it, my “deflationist pal” Jas Jain made a very interesting point.
Earnings are essentially unchanged from where they were three years ago, yet prices are up 40 percent. A damn fine observation and one that speaks volumes about the HS&J (hype, shuck, and jive) cloud surrounding the FAANG stocks. (For the Great Unwashed, those are Facebook, Apple, Amazon, Netflix, and Alphabet’s Google.)
Even scarier (here you thought Halloween ended at sunrise Tuesday, huh?) if you listened closely to what Fed Chair Janet Yellen said in her press conference following the meeting yesterday sounded a lot to me like “Here’s a long, incomprehensible rationale that says we may not be able to raise interest rates in December…”
With the market going nuts (per Jas’ 40% gains with effectively no change in earning, as a drop in the quality of those at that) plus the Bitcoins sailing through the $7,000 level this morning leads us to what we’ve been writing about for years: the Mother Of All Bubbles is here and now.
As we have long-held, the Fed is not able to raise rates for a number of reasons. The first is that it wrecks the federal budget and screws mightily with the Federal Debt. Thanks to a succession of ass-clowns alleging to be Congress, which gave away half a century worth of free lunches, we have a monstrous Federal Debt.
Just to “make it real” a bit, if you had a household income of $200,000, that much dough could pay you for how long, do you suppose?
We’re talking Ben Dover kinda finance here.
I haven’t shared how our track replaying 1929 for a while. Updated twice weekly for Peoplenomics subscribers, this is what a financial disaster looks like:
I left the blue circle on the 1929 track so you could refer back to our article in June about Bitcoin’s “Great Hesitation” which an inspection of BTC charts will show ought to be nearing its high.
Meantime, interest rates have been lower, longer, than in a century and what the astute listener would have heard the Fed Chair admit was that they are not in the position of being able to raise rates yet. They need them low so lots of money is sloshing around looking for something to buy.
It’s like if I needed to unload some paper: I’d hand you $100-bills till you ran out of other stuff to buy – and then you’d buy mine. In the meantime, though, if the Fed raises rates, the valuation of whatever paper they’re selling changes and that’s where the brown stuff meets the fan.
We note with curiosity that the Bank of England is raising rates: Bank of England hikes rates for first time in a decade, sees only gentle rises ahead. The main difference is they’re not trying to give away $100 bills to give “investors” enough liquidity to buy the steamy leftovers from their last collapse clean-up.
So, we impute, the Fed may have to raise rates, but when they do, it will be time to take the kids to the financial fallout shelter.
Meantime, Party On
Eventually, the Fed is likely to be forced into negative rates, regardless of what the cheerleaders are promoting. I can’t see any other way.
And when they do, hard assets (gold, silver, oil, wheat) ought to soar. Anything edible, in fact, could go through the roof. And then massive inflation as we can project the Federal debt going up at the same rate as Bitcoins recently.
Do you realize June 12 Bitcoin was at $3,000?
And then on August 14th it was at $4,000?
My lord o’ Goshen! That’s a 25% gain in two months.
Which means we should be where now?
If we simplified this to 12% per month, Bitcoins ought to have hit $5,000, then in October $5,600 and this month? $6,272.
But no, we’re in the $7,200 range now.
Return with us now to those thrilling days of yester-year when it was tulips, not their modern digital analog that drove people to financial craziness:
“According to Mackay, the growing popularity of tulips in the early 17th century caught the attention of the entire nation; “the population, even to its lowest dregs, embarked in the tulip trade”. By 1635, a sale of 40 bulbs for 100,000 florins (also known as Dutch guilders) was recorded. By way of comparison, a ton of butter cost around 100 florins, a skilled laborer might earn 150-350 florins a year, and “eight fat swine” cost 240 florins. (According to the International Institute of Social History, one florin had the purchasing power of €10.28 in 2002.)
By 1636 tulips were traded on the exchanges of numerous Dutch towns and cities. This encouraged trading in tulips by all members of society; Mackay recounted people selling or trading their other possessions in order to speculate in the tulip market, such as an offer of 12 acres (49,000 m2) of land for one of two existing Semper Augustus bulbs, or a single bulb of the Viceroy that was purchased for a basket of goods (shown in table) worth 2,500 florins.”
If you want a social trend to look for, keep your eyes open for the return of Green Stamps. As you can read over here, trading stamps flourished during the Depression and their use didn’t fall off until World War II came along.
And since we are in the final throes of the 1929-like blow-off now, we are looking for the modern analog to trading stamps to appear.
Just make sure, when they arrive, that you bail on them prior to mid-summer of 2023 because that’s when our historical replay suggests we’ll be on the eve of WW III.
Before the Fed can meaningfully raise rates, taxes have to go up, not down. The shifty tax talk in Washington is little more than a poor mimicry of the Revenue Act of 1929.
You really need to spend the few minutes to visit the Tax History website here. Very quickly, you’ll realize that the pending “Trump Tax Cut” is nothing more than a replay of the same error in 1929 signed by Herbert Hoover.
“And in some respects, it was. The Revenue Act of 1929 was designed to promote recovery. It marked a notable foray into fiscal activism, especially for a Republican administration. But the law’s mechanism for promoting recovery was hardly Keynesian. Rather, it was rooted in traditional theories of public finance — theories emphasizing the importance of balanced budgets and fiscal rectitude, not deliberate deficits and stimulatory spending.
On October 21, 1929, Hoover signaled his intention to ask for a tax cut. Treasury Secretary Andrew Mellon told lawmakers that he expected a budget surplus in each of the next two fiscal years. As a result, he suggested, Congress would have ample room to cut taxes. Ways and Means Chair Willis Hawley, R-Ore., responded warmly. “In the past,” he told reporters, “each reduction in taxes has stimulated business and resulted in another surplus the subsequent year.”8
It is for this, and a host of other reasons we have recently outlined for subscribers, that a tax break right now is NOT the right policy. We are at the dregs and bottom of the historical long wave in economics, not at the top.
And be mighty damn wary of the month following the signing of any “tax relief” measure. Because it will have a strong odor or resonance with Hoover in 1929.
When the Hoover-Trump parallel goes viral, we will count back a year from today when we began discussing its historical import. Nice to have lead time, isn’t it?
Reagan was, as we have mentioned many times, simply lucky with his Laffer-ble tax cuts. The country had passed the all time interest rate peak of 1980-81 and as rates came down, some tax relief worked.
Still, many don’t see it: Newt Gingrich: Tax cuts are key to reaching four percent growth — Ignore the ‘experts’.
At the other end of the stick, where we are today, it’s a different kettle of fish, indeed.
What’s worrisome to us is that the Fed doesn’t seem able to comprehend it. And in failing to raise rates now, they are doing nothing but “planting the tulips” that will collapse the economy in shambles in 2018.
There never was, nor will there ever be, a truly free lunch. And when the Fed is still unable to raise rates – for whatever cited reasons – it means the worst is yet to come.
Meantime, Party On, Dudes
While we await the collapse of the virtuous cycle, though, it doesn’t mean the passing news won’t be just freaking dandy.
Take the Challenger job cuts report just out: A peach.
“U.S.-based employers announced 29,831 job cuts in October, down 3 percent from the same month last year, when 30,740 job cuts were announced. Employers have announced 25 percent fewer job cuts than they did in the same period last year, according to a report released Thursday by global outplacement consultancy Challenger, Gray & Christmas, Inc.
So far this year, 351,309 job cuts have been announced, 24.6 percent fewer than the 466,352 cuts announced through October 2016. This is the lowest ten-month total since 1997, when 328,816 cuts were announced through October.
“Companies are currently holding on to their workforces, but this may be the calm before the storm,” said John Challenger, Chief Executive Officer of Challenger, Gray & Christmas, Inc.
“Another downturn could be on the horizon for early to mid-2018 and with it, the large-scale layoff announcements that typically follow. Adding to this is the possibility that global factors, including Brexit, could usher in a recession,” Challenger added.
October’s job cut announcements were led by the Health Care sector, which announced 6,373 cuts last month, an increase of 219 percent from September, when 1,997 positions were cut. Through October, the Health Care sector cut 31,134 jobs, a 98.7 percent increase from the 15,661 cuts announced in the same period last year.”
Sometimes the problem with economics is the data can be misleading. I liken it to putting your hand on the hot stove but wrongly concluding the pain was caused by the fact that it was raining outside at the time.
Which is, sadly, how congress works, too.
Houston Catches a Break
Maybe not from the weather this year, but certainly in baseball as they win the World Serious.
What Else Matters?
As we’ve explained, lack of training on the Rules of the Road and too much reliance on electronics was expected.
World’s most expensive dram of Scotch was a fake. I knew there was a reason we didn’t order several bottles of the stuff.