Dear Readers, Andy was on Liberty Talk Radio again with Joe Cristiano to discuss the 2020 economic stimulus package recently passed by Congress. We’ve reached a critical inflection point as a country – we now ‘need’ these stimulus programs / bailouts to continue to function in our current monetary and economic system. During the crisis of 2008, there was a chance to change course. With the passing of 12 subsequent years, so has the chance to sufficiently alter course. We’re locked into the petrodollar system until the next currency model emerges.
For convenience and at the request of several readers, we’re adding the audio from the discussion in mp3 format. You may listen below or download it by right-clicking the link. More updates to follow.
The following chart shows the yields on USTreasury securities during month of March. These are end-of-day figures. Intraday, the 1-3 month were negative during the middle portion of the week.
As of Friday, 3/27/2020, the 30-year bond is paying 1.29%. This is slightly off the bottom of less than 1% on 3/9, but is still very negative in real terms (when using the CPI to discount for price inflation). You may click the thumbnail below to enlarge. We are also posting the link to the Treasury’s site as well for your convenience.
Today, for the first time, a prominent national politician mentioned on television news that portions or potentially all of the pension systems in the United States might have to be ‘nationalized’ to fund additional bailout measures.
It is already abundantly clear that the $2+ Trillion measure that just passed the Senate won’t be nearly enough. We have lived by debt for many years with seemingly few – if any – observable consequences. The old saying says ‘live by the sword, die by the sword’. Perhaps we’re about to find out.
In 2013 there was a bank raid on the tiny Mediterranean island of Cyprus. Panic ensued with depositors losing the ability to withdraw funds, a bank holiday followed and a bail-in resulted. A bail-in? Yes, that’s not a typo. We penned a volley of articles dealing with what transpired in Cyprus and closed out with some possible mechanisms by which US retirement assets would be seized to protect national security interests.
Rather than re-write all of that content we’re going to just re-post what we penned at that time. Tomorrow (hopefully) we’ll be able to take a short guided tour through those articles and apply some of what is going on now and how this whole thing might come together. A friendly reminder. We are not asking for any money. We don’t want any. We are not giving advice. We are providing information and analysis based on almost 50 combined years of studying economics, financial markets, and geopolitics. The link to the compilation – in PDF format – is below. Until next time,
An expected consequence of the flight to ‘safety’ (sarcasm ours) has been a decrease in interest rates. While rates have been far into negative territory for quite some time now, today is the first day that nominal rates have gone to 0.0%. What this means is, at the current price, the 1-3 month T-Bill series is paying zero interest.
While this is not disimilar to what most consumers have been experiencing in their checking and even savings accounts for some time now, these are perceived to have even less risk than USGovt. debt. In our next post we’ll go a bit deeper into the various kinds of risk associated with various financial instruments. This is something we probably should have dedicated an entire column to some time ago even though we often referred to various types of risk.
Put simply, there is more generalized systemic risk (non-diversifiable) than at any time in the history of US financial markets. We are certainly living in interesting times. We will re-post an article that was written nearly a decade ago on risk in very general terms. Stay well and stay tuned.
Readers: A huge ‘thank you’ to Joe Cristiano for having me on for his debut! We kept the time down, but did talk about a few angles to this whole financial/economic wash out that haven’t really been covered. A few have been totally ignored. It’s our hope that keeping these shorter will encourage more people to listen in. Thanks again Joe and it’s good to have you back!
Since we were unable to do Liberty Talk Radio again, I’m going to address the questions we received here. The chart below will be a point of reference for most of them.
The chart above shows the Dow Jones Industrial Average from approximately 1905. You’ll have to click to see the chart in detail and I apologize for that – it is hard to get a decent chart with that kind of timeline.
The first ‘peak’ if you can even call it that was the roaring 20s and the bursting of the speculative bubble in late 1929. The Dow would lose more than 75% of its value before the move ended.
The next events are pointed to as well. The main question people have is ‘How was the DJIA near 30,000 to begin with?’ It’s a good question. There are a couple of reasons. First is inflation (growth of the money supply). More money chasing after a relatively fixed set of goods produces higher prices, all else being equal. Let’s proceed through the timeline to get to an answer about Dow 30,000.
Inflation and the revocation of the Glass-Steagall Act allowed for the run-up and eventual blowup of the dot-com bubble. The fact that many of the dot -com firms never made a single penny in profits yet sold for hundreds of dollars a share contributed as well. We’d call this part a speculative bubble. Inflation put the money in the system to allow the bubble to reach the level it did.
After the 2002-03 recovery, the central banks (globally) began serious interference in markets, causing distortions and artificially low interest rates (aka cost of capital) that allowed the next bubble – the housing bubble to inflate. Again, more money in the system due to inflation and a lower cost to that money thanks to the central banks and voila! Boom.
If you thought that was dramatic, the federal reserve in the US and other central banks began something known as ‘quantitative easing’ or QE. This is a fancy term for printing money from thin air and injecting it into the financial system and economy. In the business we call it ‘hot money’ because it’s like a hot potato. It moves around very quickly. From 2009-2019, we had multiple opportunities for what is happening right now and each time, the central banks intervened with more hot money and you can see by the shape of the curve after 2009 how the slope increases dramatically.
This general shape of curve is consistent with monetary systems that are built on fractional reserve banking and that feature a unit of currency that isn’t backed by anything tangible. Until 1971, the USDollar was at least partially backed by gold. I didn’t mark the area, but if you look on the chart at where the curve really starts to accelerate upwards, that was right in the 1971 time frame.
There has been some speculation about fractional reserve monetary systems of late. The important thing to note is that this particular type of system allows for inflation (the creation of new money) when debt is incurred. A quick example is in order. I take 100 depreciated American dollars to the bank and deposit it. Joe Cristiano comes along and asks my bank for a loan, they will lend him up to around $90 of my deposit. However, the bank still owes me my $100 initial deposit. At this point, the money supply went from $100 to $190.
One of the often used misconceptions is that, therefore, when loans are repaid, that equals deflation (the destruction of money). It does not. Let’s use our above example. Joe repays his loan to the bank after 30 days. Let’s say they were very charitable and say they charged him 1% total interest for the 30-day loan. So, he would repay $90.90. Now, my initial $100 is still in there so the total is now $190.90. No deflation.
However, when people pay down loans instead of taking out more debt it does dramatically slow the rate of bank-created inflation. This happened during 2010. Governments don’t like this because they’ve invested a great deal of time convincing people that inflation is necessary for growth to occur. If the people won’t borrow, you can sure bet the governments will do it for them and that is exactly what took place in 2010.
A final thought. A few asked if what is going on would have happened if we didn’t have a global biologic event. As you can see by the chart above, we’ve been long overdue. The QE done by the federal reserve is unhealthy for the economy and if our economy was truly healthy, it wouldn’t need constant stimulus or massive federal, state, local, and personal deficits to function. The ‘solution’ for nearly 2 decades has been to print money and blow up bubbles. Put simply, at some point bubbles always burst and this most recent one was looking for its pin.
I will be on either a brief Q&A segment with Joe Cristiano’s Liberty Talk Radio or I’ll be releasing a short podcast this evening. I know many of you are not in the US so my apologies for the short notice. Please email your questions when you can and we’ll go from there.
Topics? While I have medical training, I am not qualified to speak on the issue of COVID-19 beyond the most general of terms. I would like to focus on the global financial markets and the very strong likelihood that another 2008-style event was imminent as early as last summer.
Now, with global markets shredded, economies left in doubt, and the population of a growing number of countries behind closed doors, what needs to happen next? We’ve heard some solutions. Are they the right ones?
We’ll be addressing these issues – and your questions – tonight. Don’t miss it!
“The past month has been one of nearly continuous turmoil in the financial markets”. That might well be the understatement of this still fairly new century. Keep in mind that during the past 20 years, we’ve had 2 significant recessions (according to the Bureau of Economic Analysis), a complete meltdown of the .com mania, the inflation of a real-estate bubble and its subsequent bursting, the halving of US financial indexes, and the bankruptcy of names like Lehman Brothers, and AIG to name a few. Throw in a massive bailout, a fusillade of rescue programs like TARP, TSLF and the resulting blowout of the federal reserve’s balance sheet. This is within the first 10 years. Keep that in mind.
The second ten years have featured D-E-B-T – on all levels. Governments
of the world, states and provinces, local municipalities and parishes,
students, consumers, homeowners. In short? Pretty much everyone. That debt has
driven the economy for the past decade. Globally. Many will think this is just
an American problem. It’s not. Misery loves company, right? Not so fast. In
this brave new world of interlocking economies and financial systems, a failure
on the other side of the world can cause problems in our own back yards.
Entire countries have gone bust and have had to go hat in hand to their representative central bank. Remember Portugal, Ireland, Italy, Greece, and Spain? Don’t forget the tiny island of Cyprus and its king-sized banking crisis, which led to a bank holiday and eventually a bail-in. Wait, we just talked about a bailout. What’s a bail-in? We penned a serious of articles on this topic back in 2013. Read them here. Keep in mind that this is very non-exhaustive and brief summation of some of the more important events.
Which brings us to the present. Yesterday, 3/11/2020, the ENTIRE yield curve for USGovt bills, notes, and bonds was under 1%. That’s not a typo. There is rampant talk of negative interest rates here in the US. This phenomenon is already happening in Germany – the powerhouse of the European Union and several other easily recognizable nations. Moves in the bond market that generally take many months are now taking days. If you’re planning on retiring and living on the interest of your bonds, you might want to rethink that strategy. Many of the people we communicate with regularly have themselves or know quite a few people who have gotten a 20% haircut or more on their equity investments since the beginning of the year.
Much of the more recent activity has been blamed on the emergence
of a new Coronavirus. The fear alone that has been imparted by the mainstream –
and even alternative media is bound to have some kind of impact on the global
economy. Economists are already clamoring for cash payments to citizens as a
means of ‘stimulating’ the economy. In the US we’ve done this twice previously
in the past two decades. Both were credited with averting nasty recessions.
Both went directly on the federal budget deficit here in the US. Debt has
indeed become the answer to all that ails most economies the world over.
The gyrations and volatility in financial markets have been
enough to give even seasoned investors a serious case of whiplash. In the past
10 trading days the Dow Jones Industrials Average here in the US has had its
two biggest down days – EVER – in terms of the number of points lost. Sandwiched
in there are some of the biggest up days – EVER – again, in terms of index
points. Oil crashed over 20% in a single day. Gold has broken out and is once
again around/over the very important $1650 level. Silver is probably the
bargain of the century to this point. Throw into all this a major year in terms
of the political arena. And no, we are not breaking our tradition of focusing
on policy. The policy provides the answers. The names only serve to
muddle the issues.
As we write this evening of the 10th of March in the year 2020, it is quite possible and likely that the economic and financial foundation that we all rest on has begun yet another metamorphosis into something completely different than we’re all used to. Contemplate the concept of negative interest rates alone. Such a ridiculous move would take several hundred years of investing philosophy and modeling and flush them directly down the toilet. Again, this is likely an understatement. The US went from a national debt around $14T during the 2012 campaign season to a level of $23.5 trillion in the early part of 2020. In 1986, America reached the $1 trillion mark. Any stimulus will go right on the tab.
Many people are electing to stay home for fear of
contracting COVID-19 and with all the uncertainty that exists regarding this
virus, we refuse to pass judgement. Since consumers are responsible for nearly
70% of US Gross Domestic Product, even a month’s cessation of vacations,
cruises, flying, going shopping and all the other activities that fall under
consumption, we could easily see a sizable dent popped into Q1 GDP. Or the
money might be spent online, and it might not affect GDP that much at all. The
situation in China can only be guessed. Sadly, national governments have a
growing aversion to the truth even when lives are at stake.
In summation, we cannot and will not make any ‘predictions’
regarding Q1 GDP, consumer spending and the balance of trade. Given that oil
has dropped precipitously, that drop will translate into lower gas prices at
some point and that will lower that portion of consumer spending, which will
negatively affect GDP. This reality makes a strong case that we should be
measure growth in units rather than dollars wherever and whenever it is
practical to do so. The best advice we can give is gather as much information
as possible and try to avoid making decisions based on emotion. Seeing the Dow
Jones Industrials Average lose over 2,000 points in a single trading will
unnerve even the savviest of investors.
Living off the interest from investments, for all purposes,
is not going to be feasible for the foreseeable future. Our economies are
hooked on low interest rates. That is helpful for the borrower, but lethal for
the investor. It forces investors with shorter time horizons into the riskier equity
markets. This situation represents a clear and present danger to the standard
of living for millions of people in America alone.
This is not all gloom and doom, however. Again, like 2008,
we have a chance to endure the economic pain necessary to down regulate our
debt-laden, consumption-oriented economy into something that doesn’t need
trillions of borrowed dollars each year just to keep plodding along at a snail’s
pace. We have an opportunity. Will we avail ourselves of it? If the talking
points coming out of the television and Internet media outlets is any
indicator, we will most likely not take this opportunity, opting instead to
kick the proverbial can down the road ensuring that the pain will only be worse
for the next generation when they are forced to deal with it. We challenge not
only America, but the rest of the world to put down the credit cards and take a
step back. We did it here in the US during 2010. We can do it again. But will
we?
The PDF is from the St. Louis Federal Reserve Bank. It is a publication called ‘Page One Economics‘ and is written by Fed Economists/Education personnel. The content is easy reading and is geared towards students and individuals without formal education in economics or finance.
