Imaginary Wealth and Hyper-Financialization
Ben Hunt: “In late 1990s, the Fed began to use monetary policy as a political tool to make us richer than our economy could grow, inflating home prices and financial asset prices without (they thought) ever triggering wage/price inflation in the broader economy.”
Change “richer” to “feel richer” and the idea is perfect.
Earnings Forecast
Which Earnings Estimate Do You Believe?
- Wall Street predicts +10% S&P earnings growth. T
- The Belkin Report forecasts -48% S&P earnings slump, like 2009.
Actual earnings could be even more extreme or somewhere in the middle, but I expect Belkin to be in the ballpark.
Case for an Earnings Crash
- Recession
- De-globalization costs
- Retirement of 22 million boomers will lower productivity and slow spending
- De-carbonization is very expensive, do we even have the natural resources?
- End of a 40-year bull market in interests rates
- Potential for protracted war in Ukraine
- Central bank concern over reigniting inflation
- Renewed union push
- Wealth impact of stock market decline will itself slow spending
- Various bubbles have just begin to pop
Feedback Loops
Some of the above points are circular, feeding on themselves. But I do expect a reinforcing feedback loop. There is a wealth impact of a stock market and crypto plunge that feeds on itself.
De-Globalization
De-globalization is huge. We went from just-in-time inventory management to inventory and supply chain chaos. That point alone is sufficient reason to suspect current earnings estimates.
For discussion, please see De-Globalization: New Supply Chains Are Inefficient and Will Drive Up Inflation
Protracted War in Ukraine
Things will improve once the war in Ukraine ends, but when is that?
Neither side can win outright until at least one side changes its definition of win. Ukraine wants all of its territory back. Forget it. That won’t happen. And as long as the US keeps supplying weapons, the war will go on.
Meanwhile, How Long Before Putin Shuts Off Natural Gas Delivery to Europe?
Assume the war ends early. Things will not return to the previous normal of outsourcing everything to Asia confident that supplies will be readily at hand when needed.
Climate Change
A climate change push is everywhere. But where do we get the lithium, platinum, nickel, rare earth minerals? What about fertilizer?
What about building the infrastructure? The latter will take still more government spending on top of the declared war on fossil fuels driving up costs.
Unionization
There is a renewed push for unionization in many states. Amazon just lost a key battle.
In California, and AB5 Ruling May Disrupt All West Coast Truck Shipments
California ruled that independent drivers are employees not contractors. The US Supreme Court refused the case. The ruling creates a huge potential for a massive truck shipping logjam.
Even when the logjam ends, there will be a permanent increase in price.
22 Million Boomers Head for Retirement
Millions of those workers will soon retire. Who is there to replace them but unskilled Zoomers?
Expect a productivity hit.
For more discussion, please see Expect a Long But Shallow Recession With Minimal Job Losses
Central Bank Concern Over Reigniting Inflation
We have had a 14 years of near-endless QE. We now have Quantitative Tightening scheduled to last for years.
Color me very skeptical of that idea. Regardless, QT will go on for a while.
Powell looks like a fool on inflation, primarily because he was a fool. He will not want to risk more inflation. This point is clear.
On June 29, 2022, Powell admitted “We understand better how little we understand about inflation”
- Powell: “We understand better how little we understand about inflation.”
- Powell: “There’s a clock running here. The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.”
- Powell: “The process is highly likely to involve some pain, but the worse pain would be in failing to address this high inflation and allowing it to become persistent.”
- Powell: “Is there a risk we would go too far? Certainly there’s a risk. The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.”
That translates to “Damn the recession, we are hiking.”
End of a 40-Year Bond Bull Market
Instead of financial pumping, ponder the End of the 40-Year Bull in Debt and a “Global Depression” Threat
Francis Hunt interviews Danielle DiMartino Booth in a must watch video, her most economically comprehensive yet.
Risks Strongly Skewed to the Downside
Point-by-point there is simply no reason to believe fantasyland earnings estimates. My estimate of 2,000+- on the S&P 500 just might be overly optimistic.
This post originated at MishTalk.Com.
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Mish
If that doesn’t tell everyone just how fragile things are, nothing will.
Regression to the mean, it always happens eventually, with a little overshoot to make it spicy.
means-of-payment money supply (now designated as M1A by the Board of Governors) will
approximate M-3.”
of the principal purposes of the Act was to provide the housing industry with a
reliable source of funds. That may be
achieved through various governmental and quasi-governmental corporations (as FNMA and GNMA demonstrated). But the role of the S&Ls in housing finance
will probably diminish significantly. By
becoming commercial banks and having a larger spectrum of loans to choose from,
the S&Ls will act like banks and whenever possible eschew “borrowing short
and lending long”
“Sources of mortgage funds will shift from the
subsidized rates heretofore provided by the small saver to “bond-backed”
sources (as MBS demonstrated) which will reflect the higher interest rates prevailing in the
loan-funds markets.”
residential & commercial real-estate sales/purchases.
policy change by Alan Greenspan in order to jump start the economy after the
July 1990 –Mar 1991 recession), legal, fractional, reserves (not prudential),
ceased to be binding – as increasing levels of vault cash/larger ATM networks,
retail deposit sweep programs (c. 1994), fewer applicable deposit
classifications (including allocating “low-reserve tranche” &
“reservable liabilities exemption amounts” c. 1982) & lower
reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve
simplification procedures (c. 2012), combined to remove reserve, & reserve
ratio, restrictions.
This was the direct cause of the GFC, the
boom/bust in real-estate.
policy change by Alan Greenspan…
boom/bust in real-estate.”
88.287
At the height of the Doc.com
stock market bubble, Federal Reserve Chairman Alan Greenspan initiated a
“tight” monetary policy (for 31 out of 34 months).
Note: A “tight” money policy is
defined as one where the rate-of-change in monetary flows (our means-of-payment
money times its transactions rate of turnover) is no greater than 2% above the
rate-of-change in the real output of goods and services.
Greenspan then wildly reversed
his “tight” money policy (at that point Greenspan was well behind the employment
curve), and reverted to a very “easy” monetary policy — for 20
consecutive months (i.e., despite 14 raises in the FFR (June 30, 2004 until
January 31, 2006), – every single rate hike was “behind the inflationary curve”,
behind RoC’s in long-term money flows). I.e., Greenspan NEVER tightened
monetary policy.
weapons companies are doing quite well from all this. They’re not going anywhere.
Make no mistake, the industrialized and industrializing world is reverting to multiple spheres of influence. The Japanese and South Koreans and Taiwanese see it. So does Australia. Europe will soon get the message. South America will do what it did in the second world war: wait to see who’s winning, and then join that side. India has substantial grudges against the U.S. that originated in the 1960s. “The West” has somehow convinced itself, or at least their spokesliars and poo-bahs, that “the world” is on “our side.”
Yeah, and how about that Maginot Line?
* no new pipelines mean no refinery expansion. 7 have shutdown since 2020, for various reasons.
* ESG bias in lending is removing capital from oil extractors, pipelines, and refiners. CBs are now buying ESG bonds, disrupting nominal rates
* Europe LNG ports are only 15% of what Russia was shipping. Contagion appears on the horizon.
* sanctions appear to be causing deglobalization, and a permanent decrease in efficiency as stocks from russia are sent east, over greater distances, as LNG is shipped overseas from the US.
* oil drill pipe is up well over 60%. This is a primary input cost.
Ben Hunt: “In late 1990s, the Fed began to use monetary policy as a political tool to make us richer than our economy could grow, inflating home prices and financial asset prices without (they thought) ever triggering wage/price inflation in the broader economy.”
Change “richer” to “feel richer” and the idea is perfect.
lag model is a model for time series data in which a regression equation is
used to predict current values of a dependent variable based on both the
current values of an explanatory variable and the lagged (past period) values
of this explanatory variable”
laureate, Dr. Milton Friedman and Anna J. Swartz (“Money and Business Cycles”),
monetary lags are not “long & variable” (A Monetary History of the United
States, 1867–1960, published in 1963). The lags for monetary flows, M*Vt, i.e.
the proxies for (1) real-growth, & for (2) inflation indices (for the last
100 years), are historically, mathematical constants.
From the
standpoint of monetary authorities, charged with the responsibility of
regulating the money supply, none of the current definitions of money make
sense. The definitions include numerous
items over which the Fed has little or no control (e.g., M2), including many
the Fed need not and should not control (currency).
numerous degrees of “moneyness”, thus confusing liquidity with money (money is
the “yardstick” by which the liquidity of all other assets is measured). The definitions also ignore the fact that
some liquid assets (time deposits) have a direct one-to-one, relationship to
the volume of demand deposits (DDs), while others affect only the velocity of
DDs. The former requires direct regulation;
the latter simply is important data for the Fed to use in regulating the money
supply.
the bottom in March 2009. I denigrated Nassim Nicholas Taleb’s “Black Swan”
theory (unforeseeable event), 6 months in advance and within one day. I
predicted both the flash crash in stocks on May 6, 2010 and the flash crash in
bonds on October 15, 2015.
The Stock Market Was Rocked by a Mysterious
‘Flash Crash’ Five Years Ago. What You Need to Know. | Barron’s
“Diminishing market depth and a surge in
volatility were both on display Oct. 15, when Treasuries experienced the
biggest yield fluctuations in a quarter century in the absence of any concrete
news. The swings were so unusual that officials from the New York Fed met the
next day to try and figure out what actually happened”
Link: “Diminished Liquidity in Treasury Market”
or:
for its “depth,” Wall Street’s way of talking about a market’s ability to
handle large trades without big moves in prices. But lately, that resiliency
has practically vanished — and that’s a big worry.”
“The only relevant test of the validity of
a hypothesis is comparison of prediction with experience.” – Milton
Friedman
the clock. Chinese state media carried live video of the construction
site and showed the scale and speed of the project.
Production is half the picture.