Important Economic Trends During Anarchy – Week 4

2020 – Something Big is Afoot.  Are You Prepared?

The Fed

One morning on my walk I decided I needed to make the number one item on my Bucket List – “Become a certified curmudgeon”. I am not sure how you get certified as a curmudgeon. Is there an organization called Certified Curmudgeons of America? American Society of Curmudgeons? I have seen badges for ASC, it that the group I am seeking? Maybe I should start an organization. No, that sounds complicated and I am trying to simplify my life. Either way, I find my attitudes becoming similar to some older men that I knew in my youth who at that point in time I felt were curmudgeons. Now I realize they were not just correct, they were wise.

My transition is the result of both experience (how the world really works) and a desire for simplicity in the face of increased complexity. Every time I do something thinking it will be simple, it quickly becomes complicated. Even calling someone to get a simple answer, I end up lost in a telephone matrix system unable to find a human to help me. If I should talk to a human, English is definitely a second language. Nothing.  Is.  Simple.  Anymore.  Nothing.

Back in January, when the world was Pre-Wuhan Virus simpler, The Love of My Life and I were visiting our infant grandson and his parents in Orlando. The pastor of the church they attend gave a sermon on “What is your Why?” with the recommendation that we each “Live Intentional”. A great sermon. Superb advice. Pure wisdom. Simple is always best. But achieving simple is quite elusive.

Here are two simple and totally accurate facts:

  1. It is great to live in the country that is the Hegemon because it means our central bank, The Federal Reserve Bank (The Fed), is the strongest central bank in the world.
  2. Never bet against The Fed.

This is my first pandemic experience. It also is the first time I have ever seen our national economy go from ROARING to STOP in 30 days. I totally understand that faced with a virus released by the Chinese who refused to tell us anything about it and had vacuumed up all of the PPE while trying to buy the biotech companies with anti-viral expertise, the ONLY choice was to buy time for our medical community.

As we wrote back in March, stopping the economy was the correct decision but the damage is huge. It was just reported that the GDP dropped 32% in the second quarter. We have seen some of the negative forces released reflected in our economy, but the major ripple effects have not yet come to shore. Worse case, they will arrive like a tsunami event. Spring of 2021 is probably the economic trough.

The majority of the House of Representatives is a collection of unemployables owned by special interest groups. There are a few bright bulbs, not many. Perhaps the Republicans have some fiscal policy discipline left. The Democrats are in full “Never waste a crisis to build your political base” mode.

NEVER has The Fed been so involved in our economy. The Fed is utilizing Quantitative Easing (QE) in a manner that exceeds the QE during the Great Recession. Congress has given it additional authority which is being used. The Fed will win in this recession. The only real question is “What will be the collateral damage”.

Before 2008, The Fed had a Balance Sheet of $900 Billion or about 10% of the U. S. Treasury market. With QE, The Fed increased its Balance Sheet to $4.5 Trillion before tapering down to $3.8 Trillion in 2018. That was about 20% of the U. S. Treasury marketplace. Today The Fed holds $7.3 Trillion and expects to hold $9 Trillion of assets on its Balance Sheet by the end of this year, about 33% of the Treasury Market. The Treasury market is totally distorted.

It takes 9 to 12 months for the full effects of an economic event, positive (lower interest rates, increased deficit spending) or negative (stopping a roaring economy in its tracks) to be fully reflected in the economic data.  In other words, anything Congress does now is too late for the election this fall because it will not fully affect the economy until next July. They should punt.

What are the effects of the combined actions of The Fed with Congress’s massive deficit spending? Here are the ones that will most affect land values and the land market:

  1. Increased national debt – We are already at a point where we cannot afford our national debt at historic normal interest rates.  Trump and his advisors were clearly working to rapidly grow our economy to allow the debt to be serviced.  It may be too late.
  2. Negative Real Interest Rates – When the cost of money (interest rates) are below the rate of inflation, that is called Negative REAL interest rates. With the 10-year Treasury rate being 0.6% and inflation at an official rate of 1.5%, the Real Interest Rate is -0.8%. This suggests that borrowed money is free because any real asset is “increasing” faster than the cost of the money to buy it (interest expends of the loan).
  3. Bubbles – As investors search out opportunities to invest their money, they chase all sorts of assets which leads to those assets to becoming over-priced. Think speculative “growth stocks” that ignore negative facts and increase in price, bonds that trade at prices that provide a negative return, gold increasing 30% this year, and yes – real estate values.
  4. Inflation – That is the consumer’s perspective, our currency is being devalued. That is happening now.  With consumers focused on service (delivery) not price, prices are increasing usually with repackaging to make the increased price less obvious.
  5. Dollar – The U S Dollar is the currency of choice in the world, but its value is declining because of Congress’s deficit spending and the QE by The Fed. A decline in the value of the Dollar makes our products more competitive overseas but increases the cost of imported goods, a source of inflation to the USA consumer.
  6. False Signals in the Financial Markets This is The Greatest Risk. Capitalism depends on undistorted financial markets to determine the cost of money and therefore the best allocation of capital.  With The Fed buying financial assets and its Balance Sheet approaching 33% of the market, the signals from the financial markets are all false.   There is a point where the financial markets simply stop functioning which is called an economic collapse.  Also, we are at the point where actions of The Fed have a diminished effect.  Where is the tipping point?

I am optimistic long term because Capitalism is a phenomenal positive economic force. Have you seen all of the new products associated with the virus and the companies being created to produce and distribute them? We have lost many small businesses, but there are many new ones being created to take their place.  That gives me hope for the future of the USA.

If we survive a “stuffed” mail in ballot November election, the short term is the problem. The hurdles to a bright future include:

  1. How do you invest your capital today to protect it and get past this economic period?
  2. What is needed to get past the challenges in front of us.

The answer to the first question is to have a balance of cash and superb land. Land is the source of all wealth and the best long-term investment vehicle. Some land is simply holding the world together. Not having cash is called illiquidity and the first step to serious financial difficulty.

The answer to the second question is simple.  Adults need to stand up, demand that the political scoundrels be held accountable. We are living in an “Alice in Wonderland” world because one party’s lust for power is so consuming that they create crises to build their political power base and achieve their goals.

Every thinking person is asking “What happened during the Obama administration that was so evil and included so many officials that to cover it up required the persecution of General Flynn, the creation of the false Russian Collusion against Trump, and a faux impeachment of Trump?” Those crises were started by the Obama Department of Justice/FBI and CIA. The persecution of Gen. Flynn was directed by Obama. Yet no one in the Obama Administration has been indicted. Why? Are these acts of Sedition? Treason? Both? It appears the Deep State is real.

My “Simple” is… a combination of cash and superb land.

“But let none of you suffer as a murderer, a thief, a criminal, or even as a mischief maker. Yet if any of you suffer as a Christian, do not consider it a disgrace but glorify God because you bear His name.”

(1 Peter 4:15-16 New Revised Standard Version, Oxford University Press)

Capitalism builds wealth, socialism consumes it in self destruction.  I serve an awesome God.  Stay healthy,