Important Economic Trends During Anarchy – Week 6

2020 – Something Big is Afoot. Are You Prepared?

Financial Markets – False Signals

Every time I wrestle with my hearing aids, glasses, and Xi mask in order to go in some building, I mutter some things and think worse ones. “Thank you, President Xi” is not an accurate representation of my comments. Perhaps in another language I am saying that. Just out of ear shot it must be humorous to witness my behavior. At least I am providing some comedy to an observer. I heard my Dad curse twice in 46 years. I used up that allocation by the second grade.

My mother, a fine Christian lady but intense, used to look sheepishly at me after she would curse and say “pardon my French”. She never asked me if I actually “pardoned her French”. If asked, I would have said “No problem” because I am not stupid. Besides, I never knew if it was French or not, although it did sound familiar in English. I do not speak French, well only occasionally a few words I learned from my mother. Perhaps I should start adding “Pardon my French” after I say my version of “Thank you President for Life Xi, I love my new mask”.

Every person I talk with is in a mild state of confusion about what is happening to our country and world? That confusion is understandable. Daily we are surrounded by an amazing number of “false signals”. False signals make it hard to get your bearings.

My solution is to go for a three mile walk every morning. It both helps my back muscles to loosen up thus reducing headaches and the “quiet time” improves my mood. I occasionally see some combination of turkeys, deer, rabbits, various songbirds, beef cattle, and maybe a hawk. Most importantly, the “quiet time” is a great opportunity to identify facts and get my bearings.

I remember when the news media presented facts which they had verified so that their viewers could make up their minds. Today, the only Main Stream Media (MSM) that I have found that strives to present facts is the Wall Street Journal (WSJ). It was reported last week that 250 WSJ reporters objected to the WSJ standard for journalism because it was not “woke”. Stupid word and appropriately that rebellion was over quickly. If I had been the managing editor of the WSJ, those reporters would have “awakened” on the street.

Fortunately, capitalism makes sure voids in the marketplace do not last. Today, there are numerous small shops who play by the old journalism rules. If you are not seeking them out and listening to the facts, you are being confused by propaganda. These new sources will continue to grow in both significance and market share as the MSM declines into oblivion. That transition is something to look forward to seeing. My recommendation is “Just the News by John Solomon”.

Capitalism depends on accurate signals from the financial markets to successfully allocate resources. As the cost of capital (interest rates) increases or decreases driven by the market, capital is allocated where it can earn more than its cost. That simple statement describes why capitalism is so successful and Marxism/communism/socialism is always an abject failure.

Our tax laws encourage the use of debt as a part of the funding of an investment. When the profit is measured on the actual cash invested, the return on the actual cash is increased. When the return is higher than the cost of capital, that condition is called “Positive Leverage”.

“Negative Leverage” is a situation where the rate of return on the investment is lower than the cost of the debt. Not only is Negative Leverage painful, it is disastrous. One of the ways negative leverage can occur is when The Fed raises interest rates abruptly and significantly to discourage investments and thus slow the economy. Pay attention to that for the future.

The reverse is happening now. The Fed has driven interest rates EXTREMELY low to encourage everyone to “Go buy something”. There is no financial incentive to put money into a savings account. The Fed wants everyone to – Spend! Spend! Spend! The USA economy gets in balance (economist use the term “Clears”) by monthly payments. Lower interest rates reduce the monthly payments and the number of potential buyers increases. If demand is greater than supply, prices increase until the market “Clears”. The reverse is also true when The Fed raises interest rates to slow the economy. Prices decrease to “Clear”. A future experience.

What is abnormal is the extreme methods currently being used by The Fed including Quantitative Easing (QE), a fancy word for The Fed buying financial assets such as 10 Year Treasuries. The 10 Year Treasuries are key debt instruments in the financial markets because mortgage rates are determined by the interest rate paid on 10 Year Treasuries since the average mortgage loan is paid off in 7 years.

This is the current point of disconnect in the financial markets. No longer are market investors determining the correct yield (interest rate) for the 10 Year Treasuries. The Fed is manipulating them forcing interest rates below where the market investors want to buy. A manipulated market is hyper dangerous for many reasons including the false signals about the condition of the economy and the appropriate cost of capital. That means that capital will be misallocated, our economy will suffer, and will ultimately lead to a financial crisis in the future. Think Zimbabwe.

What are some of the signs of the misallocation of capital? Randomly, here are a few illustrations that come to mind:

1. Disney reports a loss of $5 Billion and the same day the stock INCREASES in value by $7.00 per share.
2. Big cap tech stock values increase from 22 times expected earning to 36 times expected earnings and stock analysts expect continued increases in tech stock values.
3. In the first five months of 2020, Zimbabwe’s inflation rate was 766%.

Here is reality. We are in the middle of the Wuhan Virus Pandemic Depression. The actual number of unemployed workers is obscured by massive combination of the Federal government’s fiscal and The Fed’s monetary stimuli. Please note the following data points:

1. The Fed last week announced they were no longer focused on inflation but employment.
2. Bond market investors are becoming wary of the 10 Year Treasury as the anchor of interest rates.
3. Our economy is experiencing a decade of change in a few months, a tectonic shift like an earthquake. Earthquakes cause damage.
4. The only financial market that offers a return on money is the stock market which I believe is now a speculative bubble. Bubbles burst. The stock market will “revert to mean”, a fancy phrase for in this case decline.
5. The Commercial Mortgage Backed Securities (CMBS) market is teetering.
6. The retail industry is experiencing an enormous shift in consumer behavior.
7. In their lust for power, the Democratic Party is working to elect Marxist and communist candidates to public office thereby apparently abandoning capitalism.

As a result, the combination of “Alice in Wonderland” and “1984” is an accurate description of our country today. In the short term, the die is already cast for the economy in 2021:

1. The economic data will not fully reflect the impact of the Wuhan Virus until April 2021.
2. May 2021 is when we will see the real economic recovery begin resulting from the awesome fiscal and monetary stimuli already pumped into the American economy.
3. A combination of the 2017 Tax Act, the amazing stimuli flowing, and the change of “retail” into “distribution” operations mean that the light industrial market will SOAR.
4. With interest rates at historic lows, the new home market will also SOAR. The new home market is an important leading indicator of the USA economy.
5. Industrial and new home construction will be major positive forces in our economy.

What happens AFTER 2021 depends totally on the election this November. The four Marxist Democrat members of the House won their primaries and added members to their “Squad”. Biden has announced tax increases of $3 Trillion and massive new regulations which will put us into a severe economic decline. Trump would rebuild the economy like he did the first three years of his administration. Either way, there will be inflation with both the residential and industrial markets becoming bubbles. You cannot eat gold. Get your portfolio prepared, cash short term and superb land long term.

“Do not let your hearts be troubled. Believe in God, believe also in me.”
(John 14:1 New Revised Standard Version, Oxford University Press)

Capitalism builds wealth, socialism consumes it in self destruction. I serve an awesome God. If God is on our side, who can stand against us?

Stay healthy,
Ned