THERE WILL BE BLOOD
There will be blood. Let’s discuss. The Acid Capitalist continues to fume about injustices. I
have the Fed and the mercantilists in my sights.
First, ever since the Great Financial Crisis, the global economy has failed to regain its previous trajectory towards greater prosperity. GDP is lost somewhere over the Atlantic, destination unknown. The economy has recovered for sure but it’s no way near the level that a rational investor at the turn of the century might reasonably have expected. The shortfall at the global level might be more than $20 trillion.
Its absence foments social anger. There will be blood…
What’s gone wrong? First, there’s group think, a rejection that depressions exist and a blanket ban on the use of the term in major publications. Depressions, the elite would have you believe, have been consigned to the annals of time. Assured of this, central banks have been willing to raise interest rates at the slightest indication of the economy recovering its mojo. Consider the sins of the Fed.
In 2013, conditions on the ground were improving. For sure, US GDP, was only 9.5% higher than its previous peak 5 years earlier but indications suggested that the recovery had « legs», the growth rate had improved for 4 consecutive quarters. However, adult unemployment was
What did the Fed do? They yelled fire! They indicated to the markets that their « easy money» regime was likely at an end; that they would taper…
There is another actor in this Greek Tragedy: the markets. Later, I’ll explain why they’ve become central to the plot but the policies of China et al have contributed to an expansion in the magnitude of capital markets relative to GDP that has no historical equivalent. It might reasonably be said that markets are the true overlords of our economy. Their reaction to the Fed’s quantitative tightening announcement in 2013 was immediate. “If these bozos can see the economy begin to overheat, we better bail.”
Which is to say they immediately tightened monetary policy. The benchmark 10 y T yield repriced with yields doubling to 3%. US inflation was just 1.5% for the year… Of course, the Fed had seen nothing except phantoms. They didn’t hike, Fed rates were held at zero till 2015, and their quantum balance sheet stayed largely unchanged at $3 trillion of funny money. Like the fabled, and highly excited boy shepherd, there had been no wolf. But the damage from this Fed sponsored / private enacted act of vandalism was real. The economy’s mojo faltered and the next year, 2014, GDP tracked the year before, nothing materially changed except the economy’s incremental growth rate lay battered by the premature tightening.
Consider 2015, GDP growth was 2.3%; remember that for the 30 years prior to the GFC, 2.7% growth had been the norm. Unemployment had fallen to 5% and inflation was just 0.1%. The ghost of 2013’s ghoulish tightening was evident. But what did the one-eyed lizard do?
Of course, they started hiking rates from zero to 0.5% at the end of the year and added another 25bps a year later. Call Janet what you will, I admire her timidity not her vision… They raised rates another 25bps on my birthday in 2017 and later another 50 as gdp « roared» at a pace of 2.3%. Just what were they seeking to slay with their monetary swords? Worse, Janet became Jay as Chairman and he is prone to fantastical phantasies, he sees himself as a modern Volcker. He hiked more, his dire warnings repriced the 10 Y back to 3%. He halved the Fed’s quantum balance sheet to c $1.5 trillion of funny monies. The why remains unknown but the consequences were readily apparent as China briefly teetered on the edge of a credit / bank collateral crisis. Risk blow-ups everywhere sent markets into a tizzy with the S&P falling 20%.
Now, with the pandemic in the rear-view mirror, Jay’s back, super stoked and reverting to his old ways; rates are being hiked, the 10 Y is at 3% again and the S&P is down 20% once more. Holy Shit! J Powell always makes me think of Charles Rhoades Jr. The opulent U.S. attorney from Billions with deep-seated father issues, and a penchant for kinky S&M escapades “Punish me! I ballooned the quantum balance sheet from $2 to $9 trillions of funny monies…Is the Chairmen punishing us or him? Regardless, he’s perpetuating an economic depression, a pox on the good folk.
Right China. I get it. They were piss-poor but seeking redemption. Hey buddy, you got a spare dime? Sure. A heads of state agreement was made, the US et al would suffer a temporary loss of incremental income to support the Chinese ambition to restore prosperity to their kingdom The quid pro quo? Prosperity would bring more democracy to China and they’d vendor finance public deficits of the US in the meantime. Fine, say I, until c 12 years ago when the
good kid M.a.a.D City had restored Chinese prosperity. Met the conditions of the bridging loan; payback time, remove the stabilisers.
What should have happened is that market forces, previously suspended to support the rise and rise of China, should have been re-enacted. The comparative international trading advantage from moving hundreds of millions of peasants tilling land devoid of fertiliser to Blade Runner’esque metropolis with best-in-class infra-structure and state of the art manufacturing SHOULD have spurred a positive revaluation higher in their currency.
This would have enriched the good guys, the worker bees of China. Better still, it should have made “born in the U.S.A.” stuff cheaper, spurred domestic consumption in China & created a huge new source of global demand just when it was sorely needed in the aftermath of the GFC. But that didn’t happen owing to the Perpetuation of the CCP program (the PCCP). It’s them and the Feds that did us in… The PCCP stuck rigidly to their hermit kingdom approach. Democracy you say… Sorry, we changed our mind. The dirty dollar-yuan currency float was unscrupulously upheld. The emergent tidal wave of Chinese household spending was resisted, deemed too risky. Precedent had shown that left to its own devices, the citizens might go crazy with prosperity. A reversal would send the economy into a deep recession that might remove the P from the CCP; not good… So, what happened? Profits soared. What? Excuse me? Yep, that’s how economics works. The Chinese workers never realised the prosperity that their endeavours justified, devoid of our social provisions for healthcare etc, they built rainy day funds that made their savings globally high. And rent seeking by Chinese corporates captured the upside from this cheap labour pool. Chinese companies distribute little and most of the economy’s capital formation is publicly financed, which is to say corporates save lots.
Hmm, an economy teeming with savings aka capital, and trapped with no exit, what could possibly go wrong? Private sector agents fought to attain the prosperity that the PCCP had denied them. They bid up domestic property assets to valuations which dwarf their principal trading partners.
The same thing happened state-side. in America. Unskilled labour was held hostage to the same PCCP policy. Imagine, the Commies are crushing the proletariat; the gods have an ironic sense of humour… Wages keep declining every year as a share of gdp, corporate margins are high, and profits have never secured a higher proportion of the economic pie; no wonder stocks keep posting new all time highs. American companies distribute little and with no evident source of potential new global demand for goods and services, their capex has remained historically modest. Result: savings, savings, savings as far as the eye can see; a glut some have called it. China has a property bubble; America has a risk bubble. Assets are divorced from economic reality. The PCCP ‘s tenure remains secure, and Wall St is richer than ever.
Huge forces are at play to preserve this status quo. Revalue our currency higher, open our capital account? Are you kidding, plead the PCCP. The property bubble would crash. And Wall Street? Remove the stick of offshoring, raise domestic wages for the unskilled? You mean kill profits, kill the golden goose that’s made us rich. The heads I win. Tails I win. You? You lose? The mantra of the last 15 years. NO WAY!
Wall St and the PCCP seem like opposite sides of the same lucky coin. These turkeys are never gonna vote for Christmas and hence we find ourselves in a perpetual doom loop. Cliché alert but money really does go a long way in determining the leadership of the executive branch in the US and Wall St has seemingly infinite sums to perpetuate its crimes and misdemeanours. And China, with those trillions of reserves and incremental trade flows, their US Treasury reserves effectively detach the populace from the politicians they choose. There is no public accountability when a self-serving nondemocratic overseas agent effectively finances the US government.
My rap friends yell, “these motha-f$ckers gave us Trump!” Today, we’re ruled by a monied oligarchy (Wall St and the PCCP) that serves themselves and not “we the people.”
Maybe Crazy Jay inadvertently scuppers this despicable pact. For 15 Y the capital markets have boomed whilst the economy has slumbered. Maybe Jay reckons he can continue to pursue his Volcker fetish, stick it to the capital markets, punish them more with the economy seemingly in rude health.
Health? Yes Walmart ,Target et al say otherwise but glance at the extraordinary growth in Uncle Sam’s treasure chest, tax revenues are exploding higher. @ToStRo shared it with me. I think he pinched it from Twitter. Let me know if he stole it from you and I’ll give you credit.
But it rocked me back on my heals, tax revenues +18% last year, 21% this year; I mean, who inflates their tax receipts ?? This is a serious counter factual to my approaching economic storm…@ToStRo wouldn’t touch the Ts here.
Maybe not the billionaire Boys Club??
But if the Ts can’t bounce from this..? Oh boy…
But all those late-night visits to the S&M chamber, I’m not alleging anything, but the S&P is no more than 20% away from where even masochist Jay’s resolve would break and he’d start expanding that damn quantum balance sheet again? Another 20% down? I don’t know. I don’t own it. I’m disenfranchised. I don’t drink coca-cola either. But shit sometimes happens and if the S&P has a drawdown of 40% you don’t need me to tell you the Fed play-book. China and Wall St would be saved again, the status quo retained. We can’t allow that to happen. Worse, Crazy Jay might conspire to devalue the CNH to 9; unintended consequences…he almost torched the paper stack back in 2018/19, this time he really might burn their house down and send us into a post apocalyptic, Mad Max world.
Imagine, he’s trying to rebalance the economy, reunite Wall St with Main Street, mean revert profits and household earnings and yet his path might only perpetuate the profits to infinity doom loop….
And that’s why I’m rooting for a user tax. Charge the PCCP a withholding tax. You want to keep gaming our system then we’re gonna charge you an annual tax on your T reserves. You wanna stay undemocratic, fine, but you’ll have to pay an annual levy for reneging on our agreement. Think of it as a friendly nudge, we got your back, we really do want you to succeed. We get it, your catastrophic property bubble means you’re gonna have to stay closed for longer. But
remember, every action has consequences. This has gotta end or there’ll be blood. Thank god for twitter, the Money never sleeps, and they’ll never let such arguments near a main street publication.
In the Wizard of Oz, the citizens of the Emerald City are coerced to wear goggles. They make the city shine, make everything green with the sepia of a dollar bill. But remove those goggles and…I’m not saying, but I dare you to see what I see, it ain’t prety.
The Acid Capitalist bids you farewell. I hope I’ve made you think, stretched your imagination. If you’ve reached this far I ask a small favour; that you click that subscribe button over on the YouTube channel, you’ll find the link at the start of each thread. Peace…