These past couple of decades read like the script from a David Mamet movie, with the American middle class as the mark. The trailer from a movie would include an abundance of distortions, illusions, financial debauchery and other unnatural economic acts that are prevalent in today’s economic environment. Prologue: some overarching points to keep in mind, debt that cannot be repaid and markets with rich valuations (stocks, bonds, real estate) will generate subpar returns going forward, that’s the best case.
The “Science” of Economics
The market news has revolved lately around the Federal Reserve interest rate cut, with more supposedly coming, and the currency/trade wars. Per blogger Sven Henrich, “Central banks 2009-2018: We will print $20 trillion & cut rates to nothing & that will reach our inflation goals. Central banks 2019: OK, none of that worked so let’s print more and cut rates again. Trust us we know what we are doing.”
In the interest of background, we borrow from the physical sciences and theology disciplines to make a point. From the mind of David Berlinski and his book “The Devil’s Delusion,” “In all of this, two influential ideas are at work. The first is that there is something answering to the name of science. The second is that something answering to the name of science offers sophisticated men and women a coherent vision of the universe. The second claim is false if the first claim is. And the first claim is false.” If you replace the word science with economics, the shoe fits.
Illusions and Unnatural Acts: Talking Points
Most, it seems, look to the stock market as the barometer of the vitality and strength of the American economy and the system as a whole. In reviewing the past 20 years, a case can be made that the stock market is first and foremost a barometer of excess cheap credit and speculation, also known as asset inflation. In linear terms, the Dot Com crash followed by the mortgage market crash to be followed by a sovereign debt one?
Since the 2008 crisis, the increases in outstanding bonds/debt have been vast and relentless. This has occurred with historically low interest rate levels. In Europe and Japan, there is some $15 trillion of bonds that pay a negative interest rate. Many analysts in the U.S. predict negative rates here. For the sake of argument, think this through. Quite obviously no one seeking income — pensions, insurance, savers/investors — is buying these bonds. The next question is who is and why? To get to that answer, one needs to dive into collateral preferences, balance sheet capacities, the quadrillion dollar derivative world, stock equity for debt swaps, as well as the Eurodollar market and the slowing global economy. Taken to the extreme, issuers of debt, governments for one, would tend to issue debt to infinity if they could. At the same time, purchasers of debt for interest income would be nowhere to be found. If one subscribes to Newton’s idea that there is truth in simplicity, negative interest — a negative cost of money which must question a “value” of money — is sowing and fertilizing the seeds of the system’s destruction.
A passage from a terrific novel, “Trinities” by Nick Tosches, brings a point home. In a discussion between a couple of mafia bosses, as paraphrased, “Trust has been responsible for more death and destruction than all the wars of mankind.” Americans appear to trust their government and the economy based history, a history largely without central planning. Latent trust if you will. We truly stand on the shoulders of giants. Yet, if from this you expect continuity, better not tune in to the news of the day.
In summary, if you believe political will can invalidate economic law you should be OK. Otherwise, the reality is that the economy and markets are at or close to cycle peaks while America’s trust in institutions is leaking badly, strange bedfellows indeed. In any case, the above books are a good read.
Andy Wahrenbrock is an independent investment adviser from Bakersfield. He can be reached at firstname.lastname@example.org.