Invest
Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors
09
Jul

You are here

1. Global debt now 280% of GDP. Bond yields at all time lows.

2. Federal Reserve balance sheet in vertical print mode. Now at $7 trillion.

 

3. ECB balance sheet in vertical print mode. Now exceeds 50% of EU GDP.

 

4. Here’s the NASDAQ. FANGMAN stocks now worth more than GDP of Italy and Japan.

 

Men at work

The Federal Reserve do not just print money to give to Wall Street, they are rather good at producing charts too. In February 1948 when our chart starts, 87% of men worked. Now, in June 2020 it’s 67.2% up from an all time low of 66% in May. You might draw a number of positive conclusions from this, like:
  • Men retire earlier because they are wealthier and the graph is a good thing
  • More women are now in the workforce and the burden of work is shared
Less positively, the high going into a recession (a grey column) is never recovered afterwards meaning we are unlikely to get back to 69%.

In an article in 2007 the US Bureau of Labour statistics was already worried about this, making the following prediction

The decline in the men’s labor force participation rate is expected to continue; it is projected to be 70 percent in 2020 and 66 percent in 2050.

Unfortunately, we got to 70% in 2013, 7 years early and 66% in 2020, 30 years early.

A good example what is happening was provided by US oil fracking company, Chesapeake Energy, which went bankrupt this week. In 2008 the company was worth $35 billion.  In the 10 years that followed they piled on debt during the free money orgy of the post 2008 crisis, when they finally fell over they had $9 billion in unpaid debt. The thing is, their breakeven oil price was $40 (which was low for a fracking producer). With debt costs of low single figure percentages they built marginal facilities making the company hugely vulnerable in case either oil prices fell or interest rates rose. Guess what, oil prices fell and now they are bankrupt.

If interest rates were left to find their own level, most of Chesapeake’s business would never have existed, it just was not profitable. Massive malinvestment like this is now unravelling due to falling oil prices and the 12,500 employees (most of whom were men) are looking for something new to do.

The tragedy being they themselves have malinvested in a career likely no longer wanted in the US. Making oil for $40 per barrel, when the Saudi’s literally fall over it for $3 per barrel was never going to work. If you’ve worked in fracking for the last 10 years and you join a queue of 20 million unemployed, the prospects are bleak. The gigantic sorrow of the Amazon warehouse awaits.

The idea that the only consequence of artificially cheap money is rising prices is not correct. It has profound and lasting consequences on people’s lives. The mirage of profitability it presents is a giant fraud for which you can thank Alan Greenspan and everyone who followed him.

Napoleon Bonaparte

Napoleon had quite a bit to say about bankers. Generally because he was fighting wars hither and thither and he owed them money, so I imagine that coloured his view a little.
“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”

Is that a bit harsh? I think not. Everyone hangs on the very words of Jerome Powell far more than the do those of Donald Trump. The situation in Europe is even more severe. The leading executive power in Europe is the President of the European Commission, a lady called Ursula von der Leyen. Her own parents haven’t even heard of her and I know of nobody in my small survey in the office who could name her. She is supposedly in charge and absolutely nobody knows her. During the recent crisis, her phone rang once with an inquiry about whether she too was paying too much for her electricity bill.

On the banking side, Christine Lagarde is the power in Europe. She decides how much money flows and where it goes. We hear from her all the time, she is always in the news and frankly that’s because what she does matters and what Ursula does, clearly doesn’t. Napoleon was spot on.

The legendary Frenchman also had this to say

“History is a set of lies agreed upon.”
Since 2008 we have been in a period of “historically low inflation” Banker after banker after banker rolls up and tells us “inflation expectations are too low”, “prices are falling”, ” we have to do something”. It has been going on for over a decade. So let’s take at look at supermarket prices, everyone buys food and this is perhaps the single thing we can all agree that everyone has to do.
The supermarket price index is up from the last recession where the index was 150 to about 220, in March this year. That’s 3.5% per year compound, way in excess of central bank 2% targets. More alarmingly, in 2020 so far the inflation rate is 8.1% (that’s in 4 months, not an annual rate). Some prices are falling, luxury cars, international holidays, oil, but how much of people’s expenditure does that currently represent? Half of America lives hand to mouth, prices are running away from them yet ‘inflation is falling’. For who? It’s a lie.

Unfortunately, we cannot have a situation where the truth is told, if everyone knew for example that excessive money printing to push up the stock market was also forcing up core producer prices, people would be most unhappy. So the agreed narrative is that all prices are falling, and they keep saying it and continue to. It is the agreed lie of this period in history.

The fact is, prices do want to fall because it will bring equilibrium. The over-leveraged will go bankrupt. Banks will go bankrupt as their loan books sour and we will start again. It would be ugly, house prices would drop precipitously. The more it doesn’t happen though, the worse it becomes when it does.

Expect central banks to go into overdrive in H2 making sure they pump the presses to keep those prices rising. Not doing so is a hard decision they can’t face and it would let the power swing away from them, they won’t let that happen.

Bitcoin isn’t moving

Bitcoin’s price seems stuck around $9k at the moment and has bounced around the $10k level for over a year. Despite economic turmoil and a stock market yoyo, the only boring thing on earth at the moment, is bitcoin.

More tellingly, Glassnode Research point out this week that the number of bitcoin that have not moved for over a year just reached an all time high at 60%. People are buying bitcoin and holding it. You can see the huge dip to 40% in the chart as new supply entered the market during the last run up to $20k in 2017, it’s been a slow increase in long term holders ever since.

Last time we reached the 60% threshold it held for almost two years before the price exploded upward, inducing holders to sell. This time new miner supply is half what it was then, eventually the supply pressure will tell.

Bitcoin, the dullest asset class on earth. Like land really, it’s boring. Buy some.

The Lizard of Hermes
As is becoming customary, we’ll finish with a European Central Bank anecdote. As part of working from home, it has been very important to configure your Zoom backdrop to show off how well read you are. Let’s call it ‘intellect signalling’. If you are guilty yourself, please stop, everyone knows you haven’t read any of them.

Argentina’s favourite banker joined the fray this week for a chat about how quantitative easing will drop carbon emissions, while simultaneously increasing Greek pensions and the Italian birth rate. Sadly her chosen volume was the ‘Atlas of Creation’. I don’t claim to know it, but plenty of people on the internet did. It turns out the book is by Harun Yahya who was jailed last year, for running a criminal espionage network ( a bit like the ECB then).

The ECB public relations department was quick to the defense, saying Ms Lagarde has been so busy with coronavirus (is she a doctor?) that she has not had time to read the book in question and had been mailed a free copy. It’s almost like she is highly skilled at pretending to know what she is doing and then when it goes wrong, even more highly skilled at getting herself out of the situation.

Aside from that, she mumbled the usual platitudes about helping those in need. Then pledged billions of dollars of free money for banks. Credit card rates in Europe remain at 17%, as a multiple, that’s infinity times what European banks now pay the ECB. Nothing in it then.