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November 3, 2018 | What Americans Really Need Right Now

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

POITOU, FRANCE – What America most lacks is cynicism.

People listen to a news conference without laughing. They read the headlines without even guffawing.

They believe their “warriors” are protecting them abroad. At home, they think their elected officials have their backs.

And they think their president should be treated with the respect normally reserved for traffic cops and drill sergeants.

As for their money… they are ready to believe almost anything.



Tortured Numbers

Yesterday, for example, the press reported that unemployment claims are at a 45-year low. The Dow rose more than 250 points on Thursday, and seems to be rebounding from October’s losses.

Fake news!

The increase in employment is counterfeit. Most of the new jobs are part-time, or in the low-paying hospitality and healthcare sectors. You can see what is really going on by looking at a number that isn’t tortured by the feds – real, final sales.

This tells us how much income people really have to spend. The last report showed final sales falling approximately 75% from the previous quarter. Annualized, final sales – real spending by (more or less) real people – are growing at less than 1.5%.

We say “more or less” because the final sales figure includes spending by the feds. As you know, the feds gave themselves more money to spend last year, which raised the federal budget for both military and domestic boondoggles.

Mr. Trump claimed he needed to throw the Democrats a $60 billion bone on social welfare spending so they would allow him to toss the military another $70 billion of red meat a year.

A cynic would see what was really going on; Republicans, Democrats, and the Trump administration are colluding to take advantage of the common man. The “liberals” get more money to bribe the zombies; the “conservatives” get more for their crony friends in the military.

CNBC is on the case:

From twin Air Force One aircraft to drone tankers, Boeing bagged a significant number of contracts this summer. In the month of September alone, Boeing was awarded more than 20 contracts with a cumulative value of $13.7 billion.



Cynic Is Right

Currently, the feds are borrowing at a rate of $130 billion a month to keep the cash flowing. Next year, the government is expected to borrow $1.3 trillion. Thereafter, deficits will continue to rise from here to kingdom come.

“Let’s see,” the cynical citizen says to himself (no one else is listening). “How does that work? I know I’ll have to pay for this somehow (who else will pay?).”

But wait… Who will lend that much to the government? As recently as four years ago, the feds could count on the Fed, which was buying almost half of U.S. bond issues. Now, it is getting rid of them.

Whoa! The cynic’s eyes roll. His head spins as he tries to figure it out.

“I didn’t have to pay before because our central bank bought the debt. But where did it get the money? And now, the Fed is not buying the debt… So what’s going to happen?”

And here… we’ll help out. The cynic is right.

The feds can bob and weave. They can delay and disguise. But ultimately, all debts… and all government spending… must be paid back in time… by the productive, private sector.

In the short term, as the feds borrow more and the Fed buys less… yields must rise!

Then, asset prices – stocks and bonds, which anticipate and capitalize on a stream of future income – will both go down. Businesses will back off, too… as the federales “crowd out” private sector borrowers from the trough.

Expect a recession.



Trade War

Other buyers are backing out of the bond market, too. Foreign central banks used to be reliable buyers of U.S. Treasuries… taking up as much as 90% of new bond issuance for most of the 21st century. Now, they’re sellers.

China, Japan, and India have reduced their holdings of U.S. bonds. The Wall Street Journal reports that the amount of U.S. debt held by foreign investors is down 50% from five years ago.

Which brings us back to the stock market… and the trade war. Yesterday, commentators said stocks were rising because the odds of working something out with the Chinese – to avoid an escalation in the trade war – have improved. From CNBC:

In a tweet, the president said he had a “long and very good conversation” with the Chinese leader, “with a heavy emphasis on trade.” He added that “those discussions are moving along nicely” ahead of planned face-to-face meetings at the G-20 summit in Argentina later this month.

Cynics will recall our prediction. Mr. Trump will do the same thing with China as he did with Canada and Mexico.

That is, he will act like a bully… and rant and rave about how bad the foreigners are. But he will ultimately back down and leave trade to go on, more or less as before.

Our president may be an ignorant, self-absorbed blowhard, but he is not a complete imbecile. Someone must have tipped him off by now; trade wars may be good politics, but they are bad economics.

A trade war with China, for example, would be disastrous. Not just for China, but for the U.S., too.

Mr. Trump’s personal fortune, the U.S. stock market, and the U.S. economy all depend on China to make things cheaply and pass along the savings to the rest of the world.

And then, like icing on the cake, the Chinese took their U.S. dollars and used them to buy Treasuries – helping to keep U.S. interest rates down.

Not that other countries can’t make things cheaply, too. But it would take many years – if it was even possible – to recreate China’s export machinery elsewhere.

The savings – from cheap Chinese labor – keep prices at Costco and Walmart from rising. Otherwise, the $20 trillion of new money added to the world economy over the last 20 years would be pushing prices through the roof.

Rising prices now would cause bond yields to spike up, just like they did in the 1970s. Investors would want to protect themselves from rising prices (which reduce the value of the income stream coming from their bonds).

Stocks would sell off, too, just as they did in the 1970s. As we saw yesterday, in terms of real money – gold – stocks lost 95% of their value from 1966 to 1980.

The equivalent loss today would take the Dow down from 25,000 to just 1,250. That kind of a loss is, well, unimaginable.

And yet, it has happened three times in the last 100 years – after 1929, 1966, and 1999 (when the loss was only 85%!).

That risk is far too great for Mr. Trump. As we’ve explored, he has more to lose than anyone – his fortune, his reputation, his bully pulpit. His re-election…

But wait… A note from a very cynical Dear Reader made us reconsider; he may have more to gain, too.

Stay tuned.




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November 3rd, 2018

Posted In: Bill Bonner's Diary

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